Here’s How to Avoid the Luxury Industry’s Costliest Mistake

    If your luxury brand delivers heritage, craftsmanship, and expertise, that's just the minimum you need to compete in China. What really sets you apart? ALV.
    What luxury consumers mainly pay for is added luxury value (ALV). Photo: Shutterstock
      Published   in Hard Luxury

    Underestimating the fundamentals is death for a luxury brand. Almost daily, I see startling mistakes that cost brands millions of dollars in profits. And even worse, many of these significant mistakes weaken a brand’s overall equity, which hurts the company immeasurably over the long haul. But what exactly makes luxury such a tricky and volatile segment?

    Much of what seems intuitively right in luxury is actually dead wrong. A common misconception is that the qualities of a product define its ultimate luxury value. In other words, many brands believe that people pay for the beauty and the amenities of a hotel room, for the quality craftsmanship of a handbag, and the alluring design of a hypercar. All those elements are essential for positioning a product as a luxury item, but they aren’t the drivers of luxury value.

    Those elements don’t drive consumers’ willingness to pay, which is an important distinction. What luxury consumers mainly pay for is added luxury value (ALV). ALV is comprised of brand-related social status effects which include the perception of enhanced attractiveness, social protection, being perceived as an expert, or for the experience of something new. When we measure added luxury value, the product is not part of it. This is what confounds managers of highly engineered luxury brands (like cars) or design-driven luxury brands (like handbags or hotels). The product can be an identifier or an enabler, but it’s not the value driver.

    For instance, a well-known luxury hotel chain renovated one of its flagship properties for more than $300 million. The result was a stunning architectural masterpiece, with a beautiful new lobby, a fantastic restaurant, and beautiful rooms that wow everyone who sees them. The spa is second to none, and the amenities are outstanding. But after the renovation was complete, something unexpected happened. Bookings and room occupancy went down. Panicked, the hotel commissioned a guest survey, and to their surprise, customer satisfaction was at an all-time-low; people were never as disappointed as after experiencing the renovated hotel. In other words, a multi-million-dollar improvement led to a decrease in perceived value! Revenue decreased, customers were less happy, profits plummeted, and millions were wasted. It’s an example I see all the time across all luxury categories.

    When looking into the reasons for the hotel’s dramatic downfall, it became clear that the company underestimated their luxury value, which wasn’t the quality of the property but was mainly the standout and personalized service. The human factor was more important in terms of value proposition than the physical “product” of the hotel. When the property was upgraded, the hotel didn’t re-train the staff or explain to them what the added luxury meant. The hotel was seen as luxurious before, but the upgrade raised the bar for the company by triggering higher customer expectations toward the service. Therefore, the customers were disappointed with the service — which had already been great — but no longer seemed on par with what the new positioning suggested. In luxury, ‘great’ isn’t always good enough, especially when it’s not differentiated sufficiently or when there are gaps in expectations and perceptions.

    This is the costliest mistake brands across all luxury categories frequently make: They aren’t clear about their value proposition. They connect the value too much to tangibles (products, service offerings), but not enough to the intangibles that drive added luxury value.

    One of Asia’s most expensive hairdressers understood this. He is located in Hong Kong, and one of his haircuts can cost $10,000 or more. In his view, the value proposition he provides is to be the customer’s best friend. When a customer calls him at 11 p.m. and tells him her hair looks horrible and she needs immediate intervention, he will gather his staff regardless of the day of the week or the time of day. They open the salon even after midnight, if needed, or fly clients in by helicopter and will take care of their concerns at a moment’s notice. This is made possible by reducing the number of clients and offering them personalized services. While the salon is, of course, beautiful, that’s not the factor that leads people to pay such high prices for haircuts. They pay those prices because they perceive extreme value in the human element. In other words, the most personalized services that no one else anywhere provides, which goes far beyond the building and the haircut.

    What must luxury brands need do then? Whether you are offering a luxury product or a luxury service, the most critical task is to define what sets your brand apart. Attributes like heritage, craftsmanship, expertise, experience, or “creating a dream” are what many companies thinksets them apart, but they are irrelevant. That’s because, in luxury, consumers expect everyoneto offer them the ultimate craftsmanship, expertise, or experience. They buy a “dream” with every luxury purchase, so when they go to a luxury hotel, they expect a spectacular room, and when they buy a hypercar, they expect exhilarating acceleration and stunning design. But those factors are only the “entry ticket” to luxury — they don’t drive the value.

    Ultimate value is driven by defining one extreme performance point that sets the brand apart from all competing brands at the same level. This ownable attribute needs to be determined from both a rational perspective and an emotional perspective. Without the emotional link, the brand has no purpose and will not be perceived as authentic. Once it’s defined, the brand proposition must be applied across all touchpoints along the customer journey. And to bring it to life, the staff needs to be trained in the fundamentals of luxury and their role in delivering that extreme performance point to customers, both rationally and emotionally.

    I like to compare luxury brands to operas. Consumers will perceive the brand as a whole, not as the sum of its parts. If one part is off, the entire experience is ruined, just like an opera is a horror show when one musician, even the one with the smallest role, is not playing in synch with the others. Every detail matters in luxury. There can’t be any imperfections.

    Given that the value of a luxury brand depends on delivering the brand story consistently at each touchpoint, the human factor becomes the most decisive. Defining the brand story with clarity and training the staff so they understand how to deliver their part of the branded service is relatively affordable compared to real-estate investments or developing cutting-edge technology. While many companies spend enormous amounts of money on the latter, they try to save money on the former. This is, in fact, the costliest mistake a brand can make.

    As competition in the luxury segment heats up, connecting a brand flawlessly with its target group has become the most critical factor for success anywhere in the world. But in China, where they have the most digitally savvy and brand-obsessed customers with highest expectations, prioritizing the tangible product over brand equity creation and delivery can be deadly.

    Daniel Langer is CEO of the luxury, lifestyle and consumer brand strategy firm Équité. He consults some of the leading luxury brands in the world, is the author of several luxury management books, a regular keynote speaker, and holds management seminars in Europe, the USA, and Asia. Follow @drlanger

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