Why NFTs Are the Next Mega Segment in Luxury

When you ask someone what a typical aspect of luxury is, the one word answer is often “expensive.” This is because luxury items are usually among those with the highest price points in a category. However, while price is not a defining factor in luxury, it reflects the value we attribute to an item. And in luxury, the value is extreme compared with the “normal” items of the same category. Think of a luxury handbag for 4,000 versus 80-300 for a “normal” bag. To be able to break out of the reference price barrier of the “normal” segment, luxury brands need to have a powerful brand story that often takes years to build and can be destroyed in no time if not executed with the utmost precision. Équité Research findings suggest that up 90 percent of brands have significant brand storytelling deficits that prevent them from utilizing their value creation potential, hence negatively affecting their ability to price. Given this, many brands and categories are much less successful and profitable than they could be. The emerging and rapidly growing NFT sector has particularities that make it likely to become the next mega luxury segment. NFT is the abbreviation for Non-Fungible Tokens, a piece of software code that can uniquely identify a digital asset, like a digital artwork or even a meme. Making a particular digital or virtual asset unique automatically allows to attach value to it. Welcome to the luxury metaverse. In the virtual world, fundamentally, the same rules of the real world apply. Extreme value is also created by the power of the story. However, there are several differences that influence the psychology of buyers. These effects will catapult NFT into the next mega segment in luxury. The first is that NFTs are traded in crypto currencies, such as Ethereum. The rapidly fluctuating values of crypto currencies make it extremely challenging to understand the real-time value of one unit at the time of trading. In the real world we operate in dollars, yuan, swiss francs, or euros, and as we use these for everyday purchases it is much easier to have a “feel” for the value than for crypto which changes the value continuously and often, psychologically, seems detached from the real world. In a recent discussion with affluent Gen Z buyers of NFTs, one person told me that he “would never buy certain NFTs using ‘real’ money, but with crypto the hurdle is much lower.” The reason is that we have much less reference values. Hence, the pricing barriers we have in the real world are often — or at least partly — removed or significantly weakened. This entices to spend much more for an item in the virtual world using virtual currency than in the real world using real currency. Hence, in the virtual world, at least for the time being, the willingness to pay more may be significantly higher using crypto than in the real world. This is a significant catalyst for the luxury segment among NFTs. A second driver is the typical auction setting in which NFT marketplaces function. Auctions have always been fascinating because they tap into a psychological aspect known as “virtual ownership.” Imagine that you are bidding on something even with a few dollars and you become the top bidder at an early stage of an auction. Although the auction may still run for a few days, you already imagine that you could be the owner. When we own something, we don’t want to lose it. Typically, the willingness to pay increases with ownership, even if we are only “virtual owners” and have not yet taken possession. Hence, an auction setting will typically lead to a higher final price point because of several “virtual ownership” interactions between the auction participants during the bidding process. Every bidder tries to defend what they already “virtually” own and bid significantly higher than they would when the idea of virtual ownership was removed. NFTs, therefore, are traded using crypto which partly removes our reference price ranges (in other words, the mental guardrails of how much we are willing to pay) and the auction setting additionally drives prices up through virtual ownership. The combined effect draws more people into the virtual marketplaces than a “real” marketplace would do, and the participants have a higher willingness to pay. As a result, the luxury segment in the virtual space will develop dramatically faster to higher levels as they would ever do in the physical segment. This explains, in part, the seemingly exorbitant prices NFTs generate. It goes far beyond hype or FOMO usually attributes to this sector. I predict, before the end of this decade, the market for digital art will exceed the market for physical art. Today, it’s already significant, with estimates around 16-20 percent of the total art market. To be sure, we are witnessing the birth of a new luxury segment — and we are just at the beginning. However, the more digital assets are produced, the more commoditization will happen, as in any sector. Therefore, metaverse investors need to look for NFTs that have a unique story if they want to prevent the value from plummeting over time. This is because the fundamentals of luxury value creatin stay in place even in an auction- and crypto-based market setting. Storytelling is the name of the game, and over time, only those NFTs that have a particularly interesting, intriguing, and desire-creating story will retain their value. And frankly, there are currently only a few. Those without a story will likely implode once the supply of NFTs exceed demand. Hence, in the metaverse, luxury storytelling is extremely critical as the market is scales — today and in the future. This is an op-ed article that reflects the views of the author and does not necessarily represent the views of Jing Daily. Named one of the “Global Top Five Luxury Key Opinion Leaders to Watch,” Daniel Langer is the CEO of the luxury, lifestyle and consumer brand strategy firm Équité, and the executive professor of luxury strategy and pricing at Pepperdine University in Malibu, California. He consults many of the leading luxury brands in the world, is the author of several best-selling luxury management books, a global keynote speaker, and holds luxury masterclasses on the future of luxury, disruption, and the luxury metaverse in Europe, the USA, and Asia. Follow @drlanger

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Why NFTs Are the Next Mega Segment in Luxury