Opinion: Are luxury brands underpricing?

Burberry recently tried to introduced handbags at significantly higher price points — and failed miserably. Balenciaga has discounted prices in China on their T-Mall platform in average by 40% during the first 4 months of 2024 according to a report by Cao Shuangtao. As an example, its crocodile-patterned hourglass bag with the original price of 17,200 yuan is now offered at 10,899 yuan. A desperate attempt to reignite the appeal of the brand in China, as price promotions in luxury are the fastest way to destroy brand equity and bring a brand further down into a deadly spiral. When we see examples like these, the question in ask in the title of this column, “Are Luxury Brands Underpricing Themselves?,” seems the wrong one. However, the ability to increase pricing is one of the most critical levers for luxury brands. The question is, why do many brands remain unsuccessful in increasing prices, while others feel compelled to reduce them? The reason is straightforward. Price is not arbitrary, but always a reflection of perceived value. The ultimate measure of success is not just commanding a high price but justifying it through extraordinary, extreme value. This principle lies at the heart of the 4E framework that I brought into the spotlight in recent publications: Emotion, Experience, Engagement, and Exclusivity. Unlike the traditional 4P marketing mix, which emphasizes price as a crucial element, the 4E framework redefines luxury marketing by focusing on creating and enhancing perceived value. The outdated 4P model was developed in a product-focused and mass-market reality and still are mostly applied around maximizing the success of products. The 4E, instead, take a client-centric approach and focus on the interplay between brands and clients. This is critical as the brand is more important than the product and the brand storytelling is the most significant driver of creating extreme value. This shift raises an intriguing question: Are luxury brands underpricing themselves by not focusing enough on delivering extreme value? Let’s take a closer look into how the 4E framework can be the secret weapon for brands to confidently price higher. The intricacies of the 4E framework The 4E framework offers a revolutionary approach to luxury branding, focusing on creating extreme value that naturally justifies premium pricing. Here’s how each element contributes to this strategy: Emotion: The ability to create an emotional response is the heartbeat of luxury. Without emotion there is no desirability. The emotional connection transforms brands into expressions of personal identity. Hence, creating a strategy that places brand-specific emotional markers along all touchpoints of brand from products to experiences, unlocks the potential for brands to command premium prices. Experience: The customer journey in luxury cannot just be a series of transactions and interactions. It needs to be a meticulously curated adventure that excites in every moment. Every touchpoint, from initial interactions to post-purchase engagements, must reflect sophistication, personalization, and excellence. Only if an experience is extraordinary, it turns a brand into something to crave for, making clients willing to pay significant premiums. Engagement: Deep, meaningful connections with clients are critical in luxury. It’s about inspiring them and understanding their desires, aspirations, and preferences on an intimate level. This engagement goes beyond traditional marketing. Successful brands build a relationship that feels deeply personal. When executed well, clients fall in love with a brand and as a result, are willing to invest in a relationship. Exclusivity: I see the term much broader as the traditional view – excluding some clients due to scarcity and rarity. Instead, true exclusivity is a feeling. It is about feeling special and valued, being – as a human – in the center of attention. This sense of being the focus of all activities justifies paying higher prices and fosters brand loyalty. When the 4E are executed consequently and in synch, then the brand story will be tangible consistently at all touchpoints and during all interactions. And there is significant research that shows that the delivery of a brand story (if the story is client-centric, unique, intriguing, and taps into relevant insights) is the main driver of perceived value. Pricing: Reflection of extreme value and ultimate profitability lever The struggles of Burberry and Balenciaga indicate that the brands don’t generate the necessary value perception to sustain the prices. Hence, Burberry saw disappointing sales of their higher priced bags and Balenciaga started promoting in the critical Chinese market. When the value is not there, then prices will be perceived as too high. In luxury, price is not an arbitrary figure. It is a powerful statement of value. The 4E framework focuses on creating and enhancing perceived value, which is crucial before setting a premium price. This approach ensures that when a brand does set a premium price, it is backed by a significant value proposition that resonates with consumers on multiple levels. By embedding the 4Es into every facet of their operations, brands can enhance their desirability, making high prices not just justified but expected. The 4P model focuses too much on individual products and neglects the total value delivery principle that powers luxury brands and their client-relationship. Price is the most significant lever on profitability, especially in the luxury sector. A small increase in price can lead to substantial improvements in profit margins, provided the perceived value supports it. Unfortunately, many luxury brands are not creating enough perceived value, leaving significant profit potential on the table. The 4E framework offers a strategic path to rectify this by integrating extreme value creation into every aspect of the brand, allowing for higher pricing strategies without alienating clients. In today’s hyper-competitive reality, luxury brands must rethink their pricing strategies. The 4E serve as a powerful playbook to enhance their value proposition and create desirability at higher price points. It shifts the focus from price as a product-specific standalone factor to price as a reflection of extreme brand-specific value creation. For luxury brands aiming to expand revenue and profitability, embracing the 4E philosophy becomes a necessity. Every luxury brand must ask itself: Are we pricing too low? This is an opinion piece by Daniel Langer, CEO of Équité, recognized as one of the “Global Top Five Luxury Key Opinion Leaders to Watch.” He serves as an executive professor of luxury strategy and pricing at Pepperdine University in Malibu and as a professor of luxury at NYU, New York. Daniel has authored best-selling books on luxury management in English and Chinese, and is a respected global keynote speaker. Daniel conducts masterclasses on various luxury topics across the world. As a luxury expert featured on Bloomberg TV, Forbes, The Economist, and others; Daniel holds an MBA and a Ph.D. in luxury management, and has received education from Harvard Business School. Sign up for his masterclasses at the Jing Academy. Follow him: LinkedIn and Instagram. All opinions expressed in the column are his own and do not reflect the official position of Jing Daily.

Opinion: Are luxury brands underpricing?

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Published July 01, 2024

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Opinion: Are luxury brands underpricing?