When you’re the seller of a perishable good, there is an inclination to reduce the price before the item becomes obsolete. Imagine visiting Sunday’s farmers market in the beautiful Marais neighborhood in Paris. Shortly before the market closes, you’ll see the price of berries, fresh meat, and other items go down quite significantly, as it’s much more economical for the seller to get rid of what’s left before the market closes than to throw them away.
It’s a logic that the seller and the buyer understand. As the buyer, you may not get the freshest or best produce as the market wraps up, but you will save money. The seller makes a lower margin but avoids getting nothing and wasting an item he or she then must dispose of. It’s a seemingly win-win situation.
As branded goods became ubiquitous, the same tactics were applied in mass markets, such as laundry detergents, toothpaste, or frozen pizza as a competitive tool even though the items may not be perishable in the same way. Many mass market brands promote several times a year and often generate significant sales volume increases during the periods of price reductions. It’s a result of three effects.
The first is anchoring: one of the most fundamental psychological parameters that determines our willingness to pay. We live in a relative world and our decisions are widely guided by comparisons and benchmarks. If our reference price for a bottle of water is two dollars, this price point becomes our anchor. We see the same bottle for 1.50, we immediately understand that we get something of higher value (reflected by the anchor) for a lower price, which increases the desirability for the product and makes it seemingly more attractive versus competitive offers. Additionally, the product now may be open to a wider audience who would not pay two dollars. Also, the lower price may entice someone to buy more items. Combining the three effects drives up the demand and the promotion seems a success.
In the fashion industry, a collection may become “perishable” at the end of a season and space for the next collection needs to be made. Given this, many fashion brands therefore reduce price points at “end-of-season sales events” to take advantage of the increased demand the lower prices offer. Hotels and airlines reduce prices when demand goes down using real-time information and sophisticated AI-powered pricing algorithms that adjust prices depending on demand and a defined competitive set. Their rationale is also the perishable nature of an airline seat or a hotel room. If the plane leaves the airport with an empty seat, it becomes perishable, so to speak.
This has made promotions a frequently used tool even for luxury brands. The logic seems compelling. “Better make some money than none,” many brands will argue. “We will sell dramatically more during the promotion,” is another frequent argument. But these expected benefits come at a cost. And in luxury this can be a deadly one.
Luxury, when done right, creates a significant additional “extreme” value component, the Added Luxury Value (ALV), that I’ve often describe in previous columns. When people perceive the “signal” that a luxury sends, they attribute higher attractiveness, more expertise, and even an aspect of social protection to the person associated with the luxury item. The enormous price premiums reflect the perceived value.
ALV is intangible, independent from product features and reflects the brand story. Luxury brands can achieve ALVs that can be 100x, 1,000x or even 10,000x higher than all other value components. In other words, in luxury most of the value is in the story, reflected in the brand experience. If a luxury brand prices too low or promotes, it signals that it’s story — fundamentally — is perishable. Clients become confused on the value and even worse, a new, lower anchor is set that the promoting luxury brand now always will be benchmarked against.
Because luxury creates significantly more (intangible) value than any other product category, the negative impact of messing with the value perception through the price and reducing the perceived value of the brand story, will have significant negative long-term effects on brand equity. A luxury brand may see a short-term spike in sales given the three effects described earlier, but in the long run its clients will lose the trust in the ability to create ALV.
Wrong pricing and promotions are the most certain way to destroy a luxury brand. And the history of luxury is filled with these sad examples, where short-term thinking prevented brands from being successful in the long-term. Pricing mistakes in luxury are the most difficult to correct. And in many cases, they can’t be reversed at all. Don’t tap into the “easy growth-trap.” It will be your costliest mistake.
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