When you are the seller of a perishable good, you tend to reduce the price before the item becomes obsolete. Imagine visiting the Sunday farmer’s market in the beautiful Marais district of Paris. Shortly before the market closes, you’ll see the price of berries, fresh meat, and other items drop quite significantly, as it’s much more economical for the vendor to dispose of what’s left before closing. from the market than throwing them away.
It is a logic that the seller and the buyer understand. As a shopper, you may not get the freshest or best produce when the market closes, but you will save money. The seller makes a lower margin but avoids getting nothing and wasting a good that he then has to get rid of. It’s a seemingly win-win situation.
As branded products have become ubiquitous, the same tactics have been applied to mass markets, such as laundry detergent, toothpaste, or frozen pizza as a competitive tool, even though the items may not be similarly perishable. Many mainstream brands promote several times a year and often generate significant increases in sales volume during periods of lower prices. This is the 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 largely guided by comparisons and benchmarks. If our benchmark price for a bottle of water is two dollars, that price becomes our anchor. We see the same bottle for $1.50, we immediately understand that we are getting something higher (reflected by the anchor) for a lower price, which increases the desirability of the product and apparently makes it more attractive compared to competing offers. Additionally, the product can now be opened up to a wider audience that wouldn’t pay two bucks. Also, the lower price may entice someone to buy more items. The combination of the three effects drives up demand and the promotion appears to be a success.
In the fashion industry, a collection can become “perishable” at the end of a season and space must be made for the next collection. In view of this, many fashion brands therefore reduce prices during “end of season sales” to take advantage of the increased demand that lower prices provide. Hotels and airlines reduce prices when demand drops using real-time information and sophisticated AI-powered pricing algorithms that adjust prices based on demand and a defined competitive set. Their raison d’être is also the perishable nature of an airplane 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 convincing. “Better to make money than nothing,” many brands will say. “We will sell a lot more during the promotion”, is another frequent argument. But these expected benefits come at a cost. And in luxury, it can be deadly.
Luxury, when done right, creates a significant additional “extreme” value component, Luxury Added Value (ALV), which I have often described in previous columns. When people perceive the “signal” that a luxury sends, they attribute more attractiveness, more expertise, even an aspect of social protection to the person associated with the luxury product. Huge price premiums reflect perceived value.
The VLT is intangible, independent of product characteristics and reflects the brand story. Luxury brands can achieve LLVs 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 is priced or promoted too low, it signals that its history – fundamentally – is perishable. Customers become confused about value and, even worse, a new lower anchor is set against which the promoted luxury brand will now always be compared.
Since luxury creates far more (intangible) value than any other product category, the negative impact of messing with the perception of value through price and reducing the perceived value of the brand story will have significant long-term negative effects on brand equity. A luxury brand may experience a short-term boost in sales given the three effects described above, but in the long term, its customers will lose confidence in its ability to create VLT.
Wrong pricing and promotions are the surest way to destroy a luxury brand. And the history of luxury is filled with such sad examples, where short-term thinking has prevented brands from succeeding in the long term. Pricing errors in luxury are the most difficult to correct. And in many cases, they cannot be reversed at all. Don’t tap into the “easy growth trap”. This will be your costliest mistake.
This is an opinion piece which reflects the views of the author and does not necessarily represent the views of Jing Daily.
Named one of the “Top Five Global Luxury Key Opinion Leaders to Watch”, Daniel Langer is the CEO of luxury, lifestyle and consumer brand strategy solidify Equity, and executive professor of luxury strategy and pricing at Pepperdine University in Malibu, California. He consults with many major luxury brands around the world, is the author of several best-selling luxury management books, a main speaker, and conducts luxury masterclasses on the future of luxury, disruption and the metaverse of luxury in Europe, the United States and Asia. To follow @drlanger