Over the past few months, almost every brand I’ve advised said that pricing was a major challenge for them. To me, this isn’t a surprise. When business is booming, companies become more confident about pricing. But when markets contract and sales fall, there’s one primary reflex: to discount with the hope of luring back customers.
Pricing is incredibly important for luxury businesses because many of them destroy significant brand equity when they lower prices in search of fast, easy growth. The consequences are almost always fatal. Driving down prices changes a brand’s value perception, which reduces that brand’s actual value. And when brand equity erodes, a rude awakening awaits. During the current pandemic, some brands that were active in discounting, such as Burberry and Ralph Lauren, only compounded their existing issues.
When you look at the brands that are suffering most in the pandemic, there is a pattern: They are poorly differentiated brands with weak brand storytelling that price themselves in the middle of the pack. In the luxury market, I’ve never found an example where an undifferentiated luxury brand achieved sustainable revenue and profit growth by discounting, which begs the question: Why are so many brands falling into this trap and gambling away their futures?
When I do postmortem analyses on failed brand strategies, I see another recurring pattern: They almost always overestimate their brand equity and underestimate how pricing moves are perceived. Let me explain.
Within every brand team, there’s usually the perception that consumers know every detail about the brand. That’s because brand teams spend day and night solely working on their brand. The internal teams know and love everything about the brand, which creates the false impression that the external view on the brand is as positive as the internal view. So in the mind of brand managers, their brand appears to be much stronger than it is.
This phenomenon is called marketing myopia — a nearsighted focus when selling products and services, instead of putting sufficient emphasis on what consumers truly want and how to create customer value over the long term. It was first described by Harvard Business School professor Theodore Levitt in 1960 and became one of the most famous concepts in marketing science.
Yet, marketing myopia persists, and the luxury marketing strategy training that many luxury executives lack tends to compound this behavior within the industry. Avoiding marketing myopia calls for much more training and greater precision in executing these strategies, which allows brands to balance their short term and long term. Because of this reality, the demand for luxury masterclasses has never been as high as it is now.
Brands’ second error is to underestimate pricing effects. Research on competitive market signaling has shown that actively changing prices creates the single greatest competitive signaling effect, with some comparing it to a nuclear bomb. Changing a price always has a short-term lift effect, but the long-term fallout is almost always catastrophic.
If a luxury brand was able to sell a specific item at full price to hundreds of their best and most loyal customers, but then — due to a crisis or slow period — decided to detonate an atomic price drop, all they’ve done is reward a group of one-time, price-sensitive, non-loyal customers. They trade in their brand equity, which their best customers built by paying full price, for short-term, easy growth. And then, any loyal, full-price customer of the brand who sees items they once bought become significantly discounted is sure to be alienated. Nothing makes loyal customers leave faster than deep discounts.
When we interview managers about why they changed prices, the answers are usually versions of: “we didn’t expect the negative pricing effect to be that bad” or “once the brand is more established, we will promote less often.” Sadly, the odds of a brand becoming stronger after it discounts its products are close to zero.
So what is the right pricing strategy? The right approach is to take a step back and remember why consumers ever paid a premium for the brand in the first place. The answer is simple: You would only pay a premium if you got more value compared to another alternative. For luxury brands, only a fraction of the total value is provided by the product. Other factors, mostly intangible and hidden ones, drive values dramatically higher. The magnitude of this “Added Luxury Value” (ALV) can be mind-blowing. We found categories in which the top-tier brands generated ten-thousand times more value than brands in the same categories that only provided functional value.
Most managers never calculate ALV. So, intuitively, they believe that ALV is a relatively small part of the brand’s equity, which they assume is mainly driven by the product or service. Consequently, they think a discount promotion won’t have much impact on their brand’s perceived value. But think again! If the largest part of any perceived value is driven by intangibles, then discounting a luxury item is directly destroying ALV. And rebuilding an intangible once it’s destroyed is nearly impossible.
Pricing, therefore, first has to start with building an extreme value creation model. Brand executives have to generate clarity about what exactly they’re selling. What is driving ALV for their brand? Why should a customer consider them? What is the competitive advantage — not thanks to the product but because of the brand positioning? Brands must look at the big picture where the customer at the center.
Only when the value model is crystal clear and rigorously defined can a brand can price correctly. If the price is too low, it signals that there’s less value. So, next time your brand has to decide whether or not to discount, think differently. Instead of lowering prices, first, think about how you could excite your customers more. Then think about the extreme value your business creates. Only these steps will allow you to price your luxury brand as precisely as possible.
Daniel Langeris CEO of the luxury, lifestyle and consumer brand strategy firmÉquité,and the professor of luxury strategy and extreme value creation at Pepperdine University in Malibu, California. He consults some of the leading luxury brands in the world, is the author of several luxury management books, a global keynote speaker, and holds luxury masterclassesin Europe, the USA, and Asia. Follow@drlanger
FAQs
The answer is simple: You would only pay a premium if you got more value compared to another alternative. For luxury brands, only a fraction of the total value is provided by the product. Other factors, mostly intangible and hidden ones, drive values dramatically higher.
What pricing strategies do luxury brands use? ›
What is the pricing strategy used by a luxury brand? Luxury labels' pricing strategy is value-based, backed by the superiority of their products and the willingness of their customers to pay. They emphasise quality and durability above all else.
What strategy do luxury brands use? ›
What is luxury brand strategy? While there is a range of brands in every industry, luxury brands aim themselves at luxury markets with higher price points, offering bespoke services and more highly sought-after options.
What is the most successful pricing strategy? ›
Value pricing is perhaps the most important pricing strategy of all. This takes into account how beneficial, high-quality, and important your customers believe your products or services to be.
What is everyday low pricing strategy? ›
Everyday low pricing is the strategy of the retailers to set consistently low prices on the products instead of having discount events or promotional pricing. Unlike high low pricing, an edlp strategy provides the notion to the customers that they can always expect the lowest prices while making the purchases.
What is Louis Vuitton pricing strategy? ›
Louis Vuitton employs a skimming pricing strategy, setting high initial prices for its products and maintaining them even as competitors enter the market. This approach allows the brand to maintain its luxurious image and appeal to consumers who value exclusivity.
What pricing strategy does Prada use? ›
Prada employs a premium or prestige pricing strategy, setting high price points for its products to reflect the brand's luxury positioning and exclusivity.
What is luxury strategy? ›
"The Luxury Strategy" explains the difference between 'premium' and 'luxury', and sets out the rules to be applied to the luxury marketing mix (the opposite of those for classic marketing).
What marketing strategy does Gucci use? ›
Gucci's marketing strategy is to create a sense of exclusivity around their products to appeal to high-end consumers who value luxury and quality. They achieve this through their use of high-end materials, attention to detail, and signature design elements, such as the double-G logo.
What is the competitive strategy of Gucci? ›
According to the Business of Fashion, Gucci's strategy is about finding the right balance between fashion-oriented products and classic, staple pieces. The Italian company stays true to its brand heritage — producing timeless, always-in-style articles — while adapting key pieces to keep up with the latest trends.
What are the 4 major pricing strategies? Value-based, competition-based, cost-plus, and dynamic pricing are all models that are used frequently, depending on the industry and business model in question.
What is good value pricing strategy? ›
Good-value pricing is a strategy where businesses offer products or services at reasonable prices, giving customers the best possible value for their money. This approach combines quality and affordability, making it attractive to cost-conscious consumers.
How do I find the best pricing strategy? ›
How to choose your pricing strategy
- Determine your value. ...
- Evaluate pricing potential. ...
- Review your customer base. ...
- Determine a price range. ...
- Check out your competitors. ...
- Consider your industry. ...
- Consider your brand. ...
- Gather feedback from customers.
Everyday low price (also abbreviated as EDLP) is a pricing strategy promising consumers a low price without the need to wait for sale price events or comparison shopping.
What is the easiest pricing tactic? ›
Cost-plus pricing, also known as mark-up pricing, is the easiest way to determine the price of a product. You make the product, add a fixed percentage on top of the costs, and sell it for the total.
Why do companies use everyday low pricing? ›
Because an everyday low pricing strategy allows you to decrease demand fluctuations and avoid sales promotions, you can streamline your demand forecasting operations. A low pricing strategy enables you to set low prices for your products to attract more customers and increase sales.
What kind of pricing strategy does Rolex use? ›
Rolex is one of the most iconic luxury brands in the world, and a large part of its success can be attributed to its premium pricing strategy. Rolex uses premium pricing to create a perception of exclusivity and higher quality, which justifies the higher price tag of its products.
What is Victoria's Secret pricing strategy? ›
Victoria's Secret Price/Pricing Strategy:
Since innerwear is a product line that is not compromised upon, customers buy it even if they are segmented in the higher price range. Their premium pricing policy attract those who hail from society. It does not cater to the needs of the masses.
What are the 4 P's of luxury brands? ›
Luxury Marketing – The 4 P's: Patricians, Parvenus, Poseurs and the Proletarians. Is a marketing model proposed by Han, Nunes & Dreze (2010) used to define customer segmentation in the purchase of luxury goods.
What is Kate Spade pricing strategy? ›
The current pricing strategy of Kate Spade is a competitive based pricing strategy. With a large number of competitors existing in the industry, the company has a lot of accessible data on pricing to determine its own price. The price is often higher than many competitors for more features.
Price: As a luxury brand, Alexander McQueen positions its products at higher price points to convey exclusivity and perceived value. The pricing strategy takes into account factors such as the brand's positioning, craftsmanship, unique design elements, and premium materials.
How does Dior promote their products? ›
Dior has been advertising its products in a few high-end fashion magazines, such as Vogue, Harper's Bazaar, Vanity Fair, and Elle, amongst many others, to cater to its affluent and fashion-savvy customers.
What strategy does LVMH use? ›
LVMH's positioning strategy varies by brand, with each brand having its unique identity and messaging. For example, Louis Vuitton is positioned as a global luxury brand with a focus on high-quality leather goods, while Fendi is positioned as a luxury fashion brand with a strong focus on innovative designs.
Who are luxury brands targeting? ›
By far, the biggest audience for luxury brands is the audience between the age of 25-44 years.
Why do rich people buy luxury brands? ›
Fortunately for luxury brands, the Internet has made them easily accessible for impulse shopping. A sense of accomplishment is another reason why some people buy luxury goods. They want to reward themselves for their hard work by treating themselves to something they typically could not afford.
What marketing strategies does Chanel use? ›
For promotions, it usually places ads for its products in high-end fashion magazines like Marie Claire, Harper's Bazaar, Vogue, Elle etc. Chanel also does point of sale marketing by employing classy store layouts and creative use of mannequins to lure the customers into their boutiques.
Which pricing strategy is most often used with luxury brands like Gucci? ›
Prestige pricing is a pricing strategy that uses higher prices to suggest quality and exclusivity. This practice is commonly seen among luxury brands and fine restaurants.
What is Gucci's unique selling proposition? ›
Gucci's USP, so to speak, is their unique craftsmanship. Going by the records, the top three Gucci items explored by shoppers online are flip-flops, shoes, and belts. With a brand value of $ 12.7 billion, Gucci is one of the richest brands in the fashion world.
How do luxury brands stay competitive? ›
Luxury brands built their competitive advantages on value and focus. They offer superior value to a specific niche and control a set of exploitable resources. These competitive advantages are the key drivers of their long-term business success and give direction and sharp focus to the leadership.
What are the 4 four major competitive strategies? ›
Porter's four competitive strategies are cost leadership, differentiation, cost focus, and differentiation focus strategies.
According to Porter's Generic Strategies model, there are three basic strategic options available to organizations for gaining competitive advantage. These are: Cost Leadership, Differentiation and Focus.
What is an example of a one price strategy? ›
Under a single price policy, the company offers all its goods at one price. For example, it sells its pens, rulers, notebooks, and highlighters for $3 each. In other words, everything in stock costs the same. Under a one price policy, the seller shows no discrimination.
What is Samsung pricing strategy? ›
Samsung uses price skimming strategy in regards to its mobile phones. When customer demand is high due to a new release, the price is set to attract the most revenue. After the initial fervor and hype wanes, Samsung adjusts price points to suit more consumers in the market.
What is everyday fair and square pricing? ›
The Fair and Square pricing strategy is a value based proposition where the objective of Ron Johnson is to capture more value from the everyday low prices (EDLP) and to simplify the shopping experience of the customers and change their perceptions of the stores about just thriving on the basis of promotions and deals.
What is daily price mean? ›
Daily Prices means for each trading day in the 10 trading day period referenced in the definition of UGC Average Share Price, the volume weighted average price of UGC Class A common stock on NASDAQ, as reported by Bloomberg Professional Services on screen page UCOMA <Equity>AQR, or a successor quotation system.
What is the most aggressive pricing strategy? ›
The most aggressive pricing strategy is the competitive pricing strategy.
What is the simplest and most commonly used pricing method? ›
Hence the most common method used for pricing is cost plus or full cost pricing.
What pricing strategy should be used to attract first time users? ›
Penetration pricing is a marketing strategy used by businesses to attract customers to a new product or service by offering a lower price during its initial offering.
What stores have everyday low pricing? ›
What Retailer Created the Term Everyday Low Price? EDLP is associated with Walmart as the company has used it consistently in its marketing. As a pricing strategy, Walmart founder Sam Walton used EDLP when opening his first stores.
Who says everyday low price? ›
Originally stated as “Low Prices Every Day,” the term is simply flipped to emphasize that on every day, on every product, Walmart offers low prices. Why not Everyday Low Prices? “Everyday” implies ordinary, common. “Every Day” reinforces the consistency of the pricing strategy.
High-low pricing is the pricing strategy that assigns high prices to many products and low prices to a few products that a company sells. High-low pricing can help businesses increase their revenue by attracting customers through advertising low-price items and continuing to sell high-price items in the same place.
What type of pricing model should luxury or premium brands use to determine their prices? ›
Also known as prestige pricing and luxury pricing, a premium pricing strategy is when companies price their products high to present the image that their products are high-value, luxury, or premium. Prestige pricing focuses on the perceived value of a product rather than the actual value or production cost.
What kind of pricing strategy do luxury items like Louis Vuitton Chanel and the likes uses? ›
Louis Vuitton uses value based pricing in its marketing mix for its products. Since customers perceive the company's products as high value products, the customers are willing to pay the amount.
What kind of pricing strategy do Rolex use to sell some highly premium products? ›
Rolex is one of the most iconic luxury brands in the world, and a large part of its success can be attributed to its premium pricing strategy. Rolex uses premium pricing to create a perception of exclusivity and higher quality, which justifies the higher price tag of its products.
What is a pricing strategy used when a product or service is positioned to be luxurious and elegant? ›
Price skimming is typically associated with luxury items and only works if you have a product or service that is highly valuable or perceived as highly valuable. Brands like Rolex, Mercedes-Benz, and Louboutin use a price-skimming model, and the high price reinforces their luxury perception.
What is also known as premium pricing or luxury pricing? ›
Premium pricing (also called image pricing or prestige pricing) is the practice of keeping the price of one of the products or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price.
What are the 4 pricing strategies? ›
What are the 4 major pricing strategies? Value-based, competition-based, cost-plus, and dynamic pricing are all models that are used frequently, depending on the industry and business model in question.
What is the premium pricing strategy? ›
Premium pricing means a retailer is consistently pricing their product higher due to competitive advantage. Often clever branding, marketing and messaging that appeals to their customer base. The strategy is mostly used when a company has a solid and strong brand.
What is Louis Vuitton unique selling proposition? ›
1. Value Proposition: Louis Vuitton offers high-quality, luxury products that combine style, prestige, and exclusivity. This attracts loyal customers who seek unique designs and superior craftsmanship, reinforcing the brand's strong reputation in the luxury market.
What is luxury good price demand? ›
In economics, a luxury good is a good for which demand increases more than proportionally as income rises. Luxury goods are said to have high income elasticity of demand. In other words, as people become wealthier, they will buy more and more of the luxury good.
Top Rolex Marketing Strategies. 1. Prestigious brand positioning: Rolex has always positioned itself as a prestigious and luxury brand, associating itself with influential and successful people, thereby appealing to customers who aspire for this lifestyle.
What is the targeting strategy of Rolex? ›
Rolex - Target Market
Its timepieces are not merely watches; they are symbols of achievement and refinement. As such, Rolex's target audience encompasses individuals who aspire to embody these qualities and seek to make a statement with their choice of wristwear.
What is the most common pricing strategy in retailing? ›
The most common pricing strategies employed in the retail industry include; Competitive Pricing Strategy – A competitive pricing strategy is a pricing method that involves setting the prices of your businesses' products in relation to the prices of your competitors.
What are the three major pricing strategies? ›
In this short guide we approach the three major and most common pricing strategies:
- Cost-Based Pricing.
- Value-Based Pricing.
- Competition-Based Pricing.
e) High Price Maintenance Pricing strategy is used when the high price is associated with the quality of the service. Many doctors, lawyers and other professionals follow this pricing strategy.
What type of pricing strategy is used when a brand considers having high quality and a higher percentage of the market share? ›
Premium pricing occurs when prices are set higher than the rest of the market to create perceived value, quality, or luxury. If your company has a positive brand perception and a loyal customer base, you can often charge a premium price for your high-quality, branded products.
