What is luxury pricing? Have you ever wondered why Rolex watches are so expensive compared to other watches? Or why people seem to want a Rolex watch over and above other watches when the tangible differences between watches don’t really justify the huge differences in prices?
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Rolex is a luxury item and has a superb luxury pricing policy for its products. Rolex is included in the top hundred powerful brands in the market worldwide and the biggest one-day production of two thousand watches. But to a large extent, it’s premium pricing strategy has accelerated not only acceptance of luxury brands, but established whole new price ceilings other industries can only dream about.
In this article, we continue to find out more about Rolex’s pricing strategy. We’ll find out why people buy a very expensive luxury item like Rolex and ask: What makes an item like Rolex luxurious? Is it the materials, the rarity or something else that gets you a price premium worth 9-20 times more than your competitors?
We argue that luxury pricing has a lot to do with brand imaging. Because when people see a brand like Rolex, they relate it with luxury and the prestige of owning it.
We believe that customers buy luxury items for multiple reasons. The reasons are mostly related to the strong emotions that buyers associate when they buy expensive material products. They may purchase expensive things to achieve a certain feeling, like for example, a feeling of achievement from hard work or simply to gain acceptance from other people.
By the end of this article, you will gain insights on the pricing scheme that Rolex used to influence customers to buy its luxury product and understand why Rolex is one of the powerful brands in the global market.
Table of Contents:
I. Luxury Pricing Of Goods: How To Price Products Like Rolex
II. Luxury Pricing Strategy: How To Sell A Luxury Product
Luxury Pricing Of Goods: How To Price Products Like Rolex ⌚
3 Principles of Luxury Pricing
I’d like to kick off with a little known fact to give you a clue about the secrets of luxury pricing: Did you know that some Seiko brands are more expensive than Rolex brands and mechanically better and more advanced too. Yes. In fact, the Grande Seiko range is only marginally cheaper on average than prestigious Rolex brands like perpetual – and every bit as prestigious and quality per value-priced as Rolex.
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So here’s how they do it…
The value-based pricing scheme for luxurious products typically works off three principles:
- Quality – Only the best materials are used in manufacturing luxury products – so we are told or like to believe. As consumers, the assumption is that the wealthy elites want the very best in life. The same applies to when they buy luxury products too. They’d say, “We don’t just want our products to last (durability), we want them to look beautiful too.”
- Heritage – Provenance and brand reputation add authenticity to a luxurious item. Consumers trust that a brand belongs to a top-class maker/manufacturer when it comes with proof and paperwork. In fact, the price of luxury goods tends to go up (or depreciate less) when there’s proof about the item’s quality and performance. And, when there’s proof about the item’s social credibility from word of mouth referrals.
- Exclusivity – consumers want to believe they belong to a small, elite group when they buy a luxurious product like a Rolex watch. They want to know that there’s a ‘red velvet rope’ protecting their prized possessions. The wealthy (like the average consumer) are willing to pay a lot of money to guarantee that very few people have the luxurious item they have just brought. What’s more, they are willing to pay for the status that exclusivity brings with it.
Other aspects to consider are drivers of customer value – sometimes called the customer value proposition
- Consumers look for functional value drivers when they buy luxury goods. Functional value drivers are important because they somewhat influence our decision to buy a luxury product. Consumers will consider the practicality and usefulness of an item, as well as how it looks aesthetically and/or how it works mechanically compared to other like goods.
- But it’s the emotional value of a luxury purchase that really drives the greatest price premiums for sellers and manufacturers of luxury products. And, this is not only true for luxury products like Rolex but also true for industrial parts and machinery items. And, even so-called commodity items like energy and fuel. Concepts like: brand, reputation, desire for success, risk of missing out, risk of product or supply failure. And even psychological drivers like: an opportunity to self actualise; the need for success; the appearance of progression and advancement; social endorsem*nts and validation.
Psychology and emotional cues of success and risk are the backbones of luxury pricing; giving you price premiums that are 5- 13 times greater than functional value drivers.
Just like Rolex watches. For more than a hundred years, Rolex has been the epitome of luxury watches. They have perfected technical ingenuity in spite of top-notch adversity and competition. The term “Time is money” is like a motto for Rolex. Its philosophy is “the highest quality for a high price.” A philosophy that the early founder, Hans Wilsdorf spent a vast fortune in order to advertise Rolex – not only in Europe but to the whole world.
Rolex targets rich buyers or people perceived as wealthy through its history. Both sets or customer groups identified closely with wealth, success and influence. Rolex knows their target market segments and they give them exactly what they want: i.e., different price points to access their ecosystem and lots of opportunities to fulfil the desire for self-actualisation. Oh, and lots of bragging rights too.
Not a Luxury Brand at First
But did you know that Rolex didn’t always start out as a luxury brand? No, it took Hans Wilsdorf many iterations to product design and strategy to get the Rolex brand to where it is now. In fact, Hans Wilsdorf decided in 1915, to change strategy and launch a quality product for everyday use.
During those days, the idea of a small wristwatch only applied to female accessories. The assumption that men only used or wanted mechanically superior pocket watches. At this stage in society, it was believed that men were not influenced by their emotions like women; and that the concept of a wristwatch would be rejected by their affluent and purely rationale male target market.
So, one could argue that Wilsdorf not only radically challenged early assumptions on male buying habits and preferences. But also, was one of the first businesspeople to hypothesise and prove that men were just as influenced by desire and emotion as their female target market. And, it was this insight into consumer psychology which marked the turning point for Rolex.
From this point in time onwards, Rolex has been the must-have luxury accessory for:
- People who can afford luxury Rolex watches;
- And for people who would pay the hefty price of aspiring (or perhaps dreaming) to be in an elite group.
Marketing Strategy for Luxury Pricing
Rolex represents the perfection of technical innovation and aspiration. In Rolex’s watch history, it introduced the chronometer, automatic date changers, an oscillating winding rotor and most importantly the first waterproof wristwatch. Although, over time, Rolex realised that their technical firsts were not purely responsible for driving impressive price premiums. Rather, they found that how they marketed fundamental pricing and psychological principles to their target segments were the biggest drivers of Rolex’s pricing power.
Wilsdorf always knew the importance of both marketing and advertising the right aspects of the human psyche – even in 1905. He spent 100,000 francs on British newspapers to get his message across. Then got a marketing moment when, in 1925, he asked Mercedes Gieitze to swim across the English Channel wearing a chronometer Rolex Oyster on her wrist.
Media Marketing Moment
With media exposure like this, Rolex had become instantly sought-after not only by the rich but also by the masses. Its association with Ms. Mercedes Gieitze symbolised limitless opportunities for women with a dream. Rolex became a hit overnight for the every-man and woman who were committed to working hard to achieve their dreams – one of which was to wear a Rolex on their wrist.
Marketing broadened Rolex mass-market appeal to more than just the wealthy segment of society. But it was how Rolex cleverly protected their brand throughout the years that really ensured their market dominance. In simple terms, Rolex has always ensured they own the distribution of all their products. What’s more, they are the director of a very carefully stage-managed customer journey; and the architect of their own value-based pricing scheme by product, segment and channel.
For example, Rolex does not allow online purchases or small outlets to distribute their watches. They have consciously chosen to partner with the best and own the customer relationship in full. They realised many years ago, that if their customers’ experiences of Rolex is anything less than first-class, this negative feeling will in turn impact their brand and reduce their pricing power.
Rolex Brand Strategy in Luxury Pricing
It all has to do with brand imaging. A brand is the unseen attributes of name, packaging, history, reputation and advertising. It also comes from the experiences, relationships and attachments customers have with the products they buy on a very subconscious level. The feeling when owning a product and their level of satisfaction when they receive a product – from online shopping, in-store sales reps, packaging. How the product looks to the comments received from others when they are using it.
Basically, when people think of a brand like Rolex, they associate it with luxury and the prestige of owning it. Not many can claim they have a Rolex watch. It’s the idea of Rolex that is synonymous with top quality and exclusivity. Even a second-hand gold Rolex watch fetches top prices because everyone believes its the best watch in the world.
It is vital to maintain the image of the brand. Which is why brands like Rolex are coveted. When you visit the Rolex website you instantly know that you are entering into a world of opulence. And that if you were lucky enough to have one, you would feel proud of wearing it. The functionality, usefulness, and emotional aspects of the product all evoke a deep psychological message to customers using brand, marketing and luxury pricing.
Owning a Rolex
Owning a Rolex watch or any luxury builds on the owner’s self-esteem, social role, and popularity. Rolex bases its luxury pricing on the positive attitude of the brand. Things such as:
the visual attractiveness of the product
the prestige of owning it
its fame as a luxury item
the international reputation of its fineness and quality
its stability to last a long time. Even considering it as an heirloom.
Also, the materials in the making of Rolex watches are of high-end quality. Only the best materials used in its creation. But saying this, Patek Philippe uses even better materials than Rolex and are officially a more prestigious brand than Rolex by watch connoisseurs – but most people wouldn’t even know this.
Rolex is the top user of gold and precious gems in its manufacturing factory in Switzerland. They are masters of the ‘dress watch.’ They employ only the best watchmakers in the world and only a few select retailers in the world can sell the watches making it an exclusive club.
Comparison with other watches
All too often, Rolex, when compared to other watches, comes out top – both in terms of price and precision. But did you know that Rolex almost went out of business with the advent of the quartz watches in the 1970s? What’s more, it was Japan’s Seiko watches that beat Rolex in terms of time, engineering and mechanical precision. The quartz watch can keep up to a 100th second in terms of accuracy. Something Rolex watches can’t do.
Quartz technology made a mass-produced, cheap, accurate timepiece possible. It threatened the market-leading position of the Rolex in watch engineering. So why didn’t Rolex make a quartz watch? Well, they did, but it was not as successful as Seiko’s or as good.
But when it comes to brand imaging, people associated the Seiko to every man’s watch. Hence, Seiko became associated commonly with affordable watches. Even though they have their Grande Seiko range. Whereas the Rolex, conversely, considered by most people as luxury, precise and better. Even though this is not officially true or factual.
Thankfully, in the mid-1980s, the Rolex brand was saved from oblivion. During the advent of the luxury watch industry and due to a culture of excess – in which the appearance of wealth and opulence was the number 1 customer value driver.
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Implications
- Many watch manufacturers including Seiko try to emulate Rolex in terms of luxury but only one watchmaker continue to come out on top which is Rolex.
- Rolex luxury pricing comes from marketing an exclusive item that only a few can own i.e., risk, status and scarcity.
- Rolex watches are very much in demand as the brand created a collage of emotional and psychological value and risk drivers, such as self-esteem, status, fear of missing out and prestige.
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Conclusion
- The Rolex pricing and marketing strategy has worked for nearly 100 years. It continues to grow, gaining more new customers at more profitable price points.
- Rolex maintains its reputation with technical perfection using it’s brand and pricing power.
- Owning a Rolex watch is like joining an exclusive club.
- Brand imaging is necessary to make Rolex as a luxury item – time and materials are not enough to command higher price premiums.
- Luxury pricing of Rolex watches depends on advertising success, pricing to avoid risk and managing supply and demand.
⇑ Table of Contents
Luxury Pricing Strategy: How To Sell A Luxury Product
I like many of you watched the biggest boxing match in many years – Floyd “Money” Mayweather versus the Filipino Manny “Pacman” Pacquiao.
It was a very interesting contest on many levels, but this article will focus on pricing and commercial sales aspect of the match-up. I will touch on a number of common pricing issues and how they could potentially apply to this fight. Much of what we see is classic “Value” based pricing.
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Anchoring as a Luxury Pricing Strategy
The match-up was constantly described as the biggest money match-up in history (obviously neglecting inflation) and the figure of $400M has been talked about. As boxing is a very niche sport in this era – unlike the 1950s in the US, the importance of the fight is best described by the prize pot. For most fans and casual watchers, the $400M shouts “this is important – you cannot miss this”. In many ways, the fight signals this is like a Hollywood summer blockbuster and that no one should miss.
Mayweather (nicknamed Money) constantly talks about his wealth and spending habits – celebrity chefs, indoor basketball court in his mansion, $20K in his gumshield. It all helps to build the image of money, importance and luxury.
The fight was held in the fanciest hotels in Las Vegas and the high rollers rolled in.
Anchoring of expensive seats and pricing tiers. A boxing match is a classic example of market segmentation – even the cheap seats will be nose-bleedingly expensive (if you can get them of course). However, the few ringside tickets on sale are as high as approximately $60K a pop. This segmentation strategy puts airlines, etc. to shame. The rewards for sitting ringside of course are great and represent an intangible value – movie stars, pop performers and sports heroes will be clearly present ringside, raising their profile and showing how cool they are at the hottest ticket of the year. See pricing for profit.
Freemium
24/7 shows and open workouts represent a form of freemium – test the product and whet the appetite. Then buy the ticket for Pay Per View. The weigh-in is an interesting case in this fight as it will actually have a paid entrance. Usually, the weigh-in is classic freemium – a face-off, the fighters get their shirts off and flex, maybe some nasty words and more tension building. It is the closest thing to the fight itself. For this fight, the weigh-in is the closest many will get to history and so tickets are on sale!
Defining scarcity as a luxury pricing strategy
This was a once in a lifetime fight. The fighters are clearly over the hill and past their peak. In a young man’s game (less so in recent years). It would have been a better fight 5 years ago, but is probably a bigger financial proposition today.
Championship fighters used to fight every few weeks (Sugar Ray Robinson famously fought Jake La Motta twice in two weeks. Mayweather only fights twice a year. Building the hype and maximising Pay Per View sales. His average audience would probably drop if he fought more often. Scarcity helps build the “event” feel.
Tickets were also very hard to get if not impossible for Joe Soap.
Another aspect of scarcity comes from the feint “closing down” sale tinge of the fight. This was the last mega-fight for quite a while (unless maybe a rematch of course). The PPV and subscription model the sport has adopted has meant new stars are not developed at the pace they used to be.
The growth of UFC among the younger demographic has also eaten into the sport. Many TV execs fret that boxing can only appeal (in the US) to Hispanics, as well as the traditional white male aged over 45 audiences. In other words, this is the last mega-fight for quite some time.
Manufacturing value through a luxury pricing strategy
If it was the hottest ticket in years, why is it being held in a stadium of less than 20,000? The US has no shortage of mega arenas. i.e. the infamous New Orleans Superdome (an indoor arena) holds c.75,000. Obviously, there are other reasons why the fight is in Las Vegas – but a small arena also creates a false scarcity of tickets.
Of the 20,000 or so tickets available, an estimate c.2,000 were actually on sale. The quoted total gate fee is purely an extrapolation of the extremely scarce tickets actually sold. The remainder actually is given to favoured high rollers and celebrities under various agreements.
Bundling as part of a luxury pricing strategy
Casinos treat high rollers like kings – they are a key component of the casino model. When a high roller or whale favours a casino the casino commits to looking after them (a true luxury pricing strategy). Tickets to this fight is a key component of looking after a high roller. “You gamble with us, we take care of you all year round”.
True valuepricing
Mayweather earned c.$5K for his first pro fight. An extremely low amount for an Olympic representative and medalist and someone from a famous boxing family. The media did not favour him for a very long time (basically until he just kept winning big fights). Mayweather always stuck to his guns and stayed confident. He famously described a multi-million dollar HBO contract as a slave contract. Floyd has operated in an era when being an African American fighter has been no easier than in the old days. All other big PPV fights in recent years have featured a Hispanic drawcard. Mayweather has plugged along for so long there is no one else left and he has become the biggest drawcard in the sport.
Even boxers know how to do value-based pricing
If accountants ran this promotion, the fighters and promoters would lose a lot of money (cost plus is not applied anywhere!). The PPV price for TV viewers is the highest ever, >$100 in US and c.$60 in Australia. Of course, they could set it at a much lower rate. Value, value, value.
Short term vs long term
This was a one-time-only event. The undercard was low quality and there was no intention to build a long term offering. This fight was equivalent to cashing your chips in. If promoters cared about the long term future of the sport, they would have tried to put it on terrestrial free to air tv to build a long term new generation of fans. They did not. This was a once-off, short term financial money grab.
Luxury price management
This was tailored, sold and delivered as a luxury product (with a luxury pricing strategy in place). The glitz and glamour involved made the Oscars look dull. The best casinos, the biggest stars, the flashiest TV production made it a visual spectacle.
One could also argue the glamour that’s emphasised for this fight as a contrast to the grittier world of UFC.
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Price discrimination by geography, and maximising willingness to pay
There was a clear hierarchy:
- Ringside
- Descending order of seats
- Closed-circuit screenings all along the strip – with parties, etc.
- PPV – priced by geography
- Delayed free screenings later in the week
- YouTube (more below on that)
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Counteracting internet drive to diminish costs
The heavyweight title fight between Wlad Klitschko and Bryant Jennings in New York was up on YouTube about 30 minutes after the fight ended (in Russian however). This, of course, is a world of Pirates Bay and various torrent sharing sites.
How can the promoters ensure that fans will pay $100 to watch the fight on PPV rather than wait 1 hour then watch for free online? Answer:
- Police YouTube like crazy for a few days
- Emphasise the event-like nature of the fight- one that you should not miss even for a short while
- Like a Hollywood blockbuster – you want to watch the best quality picture – not a small grainy computer bootleg.
- Ensure every media outlet covers the result. Make it impossible to not know the result in the following days. Achieved by distributing media passes under strict criteria.
Vegas baby!
Finally. We were watching a fight but we were also watching Las Vegas itself. Las Vegas is facing trouble from the climate (water shortage) as well as overseas gambling centres like Macau. The US itself has seen multiple casinos spring up at every Native American reservation.
This fight was Las Vegas’s opportunity to dress up and show itself to the world. We saw many shots of the Vegas skyline, the fountains at the Bellagio and info on how much high roller suites cost.
The casinos were bankrolling the fight as stated above as it emphasised everything they love in a luxury pricing strategy; money, glamour, a rough edge, bad boys, winning and losing, characters, Hollywood, excitement. And the beauty is, the fight only lasted for approximately an hour in total from ring walk to decision. There was plenty of time for the fans to hit the tables after that!
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