Pricing strategies are tricky to put together, and even more nerve-wracking to execute. The correct pricing can mean success for your business, but pricing your products wrong results in a major loss of profits. This is especially true for luxury product pricing.
Luxury products are harder to price as the variables to consider are more difficult to quantify. Unlike ordinary products or commodities, where functionality is the main value driver, luxury products put a premium on the emotional value they provide.
In order to understand how to determine a pricing strategy for luxury products, let’s first take a look at what makes them qualify as “luxury.”
What is a luxury product?
Brands who focus on providing luxury products like Gucci, Rolex, and Bentley have several things in common. Aside from undeniable product quality and performance, their products are packaged and marketed with prestige, exclusivity, and a certain uniqueness. They also bank on providing a certain heritage or culture to their customers. These qualities all fall under added luxury value (ALV).
Luxury product consumers purchase products they perceive as prestigious. Moreover, they want others to acknowledge that luxury too. When a brand offers a product that serves as a status symbol, that brand has achieved luxury status.
With luxury products, emotional value weighs more than functional value. Production costs, competitors, and market prices are of little relevance as decisive points of reference, both in pricing and purchasing.
Instead, the key to luxury brand success lies in brand and pricing consistency, especially for global players. Of course, the price must reflect the brand’s key message and the quality of the products. Luxury consumers don’t care about high prices; in fact, they see it as an indicator of value, but they want transparency and authenticity from the brand like every other consumer.
That is why, aside from letting the product speak for itself, it is also important to provide content consistent with luxury branding. This is especially true when it comes to a brand’s online presence. Transition to digital platforms has never been more crucial for businesses, and the same is true for luxury brands. However, e-commerce has posed some challenges for businesses providing luxury products.
One of the main challenges is pricing consistency. Online shopping is known for having lower prices. It is beneficial for a lot of businesses to converge their online and in-store pricing to increase the range of available products online. However, luxury brands have to maintain consistent pricing to protect the brand.
Moreover, luxury products are priced higher, and it is human nature to want to feel more on the expensive side. Digital platforms are limited to visual and auditory stimuli. In order to justify higher prices of luxury products without tactile proof, businesses need to be innovative in getting the looks and feel of the products across, digitally. This can be achieved by providing a storyboard of product creation, giving valuable advice, and having a lifestyle blog.
Another challenge is maintaining exclusivity. Incorporating e-commerce for luxury brands is a battle for exclusivity and close relationships with customers. The good news is that there are many ways to maintain exclusivity and provide exceptional and immersive customer experience online.
All in all, the main selling point of luxury products is more about the quality, experience, prestige, and heritage the brand has to offer than the functionality of the product itself. It is largely based on the consumers’ perceived value of both the product and the brand. If your business focuses on selling luxury products, here are some of the most effective pricing strategies you can use.
Luxury Pricing Strategies
Demand and supply are one of the main factors to consider in pricing commodities. Demand for commodities tends to fall when prices are high. However, luxury product prices are not affected by supply and demand in the same way as commodity prices. In fact, when it comes to luxury items, higher prices are perceived to have greater value, and demand rises with it.
Of course, it does not mean the demand will rise indefinitely–at some point, a high price will hurt the demand of a luxury item. The key to pricing luxury items right is correctly quantifying the perceived value and identifying the price point beyond which it is deemed “too expensive.”
Value-based Pricing (VBP)
Of course, one of the best pricing strategies to use for luxury products is value-based pricing. Luxury products have undeniably high perceived value. The key to successfully implementing VBP lies in accurately quantifying the perceived added luxury value.
Added luxury value includes several factors:
- Quality, refinement, and performance
Quantifying these factors is difficult, as they are all subjective values, and extensive and proper research is necessary for accuracy.
One formula that works is the Intrinsic Value Dependency Index (IVDI) which was based on the Behavior Perspective Model. The IVDI is used to determine whether your product’s intrinsic value is perceived as a commodity, a low-end product, or a luxury item by your target market. It helps you create a baseline to gauge the starting price.
Prestige Pricing (a.k.a Image pricing)
Prestige pricing is a strategy of pricing your products and services at a higher level to give off the idea of a higher quality product. This works best for brands whose image is valued by customers, such as Nike. That’s why it is also known as image pricing.
This kind of pricing appeals to the customers’ psychological sense of value to increase profits. For example, if Nike releases a new line of shoes, customers loyal to the brand are more likely to buy the shoes if they are priced higher. They already value the brand, and while Nike has a huge variety of shoes available, the ones priced higher have more perceived prestige to it, versus their regular shoes.
This is a great strategy for businesses who offer “regular” products alongside a top-of-the-line selection.
The success of executing prestige pricing lies in three things:
- creating an enterprise tier
- a prestigious brand for your company (setting the right image with the appropriate environment)
- giving an appropriate price to the right image
Most importantly, effectively communicating the value of your products helps build brand image and customer loyalty. It also helps maintain credibility and increase your profit margins.
Some Final Takeaways About Luxury Product Pricing
Luxury pricing shouldn’t be confused with premium pricing. Premium products are freely available to anyone willing to pay the price for it. Luxury products are distinct in the exclusivity and prestige it offers. It is like joining a club, where only club members are allowed to enjoy the perks and privileges. Marketing and pricing strategies should be consistent with the brand’s exclusivity, prestige, and heritage.
Luxury products are also not limited to high-end items. There are entry-level products meant to give new and aspiring consumers a taste of the brand’s luxury for a reasonable, brand-consistent price.
Lastly, the perceived value is subject to change. Brands who want to maintain a status of luxury should be adaptive to these changes without compromising integrity. Pricing luxury products is challenging because the wrong pricing could destroy the brand’s image, but under-pricing could result in millions of £ worth of profit loss.