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A luxury brand's credibility and authority can be destroyed if the price is not right. Strategy must be managed just as carefully as clients and budgets.
Luxury is all about perception. Pricing power is created when clients believe that the prices are more expensive than they actually are. Luxury extra value can be found in the experiences and activations that luxury companies create.
Luxury customers expect annual price increases of between 5% and 10%. This expectation does not change in times of economic downturn. Many businesses feel hesitant to reduce prices in recessions, as they lose their confidence. The brand's authority, perception and equity is always diminished by discounting luxury products.
These four mistakes are the most costly in pricing luxury. They are all reasons companies close down.
First mistake: Don't underestimate the brand's value or price too low
My experience shows that management can be cautious about setting premium prices and increasing them annually. This is because they are unsure if they will be able to achieve the desired results. Therefore, price setting is based on production costs.
Pricing luxury at a low price can create a false reference and reduce the perceived value. Although pricing corrections can be made, they can confuse consumers and result in fewer sales. This can have a negative impact on revenue.
Leadership and management that are able to manage luxury brands will be aware of brand value, exclusivity, and pricing power. They understand that luxury does not come from tangible attributes, but is derived from intangible added values.
How can you price your luxury brand without making it too expensive? Pricing your products right from the start phase is the best way to avoid hesitation. Also, when you introduce a new price list remember that luxury prices will always go up.
Related: Responsible Luxury is on the Rise
Make #2 Mistake: Don't overestimate brand value or pricing.
Management can make the brand appear stronger than it actually is. This leads to overestimating its pricing power and premium customer willingness to pay. Pricing too high can be a mistake when management is not focused on customers and creating value for them.
It is essential to identify the ideal customer profile in order to manage a luxury business and understand how you can create value for them.
It is important to make an objective assessment of the brand before setting the price.
Related: Why Luxury Brands Should Use TikTok
Third Mistake: Underestimating perceptions
Never offer discounts. This was the first rule that I learned when I began working in the luxury sector 15 years ago. Although it can be tempting to discount and secure a sale, the long-term consequences are always disastrous.
Discounting luxury means punishing loyal customers, and rewarding customers who are price sensitive and only once. Discounts are a way to destroy pricing power that has been built up over time.
You want to retain brand value and maintain exclusivity. Reduce discounts whenever possible.
Fault #4: Dynamic pricing
Another temptation is to make products and services more affordable based on market demand.
Luxury hospitality and private jets are two examples of yield management. They use dynamic pricing strategies to sell the seats or rooms when there is less demand. This creates confusion for customers.
Luxury consumers don't expect price changes based on market demand. They know and are comfortable with the fact that luxury is built on scarcity and non-reaction to the supply chain.
Do you want to win in this industry? Learn the rules and how losing sales can help your luxury business grow.
The key takeaways
When pricing strategy is concerned, consumers will pay more for your brand if they get more value. If they receive more value than the alternative, they will pay a premium.
Only a small fraction of luxury brands' prices includes the production costs. Brand experience and intangible elements drive higher value.
Luxury is all about the brand, and pricing is only one part of that.
Related: 5 Tips to Sell Luxury Products on Facebook or Instagram
