The Nature Of Luxury


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The principles of marketing to hi-end consumers and trends in luxury.

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The Nature Of Luxury

  1. 1. by Viacheslav Derzhaev, April 2009
  2. 2. Old Luxury and New Luxury <ul><li>– Where's my Bentley? </li></ul><ul><li>– It has had its day, I'm afraid. </li></ul><ul><li>– But it has never let me down. </li></ul><ul><li>– &quot;M's&quot; orders, double-o-seven. You 'll be using this Aston Martin DB5 with modifications. </li></ul><ul><li>(&quot;Goldfinger&quot;, 1964) </li></ul><ul><li>That scene in famous James Bond movie symbolizes the shift from Old Luxury to New Luxury . </li></ul><ul><li>Wolfgang Reitzle, former Head of Premier Automotive Group (Aston Martin, Volvo, Jaguar, Land Rover, etc.) describes Bentley that James Bond was using at sixties as a relict of that times, with a &quot;…radiator enclosure that looked like Greek temple and a cabin in the manner of English castles&quot;. Bentley was, undoubtedly, a status symbol. </li></ul><ul><li>Aston Martin was totally different. Its luxury was built on supreme performance . </li></ul>
  3. 3. New Luxury <ul><li>New Luxury – products and services that possess higher levels of quality , taste , and aspiration than other goods in the category but are not so expensive as to be out of reach. </li></ul><ul><li>(Michael J. Silverstein and Neil Fiske, Boston Consulting Group) </li></ul><ul><li>New Luxury means taking care of yourself, loving yourself, in order to improve your quality of life, your personal satisfaction. It is more a personal experience than a social one, more and more available for a huge amount of people . </li></ul><ul><li>(Franco Fontana, Dean of Luiss Business School) </li></ul><ul><li>New Luxury products are sold at much higher prices than conventional goods and in much higher volumes than traditional luxury goods. The result is transformation of the entire category. </li></ul><ul><li>Consumers have much stronger emotional engagement with New Luxury products, comparing to Old Luxury goods that are based primarily on status . </li></ul>
  4. 4. BMW – the perfect example of New Luxury
  5. 5. BMW <ul><li>&quot;BMW produces premium cars, not luxury cars, and they are engineered by people who love cars. Other car companies concentrate on ‘visible’ features. We make the best vehicle.&quot; </li></ul><ul><li>(BMW board member) </li></ul><ul><li>BMW is a &quot;Driving Pleasure&quot;. They are driver's advocates. And that is how they describe their target customers: </li></ul><ul><li>&quot;They work hard and play hard. They treat fun seriously. They enjoy driving. They have high personal energy. Quality is very important, and they are prepared to pay more. Sometimes they don’t even take the most direct route to work if there is a better road for driving. They feel completely at peace—protected and invigorated in their driving environment. They are far more likely to wash their cars than other people in the same income cohort . &quot; </li></ul><ul><li>(BMW chief marketing officer) </li></ul>
  6. 6. Ladder of benefits <ul><li>Michael J. Silverstein, senior partner and managing director at Boston Consulting Group, describes the ladder of benefits of New Luxury products: </li></ul><ul><li>&quot;First, it must have technical differences in design, technology, or both. Subsumed within this technical level is an assumption of quality – that the product will be free from defects and perform as promised. Second, those technical differences must contribute to superior functional performance . It’s not enough to incorporate “improvements” that don’t actually improve anything but are intended only to make the product look different or appear to be changed. (U.S. automakers played that game for years). Finally, the technical and functional benefits must combine – along with brand values and company ethos – to result in emotional engagement .&quot; </li></ul>
  7. 7. Types of New Luxury <ul><li>Accessible superpremium products </li></ul><ul><li>They are priced at or near top of their category and at a considerable premium over conventional goods, but a still affordable for middle-market consumer, because they are relatively low-ticket items , e.g. fragrances or underwear. </li></ul><ul><li>Old Luxury brand extensions </li></ul><ul><li>Lower-priced versions of products created by companies whose brands have traditionally been affordable only to the rich: Marc by Marc Jacobs, DKNY by Donna Karan, Armani Exchange by Armani, Calvin Klein Jeans by Calvin Klein, etc. </li></ul><ul><li>Masstige goods </li></ul><ul><li>Neologism for mass prestige. They are neither at the top of their category in price nor related to other iterations of the brand. They occupy a sweet spot in the market “between mass and class”. iPhone is the best example of masstige goods. </li></ul>
  8. 8. Democratization of luxury <ul><li>We must be aware of the fact, that today's luxury is tomorrow standard. The rise of the New Luxury is the acceleration of historical phenomenon. Luxury features and technologies have always trickled down as innovations, which are usually introduced at the high end of the market, become more affordable and more widely available over time. Now the quality, taste, and sophistication of luxury products are cascading downmarket faster than ever before. Producers are driving the trend more explicitly and consciously. And consumers are embracing it more eagerly. This is called the democratization of luxury . </li></ul><ul><li>&quot;Luxury is crossing all age, racial, geographic and economic brackets. We've broadened the scope far beyond the wealthy segments . Most people today have satisfied their basic needs. What's left is not about conspicuous consumption, it's about pleasing oneself.&quot; </li></ul><ul><li>(Daniel Piette, group executive vice president of LVMH) </li></ul><ul><li>“ Luxury is a necessity that begins where necessity ends.” </li></ul><ul><li>(Coco Chanel) </li></ul>
  9. 9. Louis Vuitton – a mass produced luxury
  10. 10. Louis Vuitton <ul><li>Louis Vuitton has done unprecedented by advertising itself on TV, and its latest activities show shift in its positioning strategy. </li></ul><ul><li>&quot;When you look at Louis Vuitton, you see it is a mass produced luxury. It's not about hiding the logo. It's about being a bit of show-off.&quot; </li></ul><ul><li>(Marc Jacobs, Art Director of Louis Vuitton) </li></ul><ul><li>&quot;Vuitton is the McDonald's of the luxury industry: it's far and away the leader, brags of millions sold, has stores at all the top tourist sites — usually steps away from a McD's — and has a logo as recognizable as the Golden Arches.&quot; </li></ul><ul><li>(Dana Thomas, Newsweek cultural correspondent) </li></ul><ul><li>&quot;Louis Vuitton has seen success in its expansion to Japan, where 44 percent of Japanese women own a Louis Vuitton bag. Still, such expansion comes with its own risks. The popularity of the Vuitton bag in Japan has sacrificed some of the brand’s desirability. Ultimately, any move to expand needs careful management. Spread the brand too overtly, and the brand risks devaluing itself.&quot; </li></ul><ul><li>(Jez Frampton, Interbrand’s Group Chief Executive) </li></ul>
  11. 11. Consumer behavior <ul><li>Trading Up and Trading Down </li></ul><ul><li>Consumers shop more selectively. They trade up to New Luxury products or services in the categories which are important to them, which comply with their personal enjoyment and desire for satisfying emotional aspirations. There is also a practice of rocketing – spending a disproportionate amount of income in a category that holds great meaning. If the category is not important – they trade down to low-cost brands or even go without, in order to save money for trading up in other categories. The combination of trading up and trading down leads to a disharmony of consumption – meaning that a consumer's buying habits do not always conform to his income level. </li></ul><ul><li>&quot;Death In The Middle&quot; </li></ul><ul><li>As consumers buy more selectively, trading up and trading down, they increasingly ignore the conventional, midprice product that fails to deliver the ladder of benefits. Why bother with a product that offers neither a price advantage nor a functional or emotional benefit? </li></ul><ul><li>[Source: &quot;Trading Up To New Luxury&quot;, Boston Consulting Group] </li></ul>
  12. 12. Consumer behavior <ul><li>96,2% </li></ul><ul><li>Will pay more for at least one type of product that is important to them </li></ul><ul><li>70% </li></ul><ul><li>Identified 10 categories in which they would rocket </li></ul><ul><li>50% </li></ul><ul><li>Were prepared to spend “as much as they can” for goods in a particular category </li></ul><ul><li>50% </li></ul><ul><li>Say that even when the economy is bad, they will spend on affordable luxuries </li></ul><ul><li>[Source: &quot;Trading Up To New Luxury&quot;, Boston Consulting Group] </li></ul>
  13. 13. Consumer behavior <ul><li>Reasons </li></ul><ul><li>Prospering economy and increasing incomes </li></ul><ul><li>(that is history now). </li></ul><ul><li>Increased education </li></ul><ul><li>Consumers have more information about goods and markets, and therefore more sophisticated needs. </li></ul><ul><li>Changes in family structure and demographics </li></ul><ul><li>They are marrying later and have more disposable income, fewer children, richer parents, more women work today. </li></ul><ul><li>Media </li></ul><ul><li>Media reinforces and legitimizes purchases that help to live richer life. </li></ul>
  14. 14. Stretching luxury market <ul><li>Consumer's behavior results in stretching luxury market, that is also going both up and down. </li></ul><ul><li>Rolex is considered a luxury watch brand by many. Not by buyers of Vacheron Constantin or Patek Philippe for prices that normally range between $20K and over $2M. Luxury is relative . One man's luxury is often another's (usually richer) everyday lifestyle. Therefore we now have more layers of luxury than ever before. </li></ul><ul><li>Mercedes-Benz, for example, has dramatically changed its product mix in the past ten years, with continual reductions in the price of the C-class (now about $40,000) and a steady increase in revenue from the model. Mercedes-Benz has also worked to keep the brand aspirational by extending it upmarket as well. Its Maybach sells for more than ten times the price of the C-class. </li></ul>
  15. 15. More individuality, rather than uniform status symbols <ul><li>Luxury buyers are now less interested in purchasing uniform status symbols and opt for developing an individual style and expressing themselves in original ways. </li></ul><ul><li>They stop at small designer hotels (Delano, St.Martins' Lane, Mondrian, etc.) rather than at Ritz-Carlton or Hilton. </li></ul><ul><li>They choose highly tailored brands (Manolo Blanik for women shoes, Berluti for men shoes, Harry Winston for jewelry, etc.) that specialize in narrow area. </li></ul><ul><li>Therefore, luxury has evolved and became more diverse. New forms of luxury have emerged. </li></ul><ul><li>“ The way I define luxury isn't by fabric or fiber or the amount of gold bits hanging from it,” Marc Jacobs says. “That's an old definition. For me, luxury is about pleasing yourself, not dressing for other people.” </li></ul>
  16. 16. New shapes of luxury <ul><li>A survey 5,713 luxury consumers conducted by atelier , a division of Leo Burnett that specializes in luxury, has revealed key dimensions of modern luxury: </li></ul><ul><li> Status (&quot;Keeping up with the Johnses&quot;) </li></ul><ul><li> Extravagance (&quot;Showing off with your Louis Vuitton luggage&quot;) </li></ul><ul><li> Connoisseurship (&quot;Great taste&quot;) </li></ul><ul><li> Seduction (&quot;Route to romance&quot;) </li></ul><ul><li> Uber-Premium (&quot;Ultimate of its kind&quot;) </li></ul><ul><li> Creative (&quot;Expressing yourself&quot;) </li></ul><ul><li>Cutting-edge (&quot;Ahead of trends&quot;) </li></ul><ul><li>Ethical (&quot;Paying for peace of mind&quot;, e.g. fair-trade coffee) </li></ul><ul><li> Pampering (&quot;Well-being&quot;, e.g. spa-treatments) </li></ul><ul><li> Altruism (&quot;Giving something back&quot;, e.g. Project Red) </li></ul><ul><li> Escapism (&quot;Taking a break, getting away from it all&quot;) </li></ul><ul><li> Actualization (&quot;Finding inner you&quot;, e.g. personal trainer, yoga) </li></ul><ul><li> Achievement (&quot;Increasing your power&quot;, e.g. Blackberry) </li></ul><ul><li> Adventure (&quot;A bit edgy and out there experience&quot;, e.g. skydiving) </li></ul>
  17. 17. More experiences, rather than goods <ul><li>New shapes of luxury show that there is a trend towards spending more on luxury experiences and lifestyle rather than goods. Experiences include entertainment (theater, concerts and shows, casinos, etc.), social events, winning and dining, travel, SPA, massage, beauty treatment, etc. This trend also includes the purchase of goods that provide experiences for the long run, e.g. home theaters. </li></ul>
  18. 18. Amanresorts – a lifestyle experience
  19. 19. Amanresorts <ul><li>&quot;If you measure success in room numbers, Amanresorts hasn’t achieved all that much. We have never focused on being the biggest. We prefer to think small. Intimate. Involving. It’s not that we are better than big hotels because we are small. We are different, that’s all. Amanresorts responds to a contemporary lifestyle. That’s what we offer – a lifestyle experience, without limitations. </li></ul><ul><li>Each of our resorts is quite different in location, look, mood and guest experience. Yet each leaves an impression, an indelible mark. At Amanresorts we have discovered there is an alternate path. That it is possible to build environmentally friendly and aesthetically pleasing resorts. That small is good for business as well as guests. That less is more.&quot; </li></ul><ul><li>(Amanresorts official website) </li></ul><ul><li>Amanresorts is a series of small hotels situated all around the world. They were built by a single man, Adrian Zecha. He alone was taking all the decisions concerning design, location, policy, etc. Amanresorts are far more than hotels – that is a culture, a lifestyle, an attitude to life. Of Adrian Zecha. And they have never been advertised by means of traditional advertising. </li></ul>
  20. 20. Principles of luxury <ul><li>Dr. Dan Herman, an independent consultant that builds luxury bands worldwide, has identified main principles of luxury brands: </li></ul><ul><li> Luxury brand is first and foremost a product of superior quality </li></ul><ul><li> Luxury brand's value is usually beyond its core function </li></ul><ul><li> Luxury brand incorporates culture and philosophy </li></ul><ul><li> Usually has something extravagant or excessive (far beyond needs) </li></ul><ul><li> Owns style & leadership (being challenging; leading, not following consumers) </li></ul><ul><li> Is linked with those who &quot;run the world&quot; </li></ul><ul><li> Is managed with authority or even dictatorship </li></ul><ul><li> Is difficult to reach (consumers have to outstretch a bit to afford it) </li></ul><ul><li> Has mystery and legend behind the brand </li></ul><ul><li> Uses No-Mix principle (luxury consumers want to be distinguished from others) </li></ul><ul><li>These principles are suitable for both, Old Luxury and New Luxury. </li></ul>
  21. 21. Luxury in crisis times <ul><li>&quot;In marketing folklore, luxury brands were said to be immune to economic downturns. Their audience of uber-wealthy loyalists meant they remained protected during tough economic times. Furthermore, as the global economy prospered, luxury brands attracted new segments of customers who were suddenly able to afford a wealthier lifestyle. It should be no surprise then, that we saw so many luxury brands –Tiffany & Co. as an example – rush to make themselves more accessible to a broader audience over the last ten years. And it is luxury’s reliance on this extended market that now creates risk and makes them vulnerable to the downturn.&quot; </li></ul><ul><li>(Jez Frampton , Interbrand’s Group CEO) </li></ul>
  22. 22. Luxury in crisis times <ul><li>Three types of luxury consumers </li></ul><ul><li>Uber-wealthy  Financial world elite </li></ul><ul><li> About 150 thousands (86% - Moscow, 11% – St. Petersberg) </li></ul><ul><li> $1 mln annual income </li></ul><ul><li>They will remain consumers of luxury. </li></ul><ul><li>Mass Elite  Major businessmen, officials, heirs of capital </li></ul><ul><li> About 1.2 mlns </li></ul><ul><li> They speculate on stock exchange, invest in property, therefore are vulnerable </li></ul><ul><li>They demonstrate mature consumer behavior. </li></ul><ul><li>Medium Luxury  High salary workers, middle class </li></ul><ul><li> Buy products on credit basis </li></ul><ul><li>They've usually demonstrated conspicuous consumption, therefore they are most affected by crisis. </li></ul>
  23. 23. Luxury in crisis times <ul><li>Overall, the more uber-premium is the product, the more prone it is to the economical downturns. Sales of superyachts, private jets, superpremium individual tours and vacations, bespoke clothes, etc. were not much affected by crisis, whereas sales of more &quot; democratic &quot; luxury have experienced a significant decline. </li></ul><ul><li>Mercury Group has recently acquired control over Phillips de Pury & Company, an old auction house and art dealership , that previously belonged to LVMH. That is a vivid demonstration of their confidence in the market of uber-premium luxury in Russia. </li></ul>
  24. 24. <ul><li>“ ...It is in these difficult periods, that we need to show our difference and keep pushing on creatively”. </li></ul><ul><li>(Bruno Pavlovsky, Head of Chanel Fashion division) </li></ul>Afterword