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analysis of pricing strategy for luxury products

PRICING STRATEGY | 10th February 2010

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GROUP 10
Sreejith Narayanan E, 0911054 Nutan Kumari Choudhary, 0911111 Hangsing N David, 0911239 Devi Prakash N, 0911307 Vinod Gaikwad, 0911308

Agenda:
1 2 3 4 5

What is Luxury? Luxury Industry Buying Behaviour Luxury Pricing Value Communication

What is Luxury?

1
Luxur y

2 3 4

As wealth spreads, what drives consumers behaviour is neither subsistence nor comfort but the attainment of esteem and envy of fellow men ~ Thorsten Veblen, 1899 Luxury is no longer the embrace of the kings and queens but the mass marketing phenomenon of everyday life
~ Ian Yeoman and Una McMohon-Beattie

Luxury is increasingly about experience and authenticity rather than monetary value ~
Yeoman et. al. , 2005

The concept of luxury is incredibly fluid, and changes dramatically across time and culture ~ Ian Yeoman
and Una McMohon-Beattie, 2006

Luxury Goods- What are they?


A good that is rare and priceless for the owner Is always relative; differs from individual to individual

Traditionally accessible to the top class of the society due to rarity

Past: Accessible to aristocratic class and inaccessible to others

Present: Meritocratic class who can afford to pay high premium

Luxury IndustryWorldview Worlds Luxury Market


Market Size
According to Bain & Companys luxury goods worldwide market study, 80% of sales from the Americas, Europe & Japan World Luxury Market 2008 Euro 170 billion Projected Market for 2009 Euro 153 billion Luxury Changing Representing a fall of about 10% in 2009

The World of Borders 2000s, India and China, Post mid

making waves: 10% + GDP growth in China & about 9% GDP growth in India yoy Along with Russia and Brazil, the Asian giants became the focus of the worlds attention as the BRIC countries

Swiss watches account almost 100% luxury mkt >50% of gold & diamond is in jewellery market France manufactures 50% of global champagne Europe largest market for luxury goods Japan more than 25% of luxury consumers

Top 5 categories of products in the luxury basket are Jewellery Clothing Time-wear Digital Accessories Cosmetics & Skincare 0%
8.46% 12.95%

Luxury Industry- Indian context


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27.61%

Spending Spending US$ INR crores Mn

17,576 10,183 5,386 8,244 4,897

4,088 2,368 1,253 1,917 1,139

Jewellery Clothing Time-wear Digital Accessories Cosmetics & Skincare

15.99%

7.69%

20%

40%

60%

Source: Gitanjali Group, June 30 2009

According to Technopaks India Luxury Trends 2006, India had 1 million luxury consumers; 6-7 million very affluent 1.6 million households earning over 70,000 and spending more than 6,000 on luxury; set to grow 14% annually Fastest growing millionaire population

India consumes more than 25% of the gold produced in the world

Feature 1: Primary Profit Driver- Price


Impact on EBIT Margin on a 2% increase in the levers below:*

The number of units sold per luxury good is very minimal Hence it is important to maximize profits per sale

*Source: Simon Kucher & Partners

Feature 2: Emotional than technical*


Luxury

Premium

Price

Val for Money

Economy

Luxury goods need not be technically or functionally superior, like Premium Products
Features

Emotional arguments like brand, uniqueness or prestige are more important than technical features. They give oneself a Social elevation and unmatched pleasure

*Source: Prof. JN Kapferer, HEC Paris

Luxury Pricing- Major factors


FACTOR
Competitor market prices &

FEATURES

IMPACT

Unique Selling proposition & brand positioning makes benchmarking difficult No impact

Costs

Costs are high in luxury pricing due to Low volumes of production Raw material, process and design exclusivity Minimal Selective distribution and marketing impact Still, costs do not correlate with the set prices as value provided to customer is different

Emotional value is more important than functional value for pricing. The emotional value perceived by the customer ultimately results in the willingness to pay the price premium. Luxury Good is a Veblen Good - Increasing price of the product increases its Customer Value High Impact perceived value as a luxury item to such an extent that sales can go up, rather than go down hence it has positive price elasticity of demand As people become more wealthy they buy more and more luxury goods thus there exists high income elasticity of demand

CUSTOMER VALUE IS OF HIGHEST IMPORTANCE IN LUXURY PRICING

Estimating Customer value

Market Research Techniques:


Not feasible since capturing emotional factors can be tedious Establishing factors through MR may nullify the ability to surprise the customer and thus may no longer be coveted Due to these factors, MR techniques are less used Predecessor Price data & cost of goods sold Available and provides a good estimate for luxury firms Determined by stalwarts in the firm using gut feeling!

Internal Data

Expert Judgment

Pricing Equation
Money For Quality & Innovation Value For Money

Mon ey for Em otio n

The pricing equation used by luxury industry is: Price= Cost + Customer Value added Customer value added is determined through internal data and expert judgment
Emotional Value

The customer value added = functional + emotional value Emotional value depends on the type of consumer The art of luxury pricing lies in quantifying the value to consumer regardless of costs, competitor or market prices.

Functional Value

Private Label

Brand

Luxury Brand

Functional & Emotional Value


Source: Prof. JN Kapferer, HEC Paris

Current Issues

Price difference across countries:


Due to difference in purchasing power parity Issue since many luxury customers are globetrotters Could also lead to grey marketing More needs and aspirations coupled with willingness to pay more To capture this huge demand, mass brands imitate luxury products Differentiation is lost and confusion among customers!

Economic growth of middle class


Approaches to tackle these issues


Bring in more exclusivity in products (limited editions and customizations) Limit the distribution channels to direct retail and exclusive stores Philanthropy and bringing in elite enterprise! Rolex awards for enterprise, mentor and protg arts initiative etc. aiming at targeting celebrity and upcoming customers! Not openly disclosing the prices Promoting experience than just the logo

Value Communication

Highlighting the experience and eliteness Exclusive channels used:


Subtle advertisements Elite magazines

Luxury promoting luxury!

Events and programmes such as fashion shows Avoid generic advertisements!

Rolex Ad

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THANK YOU

APPENDIX
SEGMENTATIO N

1 million luxury

LUXURIENTED: Source of affluence is largely


traditional and inherited wealth. They have high level of exposures and awareness to world class living

6-7 Million Very Affluent 9-10 Million MidAffluent 14-15 Million Upper Middle Class

NEW RICH: Adequate spending power,


acquiring orientation to luxury

GETTING THERE: Acquiring spending power,


spends mainly on high end white goods, education of children, better housing and larger automobiles

MID AFFLUENTS: They are also acquiring


orientation to luxury, however unlikely to indulge beyond a limit

Source : India Luxury Goods Sector 2006, Technopak Consulting 2006

The conceptual model used by Klaus-Peter Wiedmann, Nadine Hennigs, and Astrid Siebels In finding clusters of consumers on the basis of luxury consumption behavior

Price Value Usability Value Quality Value Uniqueness Value Self-identity Value Hedonic Value Materialistic Value Conspicuousness Value Prestige Value

Financial Value

Functional Value Luxury Value Individual Value

Social Value

The spread of luxury model in Asian countries

India China Taiwan Hong Cong/Singap Japan

In the research paper Value-based segmentation of luxury consumption behavior, Klaus-Peter Wiedmann, Nadine Hennigs, and Astrid Siebels found 4 types of clusters on the basis of luxury consumption behavior -

Buying behavior- luxury goods


The Materialists

They have a lot of luxury in their lives and Click icon to add table wish to owned certain things they dont havethink that their lives would be better if they They had the most positive attitude toward luxury objects They did not strongly perceive the social dimension of luxury consumption as being important for their perception of luxury value They are closely attached to functional value items but do not seem to be greatly excited about the emotional dimensions of luxury consumption They consider the hedonic value aspects as being unimportant They have superior quality standards and differentiate themselves from others with the purchase of exclusive luxury products They perceive social aspects as being most important for their perception of luxury value and had the most positive perception of all prestige items They place much emphasis on prestige over quality assurance and are more concerned about other peoples opinions They buy luxury brand mainly for impressing others rather than for themselves They perceived the hedonic value aspects of self-directed pleasure and life enrichment to be most important for their perception of luxury value Their definition of luxury refers to exclusivity and products that are not for mass consumption They are less likely than other groups to be enthusiastic about luxuries

The Rational Functionalists

The Extravagant Prestige Seekers

The Introvert Hedonists

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