Defending luxury prices in a down economy

Brand strategist Martin Bishop kicked off an interesting debate on methods to defend the price of luxury goods in a lousy economy. Some commentators suggested marketers who discount luxury brands are showing a sign of weakness.

Here is our response:

It is not true that if consumers require a price cut, marketers have not done their job.

Economist Richard Thaler noted decades ago that consumers require price framing -- a reference point by which they can determine if they are getting a good deal. Every product really has two prices, a usually higher mental "price A" by which you judge the value, and the "price B" you pay. If consumers judge the difference to be positive, they feel they get a good deal; if the difference is negative, it appears to be a "rip-off" situation.

Talbots is a luxury clothier that uses price framing brilliantly -- a $120 sweater is expensive, but if it is marked down 40% from $200, the woman shopper thinks she's found a bargain.

Marketers have always played this game, in many ways -- not always using discounts. Luxury goods seek to disguise the price differential by obscuring the first reference price. Gee, a diamond costs $3,000? Well, that could be a good deal, because as a consumer I do not have transparency into what the reference price is. Obscuring the reference is a common pricing strategy -- you can do it with luxury branding (a Lexus costs more than a Toyota even with most of the same components) or with simple variations of bundling (think of Omaha mail-order steaks which include free knives and add-on packets of food).

The story here is that consumers are bad at judging value, and so typically look for a reference to see if their deal is better or worse. Luxury brands disguise negative value for consumers -- the fact that consumers are paying a very high surcharge for a product or service really not worth that -- by clouding the reference price.

In a down economy, the mask begins to fall off. Diamonds that have been positioned as $3,000 icons of love that last forever begin to look more like shiny pieces of carbon. It's not that marketers are doing a worse job; but rather outside inputs of information -- news about the economy, fear that one may lose her job -- create a new level of awareness that helps consumers figure out the "real" reference price. The bottle of perfume that costs $80 suddenly looks like scented water worth 80 cents. In times of caution, consumers in essence open up their judgment inputs to more sources of information, like deer hunted in the wild. This heightened sensitivity gives them a better fix on the real value of the product.

All of which is saying, yes -- luxury brands will take a hit, as the illusions they present on the reference price wear off. Discounts on luxury goods are not a bad strategy -- the dismal market is going to force brands there anyway -- so instead of fighting downward price pressure, try new ways to control the perceived spread between the reference price and reality. Coming soon: $4,000 diamonds now 33% off.

Photo: Laura-Beth.