3 pillars of digital luxury
How to create, distribute and capture value in digital luxury markets
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A digital luxury item can be anything from: a) a non-fungible token in the form of a virtual product, like Dolce & Gabbana’s the Doge Crown or Gucci’s Dionysus bag that can be used, owned, exchanged, rented or sold in digital environments, b) a token that is a membership card, DAO contribution recognition, a PFP and a social visa, like BAYC or RARE curation token, c) virtual products that are worn in metaverses, like Roblox and Fortnite skins, d) physical products with virtual counterparts, like Diesel’s new PROTOTYPE sneaker and a corresponding NFT, or e) the image of a physical product or a look or a moodboard or any other piece of rare, exclusive or coveted content turned into an NFT and distributed as part of a collection.
Balenciaga launched last week its metaverse business unit. Digital luxury items can become a $56 billion market by 2030, according to a recent analysis by Morgan Stanley. Done right, digital luxury items create cult objects (e.g. Beeple art or a rare BAYC), justify high prices, collectibles, and initiate brands in the domain of intangibles. Digital luxury goods fuel brand growth in mature markets because they relieve the pressure of compressed trend cycles on brands to constantly come up with the new stuff. They also lend a brand a trendy positioning, remove the barrier to a brand’s image and extend a brand’s appeal to multiple audiences. People who’d never consider a brand may go for its digital asset.
The operating system of digital luxury strategy is collecting. Digital luxury goods are simultaneously equities and collectibles. When someone buys a Diesel PROTOTYPE sneaker and the corresponding NFT, they aren’t actually buying a sneaker and a NFT; they are investing and collecting.
In terms of business, digital luxury assets are gold. They combine two traditionally high margin businesses: luxury and digital. The margin of digital GUCCI Dionysus is higher than the margin of physical GUCCI Dionysus (as is its price, as it happened recently).
Three elements of a digital luxury item are: aesthetics, identity and status. Together, they determine the value and utility of a digital luxury item, in virtual or physical worlds.
This dimension is particularly relevant for virtual items in a) and c) scenarios outlined above: for stand-alone virtual products, like Doge Crown or a Bored Ape or a Beeple piece of art, and for virtual items like skins that are worn in games. Aesthetics is the key determinant of value for both luxury and digital markets, and both luxury and digital items have to be highly visual. The more powerful the aesthetics of a luxury good (physical or digital), the more contagious the idea behind it. Examples are Balenciaga couture, GUCCI collections or a timeless Chanel jacket. But if the idea of female emancipation was not packaged as a highly appealing Chanel jacket, it would have taken it longer to spread and create identity for both Chanel and women who wear it. “That is so GUCCI!” is part of our cultural lexicon precisely because the brand’s meaning is compressed in the unmistakably recognizable Gucci Look. This meaning and a point of view - the story - makes digital and physical luxury good valuable. Digital luxury goods are part of the cultural exchange system, not a market segment. In modern culture, things that command our attention are the things that stand out: logos, slogans, prints, memes, references, remixes, riff-offs. But it is the things that stand out and have meaning - an ironic meaning, a double meaning, a meta-meaning - compressed in one visual that will win in the digital luxury goods market. They are the hardest to imitate because aesthetics isn’t gloss; it’s the story and the cultural link that holds a community together and that gives it identity. Aesthetics without community is advertising.
This dimension is particularly relevant for virtual items in b) and d) scenarios outlined above: for tokens that act as membership cards, DAO contribution recognitions and PFPs, and for digital assets with their physical counterparts, like Diesel’s new PROTOTYPE sneaker and a corresponding NFT. Identity of digital luxury goods comes from brands, but more critically, from brand communities. Digital luxury items hold together decentralized taste communities, connected by their shared aesthetics.
Digital luxury strategy is focused on creating, distributing and capturing social, cultural and economic capital. Social capital comes from participating in the community. Cultural capital is created by the outcome of this participation. Economic capital comes from the collectible value of digital luxury assets.
Gucci Dionysus is a luxury item, but digital Gucci Dionysus is identity of a community of culturally plugged-in, affluent, future-looking, crypto-fan hypebeasts. Gucci Dionysus is also a personal identity. Metaverses are pseudonymous, so identity signaling is through digital goods. PFPs like a Punk or a Bored Ape are strong signals of identity. They are like Rolex advertising: the goal of Rolex advertising is not to sell Rolexes, but to make those who can afford a Rolex happy that those who cannot know what Rolex means.
Digital wallets play a key role in identity signaling in the virtual world. They are the most important part of crypto economy as our digital asset collection stored there is the strongest cultural, social and economic signal our our standing.
Digital identities are not static. They are constantly mutating, so digital luxury goods need to keep mutating as well in order to keep their meaning and story going. Their identity is fluid and “upgradable” by design (Bored Apes mutated after the mutant serum was airdropped to their owners). In the physical world, upgrades are literal: newness is linked to constant consumption. More recently, there’s also a circular form of economy, with secondary marketplaces like Depop and TheRealReal. In the virtual world, upgrades are fractional, gamified, circular by nature and continuous rather than discrete. It doesn’t take discarding the old in favor of the new. Newness is additive rather than reductive. Newness is also linked to one’s social and cultural capital, like it is in RARE token scenario, where its owners assume the new role in the community, giving the digital goods they own new value.
This dimension is particularly relevant for virtual items in the e) scenario outlined above: for the image of a physical product or a look or a moodboard or any other piece of rare, exclusive or coveted content turned into an NFT and distributed as part of a collection. Keyword here is scarcity: for a digital good to have social and cultural meaning and collectible value, it has to be rare. A digital luxury good is the equivalent of the Black Amex or a rare pair of Jordans, and are the currently the ultimate flex due to their high pricing, limited quantities and inability to be faked.
Inability for digital goods to be faked is key: the digital world has infinite nature and zero marginal costs, making scarcity artificial. This is why scarcity also needs to be social. For a community membership to have meaning, it has to be hard to come around. It has to require an invite, a qualifications for membership, and a sacrifice other than price (time, attention, community engagement). The most important thing to pay attention to is the social dynamic in digital communities that form around digital luxuries. This social dynamic revolves around social, emotional, and financial investment among community members. In DAOs, governance rights are luxury, but they have to be earned for contributions to the network. True supporters are scarce and they are the guarantee of a community’s durability.
Scarcity amplifies the power of identity that’s created by aesthetics.
The flywheel is the following: aesthetics creates value, identity amplifies this value through community, and status defines desirability through scarcity of ownership of and access to the identity. Value of a digital luxury asset is the outcome of this flywheel.
Aesthetics powers identity that powers status.
What keeps this flywheel going is service that comes with verifiable ownership and secondary royalties. Service is the spark around any digital luxury asset, either when the asset is being used in a metaverse to unlock benefits or when it lends some form of a preferential treatment in the physical world, like events, exclusive pre-sales and first dibs.
At the level of marketing and sales, digital luxury items protect pricing power, ensure high margins and reframe consumers’ perception of the brand.
At the level of a product concept and design, digital luxury items provide value innovation. Digital luxury assets are a fertile testing ground for new designs and product ideas. Community adds their imprint, making new designs culturally noteworthy and spurring interest in the designs’ later commercial release.
At the level of distribution, digital luxury items expand a brand’s market and renew its customer base. A digital luxury item with a recognizable aesthetic renews brand associations.
At the level of merchandising, digital luxury items give halo to the core collection, they re-evaluate brand perception and increase brand consideration.
The other week, I spoke with Mike Shields of Next in Marketing podcast about web3 and the fact that, while the NFT bubble may burst soon, marketers should not put off laying the groundwork for figuring out how decentralized ownership, blockchain and the metaverse will completely change how they interact with customers. We also discussed the future of retail, how brands should approach influencers, and plans for a sequel to her most recent book. Listen to our conversation here.