Hermès Birkin bag never goes on sale. Neither does Louis Vuitton, Tiffany or Apple (with exceptions of academic discounts and Black Friday). These brands also share control of their entire value chain, eliminating the retail middleman. If you see Louis Vuitton at an upscale department store, that’s because they lease the space, not because they do wholesale.
In the customer-centric digital world, luxury brands can collect and analyze data on their audience’s purchasing behaviors and social chatter around luxury items. They can then fine-tune and test and optimize their inventory strategy, making overstocking and sales as avoidable as they are undesirable.
This customer-centric, data-driven strategy is still rare among luxury brands, a fact made even more puzzling knowing that their equity revolves around selling Veblen goods. A luxury item is a Veblen good. In the inverted economic logic, the more something costs, the more demand and sales it will generate due to perception of superior quality, exclusivity and unattainability.
Luxury brands have increased prices of their items by 60 percent over the last decade, according to the Bureau of Labor Statistics. Hermès Kelly bag used to cost $4,800 in 2003. Today, this price is $7,600. Burberry keeps making its trench coats progressively more expensive, to spur desire among the more affluent consumers.
Reducing luxury prices signal lack of desirability. It also signals lower quality, lack of exclusivity and scarcity. It makes luxury goods attainable.
Yet, lowering prices on luxury items has become a go-to marketing strategy for high-end retailers. Barneys’ end-of-season sale offered a whooping 70 percent markdown. Market-driven price reductions like holiday promotions, competitive pressures and fight for market share trained consumers to expect sales to the point they nearly refuse to pay full price for anything.
This vicious cycle of customer expectations and brand offerings is the unfortunate side effect of the old-fashioned retail system. Luxury consumers, presented with products before those have even been made, had to wait six months for items to hit stores. By that time, they were willing to wait a few months more and get them on sale. In the lag-behind, off-season, overcrowded luxury landscape, waiting for sale became the easiest customer decision-making tactic.
Direct-to-consumer retail model comes to rescue. In this model, runway shows take place at the end of the production process (and not prior to it), items are available immediately after they are shown, and luxury products displayed at the runway are in-season.
Faced with new and seasonal items, luxury connoisseurs are ready to pay any price to have them right now. Street-style bloggers, social media and traditional press all work in favor of this instant gratification by grooming consumer demand and surrounding consumers with must-have-immediately outfits.
As the industry moves from “promise now, deliver later” to “deliver now, promise later” model, management of luxury inventory needs to follow the trend. When it comes to their inventory, luxury retailers should do what they do best: keep seducing their customers. In this, waitlists work better than sales alerts. Limited inventory works better than overstock. “Sold out” works better than “70 percent off.”
The future of luxury retail is data-driven product offerings fine-tuned and optimized by test-and-learn approach. Strategy that revolves around data-based personal communication, tiered VIP programs and small “welcome” discounts, combined with an occasional private, invite-only sample sale both preserves luxury brand equity and is aligned with modern luxury consumer behavior.
As more luxury retailers embrace data and testing, we can look forward to never hearing “oh those Jimmy Choo shoes? I got them for 70 percent off” brag again. More importantly, we can look forward to bonfires of unsold merchandise, industrial-size clothes shredders and oversaturated landfills becoming the thing of the past.
This article was first published in Luxury Daily on October 26th 2016