This is the second part of my previous blog and proposes a strategic marketing approach for the diamond industry.

As in 2008, I was approached with an important question. It is easy to criticize, but are there suggestions you can share with the diamond industry about what steps it should take to pull itself out of its misery? This is an honest question and while I cannot outline a full plan here, I will draw people’s attention to some basic ideas that I think they should follow if they are really concerned with the diamond industry’s future. Actually, these ideas are basic to any marketing strategy in any industry with any offer.

• Know your customer

Sounds simple? You’d be surprised to learn how many companies do not know their customers. Decisions are made high in the supply chain while the customer is at the end. How many executives really bother to go out and meet their customers, to talk to them and learn what’s on their minds? How many know how to ask the right questions? The old marketing adage says that we buy by our emotions, but justify the purchase with logical arguments. How many know what the emotional motives behind a purchase are? How many know how to identify those motives? How can we make a marketing decision when we do not know what motivates the customer and how we can satisfy the customer with our offer? Know your customer, figure out his emotional needs and see how you can answer them with your offer.

•  Map your offer

This is the other side of the marketing coin. In 1938 De Beers understood that it had to create demand for its diamonds and invented the market for diamond engagement rings.  The diamonds used were relatively large and were suitable for solitaire rings. However, with the discovery of the small Russian diamonds which did not fit the engagement offer, De Beers developed the idea of the anniversary ring which used those tiny diamonds. The anniversary ring was a derivative of the original offer of the diamond engagement ring and those tiny diamonds were found to satisfy the needs typical for a couple a few years into marriage.

However, when Indians proved that they could polish diamonds that were previously considered unpolishable, nobody came up with a suitable marketing offer. The diamond customer today has a variety of emotional needs that need to be mapped. Next, the diamond stock needs to be mapped as well. Different diamonds are suitable for different emotional needs. We know about two types: the relatively larger diamonds, mainly solitaires for diamond engagement rings, and the smaller ones suitable for anniversary rings. However, we need to map the diamond stock more carefully and in detail so as to get a clear picture of what diamond is suitable for satisfying which particular emotional need. Are we sure that any polished diamond is actually a diamond that can be offered as one, once we take into account the emotional needs of the customer? Can any polished crystalized carbon be used in jewellery?

I should point out that in general, marketing offers like I’m describing are not common in the diamond industry. A marketing offer reflects the answer in the market found to the emotional needs of the customer. Answering these needs creates a “pull” effect, or true demand. By comparison, when the diamond market became totally unaware of the emotional needs of its customers and was concerned merely with disposing its wares, it created a “push” effect. The reason behind this practice is financial – pleasing the bankers and competing on supply. The sad result is that nobody pays attention to whether the customer really wants the product in the first place.

• Know yourself

Do we have a loyal diamond customer? Most customers are excursionists who go to the jeweller for their engagement rings and disappear from the horizon for the rest of their lives.  Even when we bring them to purchase again, it takes a few years. Most jewellers act as supermarkets as opposed to carving out a niche for themselves. They sell an engagement ring today, tomorrow another piece of cheap fancy jewellery and will even replace a watch battery. However, in acting as supermarkets, they become supermarkets – providing no personal attention, no brand identity or affinity, with shelves packed with indistinguishable offers and cashiers at the end waiting only for the customer’s money.

Has anyone asked himself what he really wants to do? What market he wants to concentrate on? Many years ago I was sitting at a panel with the London jeweller Theo Fennell. Theo argued that he does not want to cater to the engagement ring market since the emotional, social and financial burden that lies on the man’s shoulder is so enormous. A representative of De Beers stood up and claimed that this approach is insane since statistics show that the market for engagement rings is the most important by far. To this Theo very gallantly offered that this woman shove her statistics up somewhere, since he was dealing with real people and not with numbers.  Theo had a clear idea of who he is and who he would like to meet. Occasionally he would sell a diamond engagement ring but this was clearly not his market. He does not replace watch batteries either.

To sum up, if we are really concerned with the future of the diamond market, we have to take three strategic steps, by answering these very fundamental questions.

Firstly, we need to ask whether there is a market out there for our product or if we can we create one. Are there any emotional needs that are worth pursuing and providing an answer to? De Beers realized in 1932 that there was no diamond market and went about creating one.

Secondly, can we satisfy these emotional needs with our products and how? Is it a single need that we need to satisfy, an entire range of needs or maybe a single need that keeps on changing its face according to socio-demographic concerns? Which of our products are appropriate for which emotional needs? What products do we still need to search for the need that it will be the answer to?

Finally, are we looking to satisfy the entire range of desires or are we interested in carving our own niche? What would this niche look alike? What do we have to know? What supply channels do we need to secure? Most importantly, how can we communicate our existence to our customer of choice?

If the diamond industry or any other industry would follow these guidelines, I think they would succeed. One of the people who inspired me most was Steve Jobs who had a clear vision and could answer these three elements of proper marketing fully. Unfortunately, it seems that Steve Jobs took his vision with him and did not leave his legacy in Apple. This does not mean that we cannot turn the diamond industry or any other industry around. After all, what I describe here is what I call luxury marketing.

I was at the JCK show in Las Vegas last week. The JCK show is one of the largest diamond and jewelry shows in the world and almost everyone in the diamond industry attended either as a presenter or as a visitor. One of the highlights of the show is Martin Rapaport’s review of the diamond industry. Rapaport’s speech recalled for me the immortal Pete Seger song, “Where Have All the Flowers Gone?” because it seems that the industry has not changed its practice despite reality continuing to slap it in the face.

Let’s start with a bit of history. Before the big discoveries in 1882 there was not a diamond industry to speak of. Upon the discovery of the large mines in South Africa, Ernest Oppenheimer and Sir Cecil Rhodes established De Beers. Their major fear was that there might be a surge in diamond supply that the world wouldn’t be able to absorb. So they offered to buy the entire world supply, and act as a buffer, releasing diamonds according to need. Of course, De Beers wanted to profit from their position but they never withheld diamonds just to create artificial demand in a typical monopolistic manner. Following the Great Depression in 1932, De Beers risked becoming insolvent when it could not sell a single diamond while, on the other hand, could not raise enough money to honour its obligation to purchase the diamond production any further.

Fortunately De Beers survived and realized that its responsibility was to create a diamond market, or to create the consumer demand for diamonds.  In 1938 Harry Oppenheimer, Ernest’s son, hired N.W. Ayer to help De Beers market diamonds. This move proved to be a tremendous success and the “A Diamond is Forever” slogan was coined, which is arguably considered one of the best marketing slogans ever.  De Beers grew based on its ability to control the diamond rough market and to sell the production according to the real demand, taking care not to clog the industry’s arteries. In the 1950’s when the Russians started to sell their diamond production to De Beers, it presented a problem since the Russian production was of much smaller diamonds. Nevertheless, De Beers successfully started to market the anniversary ring as a means for marketing these small diamonds. Prices went up gradually, but in a sensitive way that reflected real consumer demand.

Things started to change in the late 1970’s. There were many factors involved. The introduction of grading reports (or “certificates” as they are known in the industry) increased the categories diamonds were divided into tenfold. Instead of ten categories the industry now had a hundred, and each had to be priced differently just to justify the grade. In no time, prices increased dramatically, but this time the reason was different. The increase in price was no longer geared by true demand but by internal market forces. People started to speculate and with the help of the bankers the industry bought rough with the hope of selling it later at higher prices. De Beers did not want to see a diamond stockpile grow outside their control and in August 1980 they managed to cut this speculative trend abruptly. As a result, the market came to a halt and started to build itself back slowly. Manufacturing of rough, on the other hand, did not stop and De Beers found itself in a position where it had to buy diamonds without clients to sell to.

Into this scene, Nicky Oppenheimer, the third generation, entered. Unfortunately, Nicky did not have the view of his ancestors who knew that the success of De Beers depended on the success of its market of true consumers in which they had invested money and energy to develop. Instead of building a healthy consumption that would eventually benefit De Beers, Nicky Oppenheimer was concerned with his company’s success – he wanted to make money. Looking at his stockpile, Nicky realized that the lion’s share of the value of it came from a very thin sliver of the goods – the better quality. Well, De Beers could survive by creaming its stockpile and hoping for better times to sell the rest.  De Beers embarked on faulty market research that created the infamous 4C’s, promoting larger and more expensive diamonds.

Shortly before the 1980 crash, the Indian polishing centre started to grow. The Indians found ways to polish diamonds which only a few years earlier were considered unpalatable. However, De Beers effectively stopped looking for solutions for the diamonds polished from its rough. No marketing idea was introduced to promote the cheap Indian polished diamonds. This revealed the lack of basic marketing thinking in the diamond industry, which is about understanding the unique link between the consumer and its supplier. Local or international, the consumer needs to see what unique offer he gets at the retailer. However, by writing off the consumer, the focus switched to the retailer, and suppliers wondered how they could build loyalty.

Especially with the cheap Indian goods it was difficult to differentiate between supplying offers: they all looked the same and there was an exit barrier and no loyalty. These diamonds were approached as commodities where the cheaper offers won. To offset this problem, programs were created with the aim of tying up the retailer long-term, forcing them to buy goods that reflected the production needs of the supplier, but which were not relevant to the market situation. Instead of appealing to customers’ emotional needs, retailers followed typical push tactics by offering discounts and promoting sales similar to other retail sectors. With the help of De Beers, the suppliers helped those retailers promote these programs. As a result, the bigger the retail account, the more support they got as they had the ability to push more goods down the supply chain, at least theoretically.

Over time and especially when the Internet became an integral part of the business, sellers of larger and more expensive goods followed suit, turning the entire diamond market from luxury into commodity. People started to trade “paper” or “certificates” and nobody bothered to use a loupe and tweezers, the tools of the industry. To counter the price erosion, more and more programs were created. Suppliers were ready to act as bankers and extended lavish credits without knowing what they were doing, with the hope that they would manage to tie up their retail customers who would eventually sell their goods and send the money upstream. Instead of focusing on the diamond consumer, the industry looked the other way, trying to please its bankers.

Toward the beginning of the 1990’s I started to gain interest in the diamond consumer market, realizing that the reasons behind people purchasing diamonds are totally different from what the industry that trades and sells their production believes. I could not find answers to why people really buy diamonds within the industry. Nobody knew or even cared to know. The diamond industry totally lost contact with the diamond consumer.

Meanwhile, De Beers went into strategic review and came up with two results. Firstly, its $5 billion unsellable stockpile was worth nothing and secondly, it officially ceased to be the custodian for the industry. The industry which fully relied on De Beers to create its consumer market found that the captain had abdicated the ship.

Nobody seemed to care. As early as 1998 I warned whoever wanted to listen that the industry was heading toward insolvency but nobody really listened. Without much understanding of what they were doing and with the encouragement of De Beers, the industry went into branding itself just to see how $5 billion in cash and bank money, or a third of the industry capitalization, can evaporate within three years without selling one extra diamond to make up for the loss.

Meanwhile, De Beers tried to push its dead stockpile down the industry’s throat. Abdicating its role as the industry marketer, De Beers’ relationship with the market took a new turn. Companies were put into competition based on who could better please De Beers’ bottom line. Which customer had the financial muscles to purchase more diamonds long-term? Companies were not required to show that they could sell but that they could buy from De Beers on a steady basis. Most of the goods were the cheap Indian type and with bank generosity, Indians bought the entire stockpile, polishing it and creating a new unsold stockpile, this time of polished diamonds. The industry was operating completely in reverse — instead of focusing on the end of the supply chain, it was trying to please the beginning.

The industry was now at the mercy both of its bankers and De Beers, totally disregarding the diamond consumer and his needs. With the financial meltdown in 2008, banks were at a very shaky point and needed to justify the credit they extended to the diamond industry, which they could not do, and the industry started to panic and called for an emergency meeting which I attended. I must admit that I was wrong as eventually the industry survived, again with the help of its bankers.

However, five years later things haven’t changed. The industry owes $15 billion to the banks, or more than the annual cost of rough. From another perspective it owes 65% of its polished diamonds’ value to the banks and still it hasn’t realized that there is only one way to do business – by satisfying the consumer’s needs. Visiting the JCK show tells the story. On one part of the show floor you find the manufacturers, dealers and distributors – the diamond industry insiders who keep on dealing among themselves and complaining that they do not make any profit, as if living in a bubble and totally disregarding the retailers. The retailers are found on the other side of the floor, checking new packaging, software and other materials for their stores. These two parts of the supply chain do not meet.

And as for marketing, in his last slide, Rapaport had two important lines. The first was “We need marketing,” and the last one was “He who owns the customer owns the industry.” Well, Mr. Rapaport and my dear colleagues in the diamond industry, you have no marketing and it seems that you don’t care about it at all. Consequently, you do not own the customer and, according to Rapaport you don’t own your own industry.

Dozens of people visit my blog every day. Thousands of them every month and many of them are new visitors. I know I attract the interest of many of you, even when I don’t know who you are. Sporadically, I meet people who tell me that they are faithful readers of my blog but almost not one single person cares to comment, to argue or to question.

Why should it be this way? I know that I sometime raise provocative ideas but do they need to be even more so to cause you to react? Janus Thinking has its twitter account @janusthinking and its Facebook account – https://www.facebook.com/#!/JanusThinking. I explicitly asked people to “like” the page simply to be able to get the statistics I need (I need 30 “likes”) but did not get there so far.

Trying to invent myself is difficult. Please use any platform, my site, Twitter or Facebook account to comment, ask, question or just express your opinion. I need your reaction.

I know that I am not alone. I have a friend who knows a thing or two about social media but complains that he does not get much of a reaction from his readers. Well, many of his customers are from the ultra orthodox Jewish community who wish not to expose themselves on social media. Maybe this is the reason by him but I know from others who have thousands of people following them but never comment.

Here is a question: what would make you comment? You can choose any means you wish. You can send me a private message asking for anonymity which I am going to respect or you can show me examples of what works and what not in social media, explaining what makes social media powerful in your opinion. Can we turn Janus Thinking into an interactive discussion place or should I use my screen as a crystal ball trying to figure out what is on your mind?

Thank you.

Almost a year ago I published an article titled “Value for Money?” (http://www.janusthinking.com/2012/07/value-for-money/), questioning the logic of this economic axiom. I proposed instead that we should examine an offer either along its money (cost) parameter or along its value one. This basic approach (value or money) is not only mine.

Daniel Kahneman and Richard Thaler, the Nobel laureates in economic sciences in 2002, already questioned the microeconomic theory that people can relate interchangeably to an item or to its monetary value. They demonstrated that the perceived value of an item actually changes. Specifically, Kahneman and Thaler, among others, empirically proved that ownership has a tremendous effect on an item’s perceived value. Observation of a myriad of domains, ranging from everyday items such as coffee beans and mugs to nonmarket items such as air quality, has shown that people value more those items they already own. Hence, when they want to buy they will pay less than what they would charge when selling the same item.

The reason behind this discrepancy is psychological. People are loss-averse, meaning that they put more weight on losses that they do on equivalent amount of gain. Correspondingly, people focus on different parameters when buying versus selling. In short, economic exchanges are not about trading money for a particular value, but about the psychology of the buyer and seller.

This modern behavioural economic view is not new. The Talmud distinguishes between money, which is used to purchase, and the item purchased, which the Talmud coins “fruit”. This view leads to interesting discussions. For example, when we borrow money, we have to pay attention to the currency we borrow in. If, in America, we borrow 10K€ Euros that we then exchange for $10K dollars, did we borrow money or did we borrow a kind of item/value that we then exchanged for money? This specifically becomes an issue when returning the loan. What if the Euro dropped relative to the dollar during the course of the loan and now the 10K€ loan is only worth $9K?
If we consider the American dollars we received in exchange for the Euros to be the money, and the Euro to be some sort of value – we only have to return $9K – which is currently equivalent to the value we originally borrowed. But if we relate to the Euros as money that we borrowed, we would have to return €10K.
Introducing the term “value” adds a new dimension, which is discussed in the Talmud as well. An item might be of a certain value to one person and of a different value to another. Hence, we always discuss a chain of value-item-money which has a different meaning to different people.

Recently, I reflected on these ideas when the new Israeli finance minister announced his initiatives for the forthcoming annual budget. One of Mr Lapid’s questions during the election was, “Where is the money?” reflecting on the enormous deficit of over $10 billion in Israel’s budget. As we read now, Mr. Lapid’s initiative is to fill the gap by cutting the budget, raising taxes or getting the money somehow. It seems that Mr. Lapid really doesn’t care where the money is going to come from as long as he can fill up the deficit. It is a power struggle and the budget cuts are based on skirting the people resisting them or not stepping on those with a popular cause. But is this the right way to go?

Having a balanced budget is important but, as we discussed, what counts are the values we seek. Mr. Lapid needs an agenda that he is building toward – even if it is simply economic growth. With a limited budget in one hand and clear values in the other hand, we can start looking for the “fruits,” or items we should spend on so as to fulfil our values’ needs.

As a leader, the task is especially difficult. Israeli society is far from being homogenous and many sub-groups have different and even opposing agendas. Nevertheless, a leader must find a goal, a flag to unify the nation behind. It is not always possible to find one common denominator, although it is possible, as we have witnessed, when going to war. However, we don’t need war to find one big goal, deeply rooted in life values, that seems worthy to pursue. Such a goal is based on values defined by Milton Rokeach as long-held, difficult-to-change beliefs. These are the kind of beliefs, which when looking back we leave this world, make us feel that our presence on earth was worthy despite all difficulties. This kind of goal provides hope and stimulates the entire nation.
I keep searching for a goal like this in Mr. Lapid’s financial program. Unfortunately, his agenda seems purely money-oriented. I do not find in it any larger goals or values. Yair Lapid, where are your values?

We are happy to announce that we opened our page on Facebook. Our Facebook page is for you. You can post whatever you wish. It is less formal and I would be delighted to comment on those posts which I find that I can comment in more detail.

While I will try to enrich the page with your help, i was surprised to see how helpful a simple presence on Facebook can help.

Measuring Janus Thinking’s reach I am happy to see how many are checking the blog daily. come and let’s make together a better world to live in.

Hope to see you on Janus Thinking page,

Isaac

I am an avid reader of Issamar Ginzberg’s blog (www.issamar.com). Issamar claims that he is self-educated, which is not entirely true. Growing up as the great grandson of the Grand Rabbi of Nadvorna OBM he could not avoid being exposed to the pearls of wisdom that his grandfather and uncles provided to those seeking help. Just listening to the hundreds of medical, family and business issues that his forefather dealt with successfully is the best education one can aspire to have.

Though Issamar is aware of the need to be empathic with the customer, he cannot show a level of empathy akin to that of his forefathers, who were able to totally immerse themselves in and live the problem of the other. Those holy men always based their answers on knowledge and not on interpretation. Empathy goes hand in hand with knowledge. Interpretation is based on the interpreter’s subjective experience and worldview and can therefore, prevent a person from understanding another’s situation and showing empathy.

I was provoked by one sentence that Issamar wrote that perhaps exhibits this lack of empathy: “diamonds are […] considered horrible when someone getting married doesn’t buy a diamond engagement ring… which, from a financial standpoint, is a bad investment”. Issamar attributes the need for a diamond engagement ring to the brilliant marketing campaign of De Beers, but is he qualified to make such a claim?

Issamar belongs to the ultra-Orthodox Jewry.  His marriage was pre-arranged by a matchmaker. For marriages like these, most of the “dating” is done by the couple’s parents while the young couple meets for a few hours at most, to provide their final approval. Issamar never proposed marriage to his future wife nor was he involved in purchasing the diamond ring that she got as part of her dowry. So, not even being part of the world in which engagement rings play an important role – can Issamar really make a statement?

Comparatively, in a world of courting one’s girlfriend and where the burden of proposing marriage lies squarely on the shoulders of the groom, offering a diamond ring makes a lot of sense.  The seeming romance of the situation, combined with the need for the man to offer something symbolic of the newly forming commitment in exchange for the woman’s consent – are good reasons for diamond rings to have become the standard engagement gift that they are today.

On the surface, it looks as though Issamar’s path to marriage is radically different than the modern man’s. His traditional standard for dating and marriage did not include romance and made him cynical toward the modern practice of buying engagement rings. But is Issamar really so different from the modern man in his pursuit of a spouse? The interviews I conducted tell a different story.

I was fortunate to interview many men married for different lengths of time, including one who has been happily married for over fifty-seven years. All have one thing in common when asked why they proposed marriage to their wife. None of them said that it was out of love. People sat with me for several hours, discussing their preparation for engagement, now with many years to reflect in retrospect, and one word was missing – love. Why is that?

One way of understanding why love may not be integral to choosing a life-partner can be explained by George Kelly, the father of Cognitive Psychology. Kelly posits that individuals explore in order to evolve and sustain an optimal scheme for anticipating events. Thus, one would choose marriage if it appears to provide him with the opportunity to enlarge or secure his anticipatory system. While it carries some uncertain implications, eventually he hopes that through marriage, his world will become more predictable. In short, marriage, according to Kelly is the realization that one is able to have a more predictable, fertile, and evolving life with the woman of his choice at his side.

Given Kelly’s approach, it looks like the men I interviewed knew what they were doing by not marrying out of romance or love. It also seems that Issamar may have made an optimal choice. If, as Kelly says, married life is about a better future and about dynamic evolution, fertility, and development of the anticipatory system, the less we know the woman (and the less we choose her out of love), the better marriage will serve us. As Kelly says, if future events are already known there would be no evolving in the direction of optimal anticipation of the future. “Marriage would introduce him to no fascinating future. He already knows the woman. For her to be his wife would add nothing to his experience. He already knows all there is to be known about marriage. Married life is cut and dried. Why marry?”

Though Kelly’s description is not the only reasoning we can give not to marry purely for love, it opens us up to the idea that there can be much more behind an engagement than simple romance. Issamar’s process of choosing a wife may not be that different from the modern man’s after all. Had he realized that even within this non-romantic framework, proposing with an engagement ring plays a role, (the role of self-expression for the man) perhaps he would have been less critical of the practice.

I don’t expect the world to follow Issamar’s practice of pre-arranged marriage. Nor do I hope that the world follows this approach. I prefer a bit of romance; after all, my business does benefit from this romance. However, I have learned that, at least from a business perspective, it is important to bring a man to realize that when proposing and purchasing the diamond engagement ring there should be much more to it than romance. We successfully demonstrate this lesson at our venture in Raleigh NC – Kahro Diamonds (www.kahro.com).

One last word about Issamar, who I personally don’t know. It really doesn’t matter what Issamar wrote; what counts was how I was provoked by his writing and this is actually the secret of good marketing.

Six years ago, in one of my first blogs, titled:  What is luxury? “The no-need need”, I introduced the reader to the six attributes of luxury as first proposed by Dubois and his colleagues. The six attributes are:

1. Extreme Quality
2. Expensiveness
3. Scarcity
4. Aesthetic Appeal
5.   Superfluousness
6. Time Incorporation

Though Dubois and his colleagues established these attributes based on empirical research, my research provided a theoretical basis for them, and showed that there are no more and no less than these six attributes. As I progressed, I also found that these attributes can be understood in a more abstract way such that they can be applicable in any case when personal choice is manifested. Consequently, I showed how these attributes are manifested in leadership and organisational behaviour, for example.

Regarding these attributes, J.P. Kuehlwein of Classified Branding commented a few weeks ago as follows:

I don’t think criteria like quality, scarcity or expensiveness can be assessed objectively.  In fact, if objective assessment was possible, it would make it irrelevant for luxury brands.  That is because luxury brands live on perception.  All brands do – otherwise the product becomes a commodity – but luxury brands particularly depend on perceptions because most are bought to make us feel a certain way and/or make us be perceived in a desirable way rather than to serve a utilitarian purpose.  You don’t buy a Louis Vuitton suitcase because it is practical or long lasting.  Its celebrated craftsmanship served to make it practical a hundred years ago.[…]  A middle-aged man does not buy a Ferrari because it is comfortable, reliable, economical or in any other way ‘rational’.  Emotional needs are the main drivers.

Luxury brands also do everything to NOT be comparable. Nespresso tries everything NOT to be compared to a homemade cup of coffee.  It wants to be seen and experienced as an incomparable gourmet snob experience.  Did you read that Starbucks loses in blind tests to Folgers coffee?

So, it does not matter if a TVR, Ferrari, or Land Rover is not reliable, that is not the criteria by which the buyers assess them.  It does not matter that Nespresso is (no longer) physically rare, as long as it succeeds to remain a rare experience in the mind of the drinker and host offering it to her guests.  And a Hummer is beautiful in the eyes of the beholder because it expresses the virile masculinity they want to project.

Mr. Kuehlwein makes an important point, and I agree – the six attributes are assessed subjectively. This is one of the reasons that these attributes can be applicable in almost any situation. A person can always perceive an item to be scarce, have aesthetic appeal, be superfluous etc. However many luxury users are unaware of that they assess luxury according to these attributes. My research, which is based on a system that listens to the inner voice of the consumer, has nonetheless shown that people use these six attributes even when the meaning they give to them is subjective.

These attributes do not need to be present in an item in an objective sense. Buyers perceive items to have these qualities, or interpret the items to have particular meanings to them.  This interpretation is always emotional and never logical. Nevertheless, interpretation of luxury follows a very distinct model.

Even though the six attributes do not need to be present in luxury in an objective sense, they are still a core part of luxury buying. Understanding how customers perceive these attributes in products enables us to satisfy our customers more fully and sell luxury successfully.

A recent article in the Economist of October 27^th, titled “The rise of no-name designers”, illustrates how some online companies have succeeded in creating the necessary cachet for their products without using brand building. For example, Naked Wines, the UK fastest-growing online wine distributor sells wine from New Zealand, bypassing the middleman. However, Naked Wines does not sell cheap wine. To the contrary, they look for the yet unknown, high-quality wine that can still be purchased at a cheap price. Naked Wines reduces prices by buying their wines in bulk and shipping directly.  Needless to say, they have to offer new wines every week and for the sake of their reputation, they need to be careful what wine they choose to offer.

Ning Li, the founder of Made.com discovered that furniture sold on the UK high street is made in his China hometown, Foshan, at a tenth of the price. He sells similar quality furniture at 50-60% of the high street price, cutting showroom expenses.

Now that people can get good quality, no-brand goods for cheap prices, is luxury as we know it going to disappear? Are we entering the world of brand-less, cheap “luxury” as the Economist claims?

Not so, in my opinion. The Economist made a common mistake here and monitored a change in behavior. Of course, the way people behaved in the past has changed and people behave differently with technology nowadays. However, the author forgot to ask two important questions – “Why do people behave in this way?” and “How does this behavior (ie purchasing these products) satisfy what they’re looking for?”

The Economist was right in labeling as “luxury” the behavior behind purchasing online at Naked Wines and Made.com, despite these products being cheap and their brand unknown. However, it was not aware of the ‘why’ question, i.e. why people buy these products. The ‘why’ question – or people’s motivation behind buying is what makes this behavior true luxury, and not some modified version as the Economist might have thought. The ‘why’ of luxury is that it enhances our self-esteem. If a way of purchasing enhances self-esteem, as the above kinds of purchasing do, you’ve found a luxury behavior.

Luxury often comes in disguise. In 2001 Casella wines, an obscure Australian wine producer, successfully introduced [yellow tail] wines to the highly competitive wine market and by 2003 became the most sold wine on the US market, outstripping California labels and selling more than all imported French and Italian wines combined. [yellow tail] was presumably cheap: a bottle was purchased for the same price as a six-pack of beer. On its face, it looked as if US consumers were shunning prestigious labels (shunning luxury) and buying cheap wine instead. However, [yellow tail] was never competing with wine; it was competing with beer. Their market was fun, social, drinkable beverages. They claimed that if you’re looking for a good beer, you should choose their wine instead. Actually, [yellow tail] was selling luxury beer.

Naked Wines approached luxury from a different angle. Their claim is that they are ahead of the times and the wine they sell today might fetch higher prices once it becomes famous (and the chances for becoming so are high). They tell the customers that they do not buy the brand of yesterday, but the brand of tomorrow and like any future option, these brands come with a discount. In a way, these wines appeal to the customer even more. Being innovative, smart, and ahead of the pack are all self-esteem enhancers. Naked Wines sells luxury.

Made.com interpreted luxury from another angle, revealing the weakness of luxury brands. Most, if not all luxury brands are not owned by their founders, but are run by professional managers who care about the bottom line first. Consequently, in order to reduce manufacturing costs, most items are manufactured in cheaper countries – China – in this case. Made.com does not have to offer high quality per-se. Instead they offer comparable quality claiming that they manufacture their furniture on the same premises as luxury brands and at comparable quality. They tell the customer to be smart without compromising on quality or design. Doesn’t this practice also enhance self-esteem?

Labels can be misleading. We may have a certain image of what is and what is not luxury. When we see a case that does not fit our image, we may think that luxury behavior is changing. Though we’re tempted to look at companies like Naked Wines as a “brand”, we call it a “no-brand brand” because this allows us to preserve our previous image of what a brand is. However the image we have of luxury is probably a superficial one. Cheap, no-brand luxury was never fundamentally different from expensive, brand-name luxury and it is not going to replace it.

We should not be asking “What is luxury?” but rather “What does luxury do for a person?” Looking for what luxury provides to a person, what luxury does, so to speak, would cause us to delve deeper and start asking why luxury exists in the first place. From there it is easy to confirm what King Solomon said 3000 years ago – there is nothing new under the sun.

Internet technologies in general and mobile devices in particular allow us certain independence. For example, today, many people book their flights online, check in online and get an electronic ticket, and use their mobile device to show that ticket at the gate. Unfortunately, these technologies can potentially be exploited by our service providers.

A recent study illustrates how financial service companies are promoting the idea of the self-service customer. These financial institutes provide increasingly sophisticated self-service information, used especially on mobile devices, to help people find various financial offers, compare between various products and services, and manage their accounts. The author raises two interesting points. Firstly, he argues that self-management may lead to more and more customers making wrong decisions without the help of an expert. While the author proposes some suggestions for overcoming the lack of expert service, much has yet to be accomplished to put such a service on par with the current offline practice.

However, the interesting nugget in my opinion lies in companies’ reasons behind their online services. The author states: “many financial service suppliers are under pressure to improve efficiency and margin, in some cases to increase the contribution to improving their balance sheet in the wake of the problems of the last few years. This financial pressure is leading some of them to choose the perceived win-win of a self-fulfilled customer experience with minimal staff intervention.”
These financial institutes are self-concerned. They see their margins eroding and their balance sheets heading south and they look for ways to offer an efficient service while cutting overhead and excessive staff. What is wrong with their approach is not that they are striving for greater efficiency, but that their main motivation is self-concern. While they claim that they want to offer a win-win solution, all that is sure is that they are winning. Whether the customer wins is unspoken for. What is wrong here is not what these institutes are doing, but what is behind it – concern for their own issues.

An example on the other side of things –Starbucks started enabling customers to use their mobile devices to order their preferred beverage online, pay for it by waving a barcode on their mobile device in front of a scanner, and send invitations to friends to meet at a certain coffee shop, complete with a map and the option to order their favourite beverage en route to the store. The report that appeared on Bloomberg is full of financial data. It shows that Starbucks invested $25 million in the venture, that Starbucks hopes to pay fewer fees on credit card transactions, and that Starbucks hopes the system will make the company more efficient and increase its sales.
Again, the interesting nugget is not what Starbucks is doing but why it is doing it. Years ago, Starbucks discovered that people are ready to overpay for their coffee and since then sells coffee at a premium price, as luxury. However, the luxury is the cup of coffee, not the experience of purchasing it, which can actually become a drawback. Being the provider of a mass-market luxury therefore, Starbucks suffers from its success. During peak hours people waste a big part of their lunch break standing in line and waiting to be served. Starbucks’ offer started to become a burden. Starbucks found a way to peel off that burden while keeping its luxurious offer intact. With its new program Starbucks manages to offer its luxurious coffee again without taxing its customers. Was it a sound business decision? Of course, more people will buy this expensive offer more frequently, Starbucks will operate more efficiently, and ultimately increase its bottom line. However, the customer only appreciates this program because in his eyes, it is for him and not to enrich Starbucks. Ask the happy customer and he’ll tell you that Starbucks is concerned with the customer’s needs.

Over time any offer should be updated to incorporate new technologies and new social behaviours. Nevertheless, we should not lose our focus. If we focus on our own needs, we will eventually be punished by the customer. However, if we use the same technology, but focus on the customer’s needs, we will be rewarded handsomely.

The luxury world’s relationship with the counterfeit industry is puzzling. The counterfeit industry seems to cannibalize the luxury industry by offering products that presumably people would have bought from the luxury industry in the first place. However, as I commented in the past (I need to find the article) the luxury industry does not fight the counterfeit one wholeheartedly.

The luxury industry has very good reasons to allow the counterfeit industry to exist. Having counterfeits means that the original has increased status, as Prada’s CEO announced recently, “We don’t want to be a brand that nobody wants to copy.” The counterfeit industry allows the wider society to become fans of the brand while those who use the true product feel more elite and more respected. More significantly, a Sloan MIT business professor Renee Richardson Gosline found that people use counterfeit as an entry-point to luxury. Gosline discovered that within two years, 46% of buyers of counterfeit subsequently purchased the authentic version of the same product they had purchased the counterfeit of — even though other people could not necessarily tell the difference.

However, there are problems with buying counterfeits. James Lawson, director of Ledbury Research, points out that most of the time their quality is inferior and it is socially uncomfortable to admit to using a fake. Therefore Lawson suggested that renting luxury products could become a superior substitute for counterfeits, and provide an entry-point to the brand as well. Renting genuine luxury products seems to offset the problems of low-quality and social discomfort associated with fakes. One can experience the thrill of having true luxury products at a lower cost, and then return them later.

It is true that renting luxury may eliminate some of the problems with buying counterfeits. However, from the luxury marketer’s perspective, a major difference exists between them: the time span. People who buy counterfeits become accustomed to having the product in their lives. They identify with the brand that the counterfeit is imitating, and often seek to buy the real thing eventually. Renting luxury doesn’t give this experience at all. People have the great feeling of using luxury, but for a short time only. They don’t necessarily identify with the brand, and there is so far no evidence that they move on to buy the real product. While renting luxury may replace buying counterfeits in the short-term, it is clearly inferior from the perspective of being an entry-point to the brand.

I feel ambivalent about this increasingly popular phenomenon. I would argue that a major component of the luxury experience is purchasing a luxury item at a high price. Renting luxury does not provide a luxury experience just because it involves luxury products. Unlike counterfeits, it is also not an entry point to luxury. However, while it may not fit the definition of luxury, nor lead to a luxury experience, who does not want to be king, even if only for one day?