Isaac Mostovicz’s thoughts on luxury and connoisseurship more generally.
Luxury is in the eye of the beholder. Thetas (Θ) and Lambdas (Λ) interpret the world in different ways -– the typical Theta personality seeks affiliation and control as an ultimate life purpose, whereas Lambdas seek challenge and uniqueness as an ultimate end goal. This section addresses the impact of these preferences on our luxury choices.
Isaac Mostovicz writes...
After more than 4 years of manning the US State Department conflict diamond desk, Brad Brooks-Robin stepped down and was interviewed by JCK magazine. Apart from appreciating the very honest answers Brooks-Robin gave, I was left with some questions that I could not find answers to.
Kimberley Process Certification Scheme, established ten years ago, is a structure set up to ensure that diamonds sold internationally do not finance wars or other conflicts. Countries subscribing to the Kimberley Process must put in place regulations requiring diamond dealers to buy diamonds only from known sources. Brooks-Robin considers the scheme to be effective, but believes it does not cover all aspects. Its lack of comprehensiveness was the reason the NGO Global Witness decided to leave the Kimberley Process.
However, the interview fails to address the most fundamental question. Is there any evidence that diamonds finance wars or other conflicts? Was there a raison d’etre for such a huge bureaucratic mechanism to start with? Everyone was mobilized for the scheme – the US government and Senate, the European Union, the Security Council of the UN and even Hollywood. Everyone went forward to protect the market from an evil that never existed.
Well, I would not say that it never existed. When the UNITA wanted to finance its war against the government, they sold diamonds on the open market, but that was a different story. Financing a body the size of UNITA means that they had to sell a lot of diamonds. Actually, the size of the smallest parcel they sold was over $1 million and the goods were openly traded. It would have been quite easy to stop such a trade, had those who were interested been willing to do so; however it seems they were not since they used the money to sell arms, which have the nasty nature of killing and maiming people.
The reasons behind creating this huge scheme were in reality different, but that is another story. Ten years later we now have a mechanism that works smoothly, though aimlessly, and everyone is happy. We have a car with an excellent motor but without a gearbox allowing us to drive it to our destination. We have a set of rules that is followed to the letter of the law, but no one cares whether they achieve anything at all.
The rules on the regulation of the Kimberley Process were doomed to be unsuitable for the needs of the diamond industry to start with. After all, how can rules dictated by someone who does not even know the industry — its strengths and weaknesses, its ethical code and its motivators — dictate rules? Listen to what Brooks-Robin says:
“I don’t understand why KP meetings don’t have a session on the state of the industry. There are too many diplomats and bureaucrats who come into the KP and know zero about the industry. […] There are too many people who come into the industry like me and don’t know anything about it, and KP meetings don’t give you much of an opportunity to learn about it.”
Well, this is hardly news. In early 2000, based on advice from Bain and Co. consulting firm, De Beers decided that the industry needs brands. Nobody really knew what brands meant or how to create them or whether diamonds can be branded at all. Brand was in the air and as De Beers said, we don’t know what this drive means either or how it will revive the industry, but we will learn together with you. According to Varda Shein, the general manager of the Diamond Trading Company – the marketing arm of De beers – about $5 billion in cash went up in smoke without selling one single diamond.
How well did Bain and Co. know the industry? These consulting firms have tools for analyzing corporations, however when dealing with an industry that is exclusively entrepreneurial, one needs different tools and rules, that are not taught in business school. I personally witnessed this when I was in business school, when I realized that I need a very healthy measure of creativity and commitment to apply what I learned to my business. At least if there is a positive lesson to learn from the branding fiasco, it is that the diamond industry is quite flexible and ready to adapt to any trend or move. Well, one cannot expect less from entrepreneurs.
The diamond industry is clinically dead. The mechanism works and its body is supported by life-support machines, but its soul – the personal responsibility for its actions – went away a long time ago. How long will it take before a true leader brings life back to this beautiful industry?
Isaac Mostovicz writes...
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.
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.
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.
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.
Isaac Mostovicz writes...
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.
Isaac Mostovicz writes...
I would like to introduce you to one of my clients, Groopex (http://groopex.com). Groopex is a start-up high-tech company which provides integration solutions between third party software and Web Conferencing platforms such as Cisco WebEx and Citix GoToMeeting. Did you understand that definition? Well, I did not, since Groopex’s language is technical, suiting only the technical people in the organisations. So, when I was approached by Groopex, the first thing I needed was a better layman-style definition of the product.
You are most probably familiar with distance learning. Most of my studies were conducted in this manner, utilizing emails, websites and some older technology such as snail-mail, video and audio cassettes (which were considered really innovative at the time). Nowadays you can find many recorded classes online, yet there is still no alternative to a live interactive class where you can ask questions and provide comments, and where the teacher can moderate the class according to its ad-hoc needs. Here came Groopex, enabling one, with a mere click, to participate in a live class from any location to enjoy a class experience practically identical to a regular live class.
While the technology had been created and was running well, Groopex was still struggling with its marketing. I inquired who the company thought the classical client would be, and got a wide range of answers. Even with the working assumption that the product should suit universities, interested in reaching students even remotely, Groopex could not pinpoint whom to approach in the universities. Should they approach the technical staff that would understand and appreciate the technology, or should they approach faculty members who can see the potential in teaching? Perhaps the best ones to approach would be the management who could see the financial opportunity and the benefit to the institution’s prestige in this solution?
Reviewing the history of Groopex, I discovered that the company’s idea was based on one of the founders’ successful website, WebYeshiva (www.webyeshiva.org) which offers on-line classes in an elaborate way. Surprisingly, I found that the ideal class size in WebYeshiva should be no larger than 25 students, a size which allows the class to be fully interactive. WebYeshiva didn’t offer an asynchronous video of a class; rather it offered an interactive class where the teaching experience is a multi-layer one. WebYeshiva didn’t offer a second-class solution to those faraway who could not attend a regular class; rather it offered a first-class solution for studying regardless of distance.
High education nowadays has a serious problem. Students keep on pushing for easy solutions. Prof. Jeffrey Pfeffer of Stanford University Business School related to me over five years ago that MBA students stopped reading; a must when I studied and was required to read a lot. He sounded desperate looking for solutions such as creating videos, realising that the more passive the students, the less they absorb.
I helped Groopex realize that they actually have created an in-situ solution that could be an answer to the laziness and passiveness of modern education. Instead of the failing old system of lecture, reading and some questions in class, Groopex can offer a much richer experience. Each class can be consisted of a lecture, exercises, highlighting of relevant text, using rich technology tools for exhibiting material as well as enhanced Q&A. For example, a typical MBA class at a good university can have up to seventy students. Good lecturers could interact with each student three times during a semester at the best. Further, consider those students who fret about interactivity due to shyness or fear from answering incorrectly and losing face. Using Groopex’s technology, the lecturer can broadcast the question to several students in advance to their computer screen and get several answers, some of which might be similar and some different. The students can keep their anonymity and have time to prepare their answer. Why should a student have only three chances during a semester instead three chances during each class?
This is but the tip of the iceberg, and those interested can approach Groopex directly and experience the approach that Groopex enables. However, you may ask what the connection between all this and luxury?
The answer, I believe, is simple. Luxury’s role is the enhancement of self-esteem. While Groopex would never be able to turn a bad teacher into a good one, it would definitely provide the good teacher with a modern tool-kit that will permit him to express himself in a much richer way to his students. Moreover, the students come out of this new educational experience with a feeling of enhancement and fulfilment. With Groopex we can bring back the playing experience that is so essential to learning. Students are no longer suffering but feel stronger and trust themselves much more.
Isaac Mostovicz writes...
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.
Isaac Mostovicz writes...
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?
Isaac Mostovicz writes...
Value for money is a well-known economic concept – but does it really reflect the reality of how people buy? Years ago, economists observed that individuals pay a price for service or a product. However, observing individuals was not very helpful for economists who always try to measure and quantify. So they exchanged individuals with “the market”, a virtual entity that is difficult to define. This allowed them to talk more generally about the exchange of money for products or services in a way that was detached from the human psyche and its motivations. Next, the principle of exchange was introduced. Economists argued that we determine the value of products and services by the amount of money we are willing to pay in exchange for them. Following this logic, economists claimed that a person will always try to pay the least amount of money possible for the goods or services that he desires. The term “value for money” (VFM) was born.
Exchange Value and Commodities
In this discussion I’m focusing on exchange value and how it relates to marketing. This term, widely used in political economy and especially in Marxian economics, is one of the four major attributes of commodity. Commodity is defined by its fungibility, or the ability for one unit of the commodity to be fully exchangeable with another unit of the same commodity. For example, a $10 bill can be exchanged with another $10 bill or one barrel of petrol can be exchanged for another one. However, would you exchange a $10 bill for a stack of quarters? Are all petrol barrels similar? Finally, did you notice that services were dropped out of my discussion? Actually, whenever we exchange our money for goods they are always bundled with a service, whether it is in the form of who serves us, how easily we can obtain the goods, or something else. How do we factor service into the value of the “commodity”? We’d like to think we can talk about two items that cost the same or that are exchangeable having the same value, or being similar to commodities, but in reality it’s hard to find such items. Practically speaking, value is hard to quantify.
And yet, economists tend to relate to all products as commodities. From the buyer’s perspective, when we relate to an item as a commodity, we tend to feel that the supplier has no right to mark up the item by one cent. We should be able to pay the cheapest price available and nothing more. Think about exchanging money in the airport – who doesn’t resent have to pay a commission? Because money is a commodity, we don’t think anyone should be able to charge more than it’s worth.
Luxury – the Antithesis of VFM
Luxury is the antithesis of the value-for-money economic thinking. Luxury consumers are definitely not looking to maximize value by taking the cheapest offer. After all, the principle of luxury is needlessly overspending. Moreover, the element of paying in luxury is not just about exchanging a price for the goods or services received. Paying is an integral part of the luxury experience. Luxury can never be free and the more we pay, the stronger the luxury experience is.
A Different Principle: Value or Money
From my experience, value for money is an illusion based on only observing the act of exchange without really understanding the psychological dynamics behind it. I have found that economic exchanges are always about either value or money. When we focus on the value we’re getting, we do not think much about the price. Nobody chooses a dish in an expensive restaurant based on its value for money, (“I think the 250g entrecote is a better deal than the sea bream, price-wise”), unless he is an economist. We have a general idea how expensive the meal might cost and we simply select the dish according to our liking. Likewise a person who values high quality, comfortable shoes does not fret over their expense, nor does he extensively weigh the value against the money he spends. Because he values the shoes enough, he regards the price as simply instrumental in getting the value.
By contrast, when we focus on the price of an item and not its value, we commoditize the item and start looking for the cheapest price possible. We will buy because an item is comparatively cheap or not buy because an item is comparatively expensive – and not really consider the value at all. We all know of items that we choose based on price. For some people maybe it’s napkins in the grocery store, for some maybe it’s movie tickets or a music album. Somewhere in our minds, the value of these items is unclear or appears insignificant. And the moment we disregard value, we tend to focus on price alone. “The supplier shouldn’t charge more than the bare minimum” is the mantra here. And if a person were to choose not to buy at all for this reason, often it is not be because he thinks the value and price are not commensurate. He doesn’t really think about the value, he only thinks that the offer is “too expensive,” a term that economists cannot live with because it is unquantifiable, subjective, and personal.
How We Feel About It
When we buy based on value we feel positively toward the offer and sense that we are getting something we need and desire. When we buy based on price, we feel hostile toward the offer, as if someone is demanding that we pay money that we would rather hold on to.
Price and value are not two sides of the same equation. We either purchase for value or we purchase based on price. Moreover, whether we relate to the price or the value of a product is psychologically determined, and is subjective, personal, and unquantifiable. I do not know what economists do, but as a marketer I know that by creating value my customers will recognize, I can always get a good price.
Isaac Mostovicz writes...
According to the economic news, Graff Diamonds, founded by Laurence Graff, recently pulled its IPO offering just before its deadline. At the time it had orders for just half of its $1billion initial public offering.
Who is Laurence Graff? Allow me to share a short story with you. Between 1998 and 2000, Enea Galucero, the late David Kiets – one of my colleagues at De Beers – and I tested the high-class jewelry market by sending people to pose as diamond jewelry shoppers along Old Bond Street in London. For the most part, they had horrible experiences in the most glitzy shops. But one of my “shoppers” had a great experience at Graff. She entered the shop, telling the salespeople she couldn’t afford a thing and that she was probably in the wrong place. Laurence Graff was present and, making her feel like a queen, managed to turn her initial impression on its head and almost convinced her to buy.
When the group of “shoppers” met afterwards, everyone wanted to know what Graff diamond she had been offered. However, even though she was a pro in diamond lingo, she was not sure whether the diamond had been round or square and remembered only vaguely that its weight was close to 1.5 carats. And yet she almost bought it! Graff had spoken to her, about her – and not about diamonds. With this approach, despite his diamonds going for prices of 25k and up – he was almost able to sell to someone with no intention to buy at all! One must bow his head when seeing such a master.
Sadly, now Laurence Graff seems to want to bail himself out of his diamond inventory by using part of the IPO proceedings to buy out his own diamonds. Does the master not believe in his own sales skills to turn his diamond stock liquid?
But he never saw his sales approach as his truly unique offering, and therefore did not spread that to his other shops. That was the mistake that put him in the position he is in today. Exceptional salesmanship – like Graff’s – sells; reputation is not enough. And now he seems to be jumping ship and just trying to liquidate funds. Hopefully Graff will overcome the current economic pressure. Even more so though, hopefully he will realize that his power is in his customer-oriented sales – and use that to appeal to more clients and build himself up.
Isaac Mostovicz writes...
A recent report by TAMBA notes that luxury brands, which shunned social media in the past, are embracing it much more today. Consequently, the report questions the status of exclusivity, a term that has been used interchangeably with luxury. The report claims that identifying luxury with exclusivity is an “old European myth” that does not appeal to today’s young, more democratic audience.
Showing the importance of social media among luxury shoppers, Kay Hammond of TAMBA points out several takeaways. First he claims that the notion of exclusivity is changing and that young people are purchasing luxury brands as a way of expressing personality as opposed to acquiring rarity. Secondly, he says that social media is about personal connection; despite its being seemingly removed from the customer, it is actually used to reach customers in more personal and direct ways. Lastly he proposes that luxury consumers are increasingly prominent social and mobile media users.
I think that some of Hammond’s claims are questionable. Throughout his article, Hammond refers to luxury products and services as “exclusive”, relates luxury to “exclusivity” in general, and then claims that “exclusivity” is an unappealing “old European myth”. However, throughout my years of research I never found “exclusivity” used to describe any facet of luxury. I personally do not fully understand what the term “exclusivity” is meant to convey. Though customers might use the term to inaccurately describe the value they find in luxury items, serious luxury researchers never refer to “exclusivity” when talking about luxury. Hammond presents a quasi-professional claim with no serious basis about “exclusivity” being related to luxury, and then claims that times have changed and this relation no longer stands. However, without first establishing what “exclusivity” is, it is meaningless to say that people shun it in luxury today.
A term more accurately used in luxury is rarity (which was perhaps what Hammond intended by “exclusivity”). However, without understanding what rarity it, it is impossible to judge its value among luxury consumers. Rarity comes in two forms, depending on the individual. Some see rarity in a product itself. To this person a diamond would be rare, since there is only a small amount of diamonds in the world. Others perceive rarity in the difficulty of obtaining a product. Such a person would not perceive diamonds as rare if he worked in diamonds because they would be easy to obtain, but would perceive as rare an antique Persian rug that took him years to acquire.
If you see that luxury consumers are less interested in certain items that are generally perceived as rare, that does not mean they are not interested in rarity. It just means that those items do not satisfy their definition of rarity. Rarity is not a European myth, although it is very old. Searching for rarity is based on a psychological need that is embedded in human nature and it is certainly still a part of luxury consumption.
Once we understand rarity, we can critique Kay’s claim that customers are concerned with “personality…over the notion of rarity.” Personality and rarity were never competing values. People use what they perceive as rare to express their personality. One person might use an unusual, handmade dress that she searched many stores to find to express her personality, while another might invest in an expensive pair of shoes to express his personality. Both perceive the items they acquired as rare. And both use those items to express their personalities. People did not choose the value of personality over the value of rarity – the two values work hand-in-hand.
Regarding Kay’s other claims about social media –though Kay may be correct that marketing luxury through social media is effective, we have to keep in mind that selling luxury is a different matter. Proper marketing and sales require a dialogue between seller and consumer. It is easy to engage in this dialogue face-to-face but difficult when our connection with our customers is purely technological. For most luxury products, selling requires establishing a relationship with the customer through direct contact – and for this contact, social media is not quite direct or personal enough. Perhaps established brands, such as Tiffany’s and Burberry, can cash in today on the successful dialogues they created over the years. However, it is worth checking whether these dialogues become richer and spread wider. Without continued direct contact with their customers, it is hard to imagine that they would.
Luxury consumers did not change, they simply changed the way they express their interest in luxury (which is something that will always be changing!) Rarity is and will always be an aspect of luxury. If we see luxury consumers losing interest in what we think is rare, we have to question what rarity means for them. Also, though social media is widely used by consumers and may be a useful tool for marketing luxury, it cannot provide the necessary personal dialogue between seller and consumer that selling luxury needs. Only being faithful to the principles of proper luxury marketing can assure us that we will thrive in today’s luxury market.
Isaac Mostovicz writes that regardless of what marketing discipline they advocate, marketers must try to understand their customers' inner motivations ...
People sometimes ask me what is so special about Janus Thinking. In my previous blog, I positioned myself as operating within the qualitative research field. We cannot expect people to be fully aware of their deepest, most hidden motivations. Even when they are, not many would be able to express themselves in a coherent way. That’s why people use metaphors when discussing these motivations. For example, a customer called us and asked us to visit him. When we agreed upon a date he asked us whether we were going to offer his staff some training. However, when we asked him what issues he wanted us to address he said: “With me, it’s different”. Well, the customer did not invite us to check what his problems were but asked for ”one size fits all” training while telling us that whatever we were going to provide would be rejected because with him “it’s different”. Some psychologists would use this as an example of how irrational human beings are, and criticize such behavior. But we think differently. There was a hidden message within that customer’s request, disguised within an oxymoron, which we needed to discover. Our client simply expressed his concerns in a very precise, yet illogical way. I do not know of any quantitative method which would be able to shows what exactly was on this person’s mind. Only systematic exploration could have revealed what those concerns were.
Well, Dichter emulated this approach too and we at Janus Thinking operate in the same manner, with a slight difference. To expand on this, I will explain a little about psychology. It all started with Sigmund Freud, the champion of behavioural psychology, who theorized that we have our preconscious and subconscious which guide us. Our motives are deeply hidden in our psyche and influence our behavior. Freud went on to develop psychotherapy, a dialogue between the therapist and his client to treat diverse psychological distortions. Over the years, different theories emerged and different techniques were introduced. However, all these techniques and theories had one thing in common – you need to delve deep into your client’s psyche if you want to really understand him.
Cupid and Psyche
Dichter was the first to adapt this approach to marketing. The popular maxim in marketing is that people buy with their heart and attempt to justify their behavior, post-sale, with logical arguments. Dichter explored the first part of the maxim and gave it a scientific basis. However, he did not have the tools to address the second part of the maxim and did not understand the psychology of this logical justification. To understand what lies behind the logical justification we need to explore another branch of psychology, the cognitive one introduced by George Kelly in the 1950’s. Kelly’s theory, the Personal Construct Theory, postulated that “a person’s processes are psychologically channeled by the ways in which he anticipates events.” In other words, we constantly build theories that will arrange the world around us according to our own brand of logic. We see a series of dots and immediately we look for a pattern whether it exists or not. Using Kelly’s work, I was able to find out the way people try to explain their behavior. These justifications have nothing to do with our perceptions but with the format they use. However, understanding the language allows us to read between the lines. Again, one of the most important tools for discovering what lies behind these claims of logic is developing a dialogue with the client.
Each approach, whether Dichter or Kelly’s, has its own merit. When dealing in mass marketing, for example, then we actually try to go over the head of the salesperson to have a dialogue with the customer. We may find that in that situation, there is nobody there who is qualified enough to build such a dialogue at all. Things are different in luxury, for example because we mainly deal with our clients face to face. I haven’t met every diamond salesperson on the planet, but after thirty years I can recommend only three who are able to do a good job.
Dichter, following the tradition of behavioural psychology, faced an ethical challenge. Behavioural psychologists deal with our ugly hidden secrets that we try to repress. Taking these theories into marketing, there was always a sense of trying to manipulate the customer using sophisticated methods. Since Dichter was aware of this possible negative manipulation he tried in his books to persuade readers that this was not the case.
However, are our motives based on these ugly hidden, archaic and primitive motives? I don’t think so. The role of these unchanged, hidden values is to help us find our ultimate goals that are worth pursuing. Such a noble task cannot be based on ugliness and cruelty but on something very pure and beautiful. One man to address this in a professional way was Victor Frankl, the father of Logotherapy whose approach was to search for real meaning in life. Yes, this search puts the responsibility of searching squarely on us. We, as consultants, cannot advise because this takes away the responsibility from our client. Our job is to guide them to face reality, to discover their beauty within and to use it for self-development.
The marketing of luxury is a challenge. It is very easy to manipulate people to spend more and more; neuroscientists show that by acting this way we manipulate the region in the brain called Nucleus Accumbens which is responsible for our pleasure and laughter but also for addiction, fear and aggression. However, other areas in the brain can be influenced which are responsible for altruism, for example. As a marketer, understanding this and choosing the right way to use this is key to sales. And it needn’t all be about fear – when we manipulate the positive values of man then we can create through marketing someone whose self-esteem is enhanced, who is more refined, and who cares for the world around him.