Today marks the UK launch of Apple’s iPhone on the O2 network. Already a pricey proposition (with a £269 ($564) pricetag and minimum contract for £35 ($73) a month), those who want something to differentiate themselves from the masses sure to pick up iPhones today need not look further than London luxury retailer Selfridge’s.

The department store is offering a whole range of upscale ‘blinged’ versions of phones, including the iPhone, with options for exteriors in steel, 18 carat gold, or 18 carat rose gold, with or without diamond encrusting. The phones are offered through a partnership with Amosu–currently the pricest on offer is a diamond-encrusted Nokia N95 for £12,000 ($25,180). Earlier this week there was a diamond-encrusted iPhone for £20,000 ($41,968), but it seems to have sold out.

Selfridge’s has also partnered with several designers to create holding cases by the designers Christian Louboutin, Chloe, and Burberry.

The rise of luxury phones (see also the Vertu mobile phone series) shows how they have become an integral way in which consumers represent themselves.  Less a form of technology, more a fashionable accessory…

The diamond industry is in love with Tiffany.

Witness this analysis from Diamonds.net of the way that Tiffany avoided ‘doing a Burberry’.

In 2002, with $120 silver bracelets rushing off the shelves, Tiffany’s CEO Kowalski raised the prices on all of its most accessible collections, including ‘Return to Tiffany.’ The increase was not a response to rising costs or a desire for higher margins. It was a marketing decision intended purely to reduce sales.

This sounds like madness if you are a salesperson, but if you understand brand, and the difference between marketing and sales, it makes perfect strategic sense.

Problematically, the price rises had no discernible impact on sales. So in 2003 and again in 2004, Tiffany drove prices even higher. Finally, with prices up by more than 30 percent, Kowalski achieved his goal: Sales of jewellery under $500 finally began to decline.

Kowalski had saved his brand, increased his margins and build a sustainable platform the future.

It’s worth noting that a luxury good is not the same as a Veblen good–which is an item for which demand propensity of individuals increases in proportion to the good’s increasing price, named after the most influential micro economist Thorstein Veblen.

This paradoxical outcome – pretty much a description of utopia for diamond retailers–is actually seldom found in its pure form in the real world, but is certainly present in the demand for supra-priced goods like Ferraris or Jimmy Choo shoes…

The outome of the alternative attitudinal pole ‘cheap is good’, is the so-called ‘counter-veblen effect’ which was only added much later, by Lea in 1987, but is obviously a much pervasive force in micro-economics. The cheaper something becomes, the more people want it…

There are two other interaction forces in play–whereby the overarching market conditions affects micro-economic demand.

The first of these is the snob value of a good–whereby its actual rarity and exclusivity paradoxically increases individual demand cf.. louis vuitton or chanel handbags–and then the reverse social effect–the bandwagon effect, whereby individual demand propensity increases with penetration cf. makepovertyhistory wristbands. These can be seen as the effects of preferences for belonging on the one hand, and for exclusivity on the other.

The interesting challenge for luxury brand owners is to predict the tipping point for these forces within their brand economics.

Burberry’s growth worked brilliantly for a while under the bandwagon effect, but it hit a tipping point as these de facto status-seekers and conspicuous consumers were from a social class that many legacy brand disciples shunned – the so called chav contingent.

The question is…could Burberry have reversed the bandwagon effect by apply the Veblen effect–raising the price to push out the downmarket social groups …or could it, paradoxically have reversed it be cheapening the offer–lowering the price to reduce the dissonance between the product’s pricepoint and its social status, and thus dampening the excessive consumption and damaging social prominence of its product?

It is critical, even at an economic level, to recognise that socially-motivated, and challenge-motivated individuals will require different treatment.

As with all paradox management, the answer is two optimally embrace both poles and both attitudes, thus targeting the different user groups with the right proposition. There is a real economic case here for a brand split, creating a new elite/bespoke range and also adding a lower-priced diffusion range…celebrating, rather than shunning, the chavs…