Veblen Goods

Burberry, Veblen Goods and the levers of luxury.

Isaac Mostovicz writes...

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…

You say of this article...

Bookmark and Share

Pricing luxury mobiles

Isaac Mostovicz writes...

An article in the IHT highlights a renewed interest among manufacturers in niche market luxury handsets. Vertu, the sector heavyweight, simply can’t turn out their precious-metal phones fast enough, as they are restricted by the limited capacity of their workshop in the UK.

However, if Siemen’s venture into the luxury market can be taken as an example, evidence would suggest that mass production and (relatively) affordable pricing is not the way to go. Their Xelibri line was culled after only 18 months in the market – but the Gizmodo article doesn’t quite tell the whole story. While the Xelibri handsets were undeniably oddball, and had only a limited feature set, the same could be said for Vertu’s line-up. Less quirky, perhaps, but a far cry from today’s smartphones in terms of functionality.

Is a high price a key determinant of appeal, then? The Xelibri range retailed for hundreds of pounds, whereas Vertu’s premium range starts in the tens of thousands; had Siemens added a couple of zeros to the prices of their fledgling range, woud they have fared better?

Economists call products which exhibit this characteristic Veblen goods, after Thorsten Veblen, who was among the first to examine the purchasing of luxury items. To anyone involved in brand strategy, this concept won’t be at all unfamiliar – by pitching to a higher price bracket, the sense of exclusivity is increased.

However, all of this comes with a caveat: unless the expensive product is backed up with outstanding customer service, great packaging and comprehensive after-sales support, the appeal may quickly fade. Simply slapping a bigger price tag onto a poor product experience won’t drive new custom.

Janus Thinking says of this article...

Will a limited edition save Alfa?

Continuing the automotive theme from ealier this week… Reuters report that Alfa is to launch a limited run car, the 8C, in an attempt to salvage its poor reputation for quality. Unveiled at the Paris Motor Show, the new model…

Yamary says of this article...

Walking in the presence of ganits here. Cool thinking all around!

You say of this article...

Bookmark and Share