Luxury Goods and Pricing Power
The story of the coronavirus recession and recovery is a story of unequal outcomes. Not all people are being impacted equally, and their businesses are not being impacted equally either. Some are flourishing, and some have been devastated. And even within the same industry, there is an array of possible results. There are some factors in our economy that business owners cannot control, like the existence of COVID-19. But some things can be influenced, like how much effort is put into designing, managing, and executing your pricing. It is an important time to be thinking strategically about pricing.
Today, we are going to look specifically at luxury goods. We will review some recent examples of the different approaches to pricing luxury goods and what it can reveal about pricing power.
Some luxury brands increased their pricing;
others did not
There are numerous examples of luxury brands increasing their pricing over the last 12 months. Louis Vuitton increased prices by up to 6% on select handbags in May last year, and some prices increased by a further 3% in January. Christian Dior raised prices by up to 11% in select locations. Chanel increased the price of its most famous handbag by about 20%. Gucci recently raised the price of its Dionysus bag in Korea by 22%. (Generally, annual price increases for this industry are around 5%.)
Photo by Christian Wiediger on Unsplash
However, it is important to note that not all luxury brands increased their prices. Management at Hermès (the French firm that makes Birkin and Kelly handbags) announced that there would be a price increase of approximately 1% in 2021 to address the cost of higher wages. Burberry did not adjust prices on existing products in 2020, and a price increase last month was small. Bottega Veneta, a smaller brand owned by Kering, has raised prices minimally.
So, even among luxury brands, there are differing approaches to increasing prices to customers. What explains this difference? Well, a thorough explanation will involve a discussion of pricing power.
Pricing power: your offering’s relative attractiveness to customers
Simply put, pricing power represents the relative attractiveness of your offering vs. the offering of your competitor. Basically, a firm has pricing power if its offering is more attractive than the offering from a competitor. Keep in mind that the relative attractiveness is based not only on price, but also on the benefits that the offering provides. And one of those benefits may be a perception of quality or prestige that is provided by the brand name itself.
These differences in relative attractiveness of the various offerings lead to differences in how willing customers are to stomach price increases for various brands. Thus, the brand with the highest pricing power has the greatest opportunity to increase prices.
Additionally, differences in pricing power impact how companies can react to competitive price actions. A company with high pricing power does not have to respond to competitors slashing their prices (at least, not immediately). A company with low pricing power does not really have a choice: it will generally have to discount prices if a competitor lowers their prices.
This divergence in profit outcomes implies the importance of determining whether your firm has pricing power with your chosen market segment(s).
A good time to check assumptions
A theme that keeps emerging for me lately is that there has been so much change in the last 12 months that it can be useful to review assumptions we have (about the market, the offering, the customer segment, etc.) and to validate them. Some things have changed dramatically, and they may not change back. Some things have stayed the same, but we don’t know for how long. Also, everything may change next week, and it is up to each of us to sort out the mess.
If you are using outdated assumptions, then you are playing yesterday’s game. You will never win today’s game until you reorient yourself.
It is also important that you are investigating the right questions. Naturally, a key assumption I would want addressed is whether management’s perception of their company’s pricing power is accurate. Keep in mind that this does not require extreme precision and reams of data to be collected (like you would see in a large-scale market research survey). A directional test may be perfectly sufficient, depending on scope and budget. Perhaps it makes sense to focus on the perceptions of your key accounts.
Ryan, Carol. “Hermès Shows Little Wear From Covid-19 Pandemic.” The Wall Street Journal. Dow Jones & Company, February 19, 2021. https://www.wsj.com/articles/hermes-shows-little-wear-from-covid-19-pandemic-11613744667.
Ryan, Carol. “Only the Best Luxury Brands Can Hike Prices.” The Wall Street Journal. Dow Jones & Company, January 27, 2021. https://www.wsj.com/articles/only-the-best-luxury-brands-can-hike-prices-11611745257.