The Difficulty of Luxury Pricing (And How To Solve It)
How to price a luxury right? The dilemma is that too much means that potentially no one (or not enough people) will buy. And a too low price means not enough profit and may endanger the perception of luxury. Classic pricing methods (like Conjoint Measurement) don't work well for luxuries. To be valid and reliable, those methods need hundreds of participants, a number difficult if not impossible to recruit for luxury brands.
Imagine a limited edition of 1000 for an item, a number not untypical for luxury brands. If the edition sells fast and aftermarket prices increase for a "hot" piece, the brand loses significant profitability opportunity. Take the example of a German luxury car maker. This brand recently launched a limited edition that sold out fast and is now highly desired. One can argue that there is no problem as it is a product many people talk about and that helps to drive up the image. However, if many of the buyers sell their just purchased car - say - for double the price - which happened in that case -, this is lost profit. The brand could have priced the car higher from the start and cashed-in the difference. A significant profit lost.
But the pricing dilemma is not limited to limited editions. How to price a new item right? Should a luxury brand ask for 10% more than other items, 20% more our could they sell it for 500% more? If becomes clear that a 500% premium for a new item means significantly more profit per unit. Which in a low-unit luxury setting can make a dramatic difference for a company.
The secret to luxury pricing is Nonlinearity. it's to find price points that are significantly different to "normal" linear pricing of "every day" or "premium" brands, where a feature more is priced a little bit higher. But Nonlinearity needs pricing expertise and tools to gauge the luxury potential of a category or brand.
It's one of the most powerful means to create a relevant line extension and a pricing architecture that truly reflects the luxuriousness of a brand. And by this Nonlinearity offers enormous revenue and profit potential beyond classic borders. Équité is a specialist for luxury pricing and can help luxury brands to (re-)define their pricing architecture based on data-driven tools in order to become more competitive, relevant, valuable and profitable.