Pricing Interview with Équité CEO Daniel Langer: Why many luxury brands are too cheap and what brands can learn from Hermès, Bugatti, and Beeple's 69 million dollar art sale

Many luxury brands are too cheap. In some cases, brands leave millions of dollars on the table, weaken their brand equity, and often even risk their survival with the wrong pricing strategy. According to Daniel Langer, luxury pricing is one of the most elusive managerial tasks. This has several reasons, as the CEO of Équité explains in our interview. Among those: too many knowledge gaps on luxury pricing, insufficient focus on brand storytelling, and category myopia when it comes to pricing. We interviewed Daniel Langer in Malibu, California, where he teaches luxury strategy at Pepperdine’s Graziadio Business School. A wake-up call for the luxury industry.

Daniel Langer is one of the world’s most renowned experts on luxury in a digitally disrupted world, and with Millennials and Gen Z. He was named one of the global “Top Five Luxury Key Opinion Leaders to Watch 2021” by Netbase Quid. He founded the luxury strategy firm Équité and is also the adjunct professor of Luxury Strategy at Pepperdine University. He consults some of the world’s most admired and iconic luxury, lifestyle and consumer brands with his team. Daniel is the author of several top-rated luxury management books in English and Chinese. He holds luxury, strategy, and pricing masterclasses worldwide and is frequently featured in leading global media publications, including The Economist, Forbes, New York Times, Nikkei. His education includes Harvard Business School, and he holds an MBA and a Ph.D. in luxury management.

Q: In several of your articles and publications, you claimed that many luxury brands are too cheap. This sounds exceptionally provocative. Can you explain?

Langer: I remember an interview that featured me about a decade ago in a German car magazine. It was the first time I made a wake-up call to managers about luxury pricing. At that time, the most expensive new car worldwide was the Bugatti Veyron. The price was around 2 million US dollars. This sounds expensive at first glance. And this is where it gets interesting. Rolls-Royce, Bentley, and Maybach were priced significantly lower in the mid 500ks in US dollars. Sports cars like Lamborghini and McLaren retailed between 200k and 350k for most of their models. Hence, there was a clear hierarchy of brands and price points. You could say almost like a reference price system with 2 million dollars marking the extreme. No one dared to go beyond. At that time, I had finalized the development of one of the first pricing tools for luxury brands as part of my Ph.D. research on “decoding luxury”. The newly developed pricing instrument featured a revolutionary property. It allowed for the first time to compare categories with each other and generate an estimate on the magnitude of Added Luxury Value (ALV) a brand or even an entire category provides. I called the tool “Luxury Index.” The results were shocking for the car category. The entire category was less luxurious than the categories of women’s shoes, handbags, wine, and even breakfast omelets or dinner deserts, believe it or not. It was the first time that a data-driven tool allowed to benchmark the ALV between categories, and it revealed that the potential for the most expensive cars could be in the ten million dollars. In other words, the most expensive cars were too cheap by magnitude 10 to 100.

Q: What were the reactions?

Langer: As you can imagine, I was slammed by the readers. Many people were angry at me, stating things like, “cars are already expensive, we don’t need anyone to make them more expensive.” This is a great example where you can see that luxury is counterintuitive. Without the data-based cross-category benchmarking, I could never have come to a conclusion. However, looking at the results of the Luxury Index, it became clear that cars were too cheap at their top end. There was an enormous value creation potential. And this is critical learning. I sometimes ask: What if all brands in a category price wrongly? What if there is dramatically more potential in a category than the players think. I like to call it category pricing myopia.

Q: What happened next?

Langer: Over the last decade, the price points of the luxury car sector went up 10-20x, similar to my data-driven predictions a decade ago. Car brands with 2 million dollar cars now include Ferrari, Lamborghini, Aston Martin, Bentley, McLaren, and newcomers like Automobili Pininfarina. Bugatti has been the most consequential car brand in storytelling and thus further increased their ability to price. La Voiture Noir is so far Bugatti’s masterpiece, sold at almost 20 million US dollars and featuring one of the most compelling stories. It is always the brand the story that drives the desire when we look at the top end of a category, it’s not a game of facts and features. Brands have to be excellent storytellers. I predict prices to climb further as many of the most expensive cars are still too cheap, and many brands do a relatively cost-based approach, even more than a decade after I first published the result of my initial research.

Q: Can you elaborate more on the luxury category myopia in regards to pricing strategies?

Langer: To fully understand why luxury pricing is so complex, we need to know how it is typically done. Many brands price their luxury products by looking at the cost first. Let’s say a product costs 100 dollars to make, and a brand may decide that there should be a 2-5x markup to account for wholesale margin, advertising, logistics costs, and profit. Most brands will then cross-check with prices they observe within their competitive set. This leads to a pricing strategy that positions their brand relative to those other brands, sometimes with a slight premium if they think their brand can sustain it or with a discount if they feel they want to be more accessible. In a nutshell, many luxury brands use similar or even the same tactics as mass-market brands. And this will always be wrong. It leads to similar pricing results within a category. However luxury is a business of extreme value creation, where the best brands can create value in an exponential, non-linear way if they get their strategy right. By pricing linearly for non-linear value creation, many luxury brands confuse and tap into the pricing trap. When everyone does what everyone else is doing, it can’t be luxury by definition, and as a result, entire categories do not realize their potential. This is what I call category pricing myopia. The players within the category often don’t even understand the potential they leave on the table.

Q: What are the consequences?

Langer: The consequences are dire: I know a case of a luxury fashion brand that was able to generate significant hype. Their brand story was phenomenal, and the luxury experience they created was second to none. At the launch of the brand, the CEO decided to price at the lower end of the luxury space as he feared that his brand was not known enough and that he would not be competitive. Later he learned that it was a dramatic mistake to a point where the brand was almost forced to shut down. So many luxury startups do the same mistake as we speak. Operational and structural costs are underestimated, and instead of translating the ALV the brand created into a pricing opportunity, the attempt to “play it safe” literally destroys brands. Even worse, customer loyalty never will reach the highest level because the best customers will move to higher-priced brands because they are confused why a brand with that level of quality, service, and above all - a fantastic brand story - is so affordable. A missed opportunity that puts many luxury brands in danger. And many brands in the market are in the same dilemma. Decisive action is needed.

Q: What are the biggest pricing mistakes in luxury?

Langer: The two biggest mistakes are: first, not pricing for the ALV created, and second, promoting your brand.

Q: We saw that many luxury brands regularly promote, especially during the pandemic. Why do you say it is a mistake?

Langer: Promotions are the most secure way to destroy trust and brand equity. In other words, if you want to be sure to be unsuccessful and alienate your best customers, then you should promote! It’s the fastest road to disaster. Just look at the brands that were hardest hit during the pandemic. Across the board, these were brands that promoted, some at 15-20%, others up to 60% and above. This is a catastrophe in luxury. Because luxury is about the creation of desire and extreme value. If your best customers support you early in a season and give the same products at a discount to customers who are not loyal, you are punishing loyalty and rewarding those who would never buy you at full price. Just because many luxury brands promote, it does not mean that it’s a good idea. It’s the worst strategy any luxury brand can deploy. The best and most valuable luxury brands in the world will never discount. Never. Take promotions out of your playbook when you manage a luxury brand, period. There are no grey zones here.

Q: This was a clear statement. What about the first mistake, not pricing for ALV?

Langer: I mentioned before how most luxury brands price and why the approach will always lead to suboptimal results and weaken the brand equity. Let’s have a look at the best brands, as they do things differently. Hermès is an excellent example to learn from when it comes to luxury pricing. Hermès understands better than most that pricing is not just a function of the cost of a product. Instead, it is a result of the Added Luxury Value (ALV) a brand creates. Hence, when we price a luxury item, the cost of production is irrelevant. The only question that matters is: How much ALV are we creating? How extreme is the perceived value of our brand? How much desire are we creating with our brand? These are the right questions to answer, not how much the production cost was. The perceived value through the story is the main value driver, and it is never the product. This is highly unsettling for many and hard to accept. Because our intuition tells us that value should be tangible (“product”) and not intangible (“story”)—the problem: as in so many aspects of luxury: intuition is wrong. The real value driver is the story. The combination of value creation elements (based on its compelling brand story) drives Hermès’ value up so much that customers deeply desire its rare and unique products and are willing to pay much more than other brands. The product does not drive these high price points — the story and its execution drive them. In other words, the products are part of the story but aren’t the story. This requires a fundamental shift in making the brand story the central element of luxury marketing. Louis Vuitton, Dior, Gucci, and a handful of other luxury brands execute a similar strategy of excellent storytelling and pricing for the extreme value their brands create. For many luxury brands that have been hit hard by the pandemic, this should be a call to action.

Q: You mentioned that wrong pricing strategies destroy trust. What do you mean?

Langer: Apart from the aspects I mentioned before, there is an element of trust that promotions destroy in luxury. When a brand creates desire and extreme value through its brand storytelling, consumers will be willing to pay the created value’s monetary equivalent. If consumers now have reason to believe that some consumers pay less, trust is broken. This is a considerable challenge for many categories, from luxury hospitality to fine watches and jewelry. These businesses have either embraced the idea of demand-based variable pricing (hotels in particular) or have been overdependent on wholesale sales (watches and jewelry), where stores often give their best clients discounts. These tactics may lead to a short-term balancing of demand; however, they destroy trust and consumer loyalty in the long run. Once disruptive competitors enter a category that implement much more trust-provoking strategies, incumbents often lose their customers dramatically. Think about how Tesla changed the car sales model with a direct sales approach and zero discounts, similar to Apple’s model. Both brands became some of the world’s most valuable companies, disrupting their respective categories in record time and changing the pricing game in their categories.

Q: Why are so many luxury brands weak in brand storytelling?

Langer: Brand storytelling is not to be confused with a marketing campaign. Instead, it is the ability to have complete clarity of all details and elements of the rational and emotional brand positioning. This includes the ability to express the brand positioning ideally in less than five seconds, the attention span of the most influential luxury generation, the Generation Z. Brand stories also need to be insight-driven, purposeful, and they need to be authentic. Don’t tell me too fast that your brand positioning does all of the above because very few brands do. More than 90% of today’s luxury brands don’t meet the criteria I mentioned. Since I expect many not to adjust, about 50% of today’s luxury brands will not exist anymore by 2030. Weaknesses in brand storytelling are unforgiving in a time of digital brand access, ever-increasing hyper-competition, and young consumers who look for experiences. Times change and brands that don’t change have no future. The second weakness of many brands is to translate the brand story into a distinct brand-specific luxury experience, the optimization of each touchpoint of the customer journey. Given that digital touchpoints become more critical, the luxury experience creation through the digital journey is essential to decide between death or survival for a brand—the competitive game shifts from the point of sale as the moment of truth to the digital journey. Just think about the finding that up to 95% of luxury purchase decisions are now decided throughout the digital journey. This is where brands need to gain a competitive advantage, and the brand story needs to be felt every step of the way. If the story is unclear in consumers’ perception, then the brand will not be able to provide extreme value, and consequently, the brand can’t price for it. This means pricing always starts with auditing your brand story and your luxury experience strategy. Always.

Q: You speak a lot about digital and Generation Z as major disrupting forces in luxury. Is there an example with an effect on luxury pricing? Intuitively brands may think that selling online may lead to lower prices?

Langer: If you think Gen Z goes for lower prices, then your intuition misleads you again. One of the best examples is the recent record-breaking sale of Beeple’s 69 million dollars digital art piece named “Everydays: The First 5000 Days.” Christie’s priced it initially at their online auction for 1,000 US dollars. It was sold for 69 million. The reason: it was the first digital artwork using NFT technology to be able to trace its origin, which is the abbreviation for a non-fungible token. It is based on the same blockchain technology that protects cryptocurrencies. This created hype among young digital natives who followed the auction in masses, with 22 million viewers live-streaming the event. The price point reflects the story, being a first of its kind, kickstarting the new category of high-priced digital art. Consequently, the buyer was a blockchain entrepreneur. While it shows how brutally digital and Gen Z are changing markets, it also underlines that storytelling is the true luxury value driver.

Q: What should brands do now?

Langer: It is safe to assume that most luxury brands are probably pricing wrongly, leaving millions of profit potential untapped, in some cases billions. What if your pricing is fundamentally wrong? I recommend doing a critical, ideally data-driven self-assessment and be brutally honest in the analysis, without letting gut feeling or intuition guide you. Brands need to remind themselves that the brand story is the most critical asset and that many are not doing enough to create extreme value. Lastly, brands probably underestimate how critical relevance to Gen Z, their digital desires, and their digital lifestyle is. Auditing these three aspects will be essential for brands to avoid being left behind. Above all, when you want to be successful in luxury, always price for the (extreme) value you create, taking ALV as the main deciding factor. And never promote unless you want to be sure to destroy your brand.