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Luxury Branding

The Business Model Of Luxury Brands

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The Business Model Of Luxury Brands

Luxury is a business model. This has been empirically fine tuned through time by those luxury brands that dominate the pantheon worldwide: Louis Vuitton, Chanel, Gucci, Hermès, Ferrari, Rolex and so on.

These companies, many of which are still family owned, have crafted a unique common business model, a pillar of their resilience and profitability. This business model runs contrary to most present business models in any sector. It rests on strict principles that maintain the uniqueness of luxury and preserve the non-comparability of those luxury brands that stick to it. Here are a few examples, some of which have been called the anti-laws of marketing:

  • Do not delocalize production: luxury is the ambassador of the local culture and refined art de vivre.
  • Do not advertise to sell: luxury communicates to build the dream and to recreate it. This is not measured by short-term sales increases because, unlike consumer packaged goods, possession of a luxury good dilutes the excitement one had before the purchase was made.
  • Communicate to non-targets: part of the value of owning a luxury good is the quality craftsmanship of the product, but another necessary part is the recognition by non-owners. This is why Aston Martin, although a very small brand, used product placement in the blockbuster James Bond movies – so that everyone in the streets could recognize one, thus endowing the driver with admiration.
  • Maintain full control of the value chain: from ingredient sourcing to the retail experience, luxury quality can only be delivered if the brand has 100 per cent control.
  • Maintain full control of distribution: this is where one-to-one service and interaction should take place. The experience must be exclusive.
  • Never issue licences: brand licensing necessitates loss of control
 and increases the risk of consumers having a bad experience. Luxury brands promise exceptional quality and an exceptional experience, but licensors must be profitable even after having paid important licensing fees. This can only be achieved by reducing the quality of the products themselves or of the distribution. This is why between 1998 and 2008 Ralph Lauren retail sales from brand licensing decreased from 60 per cent to 35 per cent. The US fashion brand bought back many of its licences worldwide.
  • Always increase the average price: since the middle class gets richer, to remain its dream the luxury brand should never trade down nor cut its prices. If it does create some accessible lines, this must be done on a limited scale and be counterbalanced by systematic trading-up. All new models of Jaguar, for example, when managed by Ford were designed to make the brand 
more accessible. The brand never created its own ‘S Class’ (as Mercedes did).
  • Develop direct, one-to-one relationships with clients. Luxury means treating all clients as VIPs. This necessitates direct, personalized, one-to-one interaction, ideally in exclusive stores that represent the dream in 3D.

This luxury business model can be applied to companies in any sector. Thus, Apple, MINI and Nespresso are typical examples of companies that are not considered to be luxury companies, but nevertheless follow the luxury business model. There are other business models among the high-end labels: the fashion business model and the premium business model. The main characteristic of the fashion business model is that it delocalizes production in search of low-cost labor forces. Unlike luxury, fashion does not sell timelessness. As soon as the fashion season ends, sales and super-sales that slash margins are employed to eliminate inventory. Fashion does not worship quality as much as luxury does.

As for pricing, in the luxury business, model average prices should always go up (this does not prevent having some access prices), as there are enough newly rich consumers to justify this strategy as long as they dream of the brand. When this dream falters, many luxury companies prefer to expand downwards, selling to more people, thanks to profitable accessories that have more accessible prices and are produced in larger quantities in countries with low labor costs. Such accessories are to be bought repeatedly by the clients, a sign that the luxury brand has moved to a fashion business model, in which originality and change are valued, not rarity and timelessness.

The premium or super-premium business model rests on the willingness to create an objectively ‘best’ product. Grey Goose super-premium vodka, for example, advertises itself as the ‘world’s best-tasting vodka’ since it has received many awards from expert juries. Unlike luxury, which refuses any comparison, super-premium brands look for it and build their fame through it.

Contributed to Branding Strategy Insider by: JN Kapferer, excerpted from his book, Kapferer On Luxury: How Luxury Brands Can Grow Yet Remain Rare with permission from Kogan Page publishing.

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1 Comment

Florent
Twitter: florentgeerts
on July 03rd, 2016 said

Fascinating how the luxury market works. Nice article! Wrote my bachelor thesis about this a while back, fascinating topic.

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