Supple handbags. Opulent hotels. Sleek boats. There's always a market for the finer things in life. But although the luxury-goods category has a built-in allure, an exact formula for how to price items in this sector has proved elusive.
We asked Paco Underhill--CEO of retail-focused research and consulting firm Envirosell and author of Why We Buy: The Science of Shopping--how startup entrepreneurs should tackle pricing their luxury products to reach the greatest possible audience.
Why is it trickier to price luxury goods than other products?
The challenge is addressing people's perceptions about what luxury actually is.
When presenting and pricing luxury items, entrepreneurs must always add to their products' perceived value and eliminate any suggestion of commoditization.
Here's an example. One retail entrepreneur I know goes on an annual buying trip. She buys quantities of scarves--a very elegant but not especially expensive accessory item-- from a very small supplier in France for about $5 apiece. Once in her boutique and labeled "French scarves," this merchandise, carrying a $100 price tag, flies off the shelves.
Do consumers understand inherently what value is?
Some consumers, whom the industry refers to as "old money," because they've inherited their assets, traditionally understand value. They've been trained how to consume since birth and know not only the luxury brands but also the pecking order of these exclusive brands.
Today, however, most global wealth is in the hands of "new money"--people who've earned it in the course of their own lifetimes--and whom entrepreneurs must educate. These consumers are often more inclined to purchase a luxury item on a whim, and may not know the true difference in value between, say, a $10,000 vs. a $100,000 product. Entrepreneurs who want to sell to this type of consumer must be prepared to delineate why their luxury-product brand is superior to another.
How else can one increase perceived value?
The emphasis on exclusivity, presentation and attention to detail is critical to help enrich the perception of the product. Website design, writing style to describe the product and research all factor in. If the luxury item is, for example, a very expensive tea, it's important to explain everything that's extraordinary about it: where and how it's grown, the soil, the mountainside it comes from. It's important to point out exactly how it differs from commercial varieties and, therefore, how the price is justified.
Why should startup 'treps consider the luxury market?
The advantage is the potential for a higher profit margin. But if entrepreneurs haven't been able to get the price they feel their item is worth, they need to go back to the product's perceived value and figure out how to increase it.
What if they realize they've priced wrong?
One nice thing about online retailing is that entrepreneurs can easily change the price, and the sooner they do it, the better. But entrepreneurs who sell solely in physical stores need to do it, too.
If something isn't selling, how do you know if it's due to the pricing or some other factor?
Brick-and-mortar businesses have the advantage of being physically in a better position to spot problems. They can observe how customers don't interact enthusiastically with the product. If they pick up on these things--overheard comments, for example, which may lead to a conversation with the shopper--they can mine valuable, actionable information. Online-only entrepreneurs, whose business interactions are conducted remotely, are, unfortunately, much more removed from knowing what the customer is actually thinking.
This story appears in the April 2014 issue of Entrepreneur. Subscribe »
