Costly Mistakes to Avoid When Pricing for a Luxury Design Startup
Extreme value is the goal of luxury brands and it must reflect in their pricing strategy.
The consequences of the wrong price can destroy the authority and credibility of a luxury brand. That’s why the pricing strategy needs to be managed as rigorously as clients and budgets.
When it comes to luxury, price is about perception. When clients think the prices are higher than what they are, pricing power is built. The “luxury extra value” is to be found in the experience and activations luxury companies create.
Annual increases of 5% - 10% on the price list are expected by luxury customers, and this expectation doesn’t change during an economic downturn. But during a recession, many businesses lose their confidence and they are tempted to discount with the hope of keeping up with the forecasts. Discounting luxury products always dilutes the brand’s equity, authority and perception of luxury.
The four most common mistakes in pricing luxury are costly because they are all reasons why companies go out of business.
Mistake #1: Underestimate the brand value and pricing too low
In my experience, management of luxury brands can be hesitant in setting and annually increasing premium prices. This hesitation is due to the insecurity of being able to meet the desired results, which leads to price setting based on production costs to feel comfortable.
Pricing luxury too low creates the wrong reference and compromises the perceived value. Pricing corrections are possible, but they confuse consumers and lead to fewer sales, with revenue implications.
The leadership and management you want for a luxury brand are aware of the brand value, exclusivity and pricing power. They know that luxury doesn't have tangible features, but comes from the intangible added value.
So how do you avoid pricing your luxury brand too low? Price your products from the launch phase without hesitation, and when introducing a new price list, remember the rule that luxury prices always and only go up.
Related: The Rise Of Responsible Luxury
Mistakes #2: Overestimate the brand value and pricing too high
When management perceives the brand to be stronger than it is, the consequence is overestimating the pricing power and the premium customers are willing to pay. Pricing too high is a mistake that happens when the focus isn’t on the customers and how to create value for them.
One of the fundamental steps in managing a successful luxury business is identifying the ideal customer profile and understanding how to create value for this segment.
Before setting the price, it is essential to ground decisions on facts, the external point of view and make a realistic brand assessment.
Mistake #3: Underestimate perceptions
Never sell discounts. This is the first rule I learned 15 years ago when I started working in the luxury industry. Even if discounting and securing the sale can be tempting, the long-term effects are always catastrophic.
Discounting luxury translates into punishing loyal customers and rewarding price-sensitive and one-time customers. Pricing power built over time gets destroyed when discounts are part of the pricing strategy.
Want to maintain the brand value and command exclusivity? Avoid discounts as much as possible.
Mistake #4: Dynamic pricing
Another temptation is to set flexible prices for products or services based on current market demands.
Examples of yield management are luxury hospitality and shared private jets. When demand is low, they adopt a dynamic pricing strategy to sell out the rooms or seats. From a customer perspective, this creates confusion.
Luxury consumers don’t expect a change in price according to the market demand. They are aware and comfortable that one of the pillars of luxury is scarcity and non-reaction of the supply chain.
Aim at winning in this industry? Make sure you know the rules of the game and learn how losing sales helps your luxury business grow.
- In terms of pricing strategy, remember why consumers pay a premium price for your brand. They only pay a premium if they get more value than another alternative.
- For luxury brands, only a fraction of the price consists of the production cost. Brand experience and intangible components drive value higher.
- In luxury, the brand is everything, and pricing is just a component of that.
Entrepreneur Leadership Network Contributor