Why would people buy something at double, triple or even ten times the price as their neighbour? The answer is not in taste, utility or even necessity, but rather one of the strongest forces that influence people: status. The notion seems quite ridiculous. This blog aims to decode consumer preference and how luxury goods are an important exception in Marshall's law of demand, and how an enterprise can position their goods and services as "elite."
What are Luxury goods? Here, people prefer paying a higher price regardless of quality, quantity (sometimes a lesser quantity is appreciated due to lack of supply), utility, impact, and usage. These goods exploit the core human behaviour of relative status or the need for "display." Human success is not mainly measured by wealth or status, but in terms of relativity, of the success of others. This economic exception understands and thereby takes advantage of humans' competitive natures.
Taking a classic example and studying the case of, say, the before and after of a restaurant after achieving the elite status of "Michelin Star" tag. It is often acclaimed as the highest culinary honour for any restaurant. For example, Pied à Terre during its initial stages was highly criticised due to "food quality" due to a lack of capital resources. Upon what seemed like a miraculous attainment of a Michelin Star, this same company was acclaimed as London's best restaurant, highly rated on top blogs. The same can be said for El Califa de León in Mexico City. A street food stall that changed its prices (by about 150%) , which only led to an increase in its demand, and led to it opening stalls all over the world, turning this street food "Michelin Star" brand into an overnight success.
Drastic Increase in Consumer Demand at El Califa.
We can make simple economic models, as well as diagrams to understand consumer psychology. Assuming other factors as equal, let us assume two factors for simplicity- "Impressions" and "Demand."
Let us analyse an economic model of the impact of attaining this honour of a restaurant, specifically the increase in demand. The following economic diagrams assume other factors being equal, and how, under a real-life case scenario, a higher number of impressions on social media, about a product, acclaiming it as "elite", caused a shift in the demand curve.
BEFORE
AFTER
The above models show how, due to higher impressions or association with a "luxury tag", the demand curve, to a higher level, increasing demand. This shows that a commodity which is more popular and has a "goodwill", brand reputation will always sell more commodities than a less popular, or a "not-premium" associated brand. But is it all about the brand that matters? Are people ready to spend all their money, despite a theoretical "unlimited" change in price, only for the sake of showoff? How can a business or an enterprise do the same? Here are the reasons, in Thorstein's theorem, of why consumers are willing to spend an infinite amount of money, when cheaper alternatives exist, how enterprises do, and how new enterprises can weaponise:
• Limited Supply:
Remember the last time you went into a store and quickly grabbed a chocolate, because it was the only one on the shelf? Without checking the price? What if I told you the chocolate shelf was intentionally kept empty? Businesses exploit the human need for scarcity, a principle of economics, to increase demand. Humans are competitive in nature, as previously proved. They are especially motivated and driven when "acquiring" a rare commodity, which increases their status or provides them with prestige in their society. Getting something so rare, which no one has, or even something which no one has, provides us with a triumphant feeling of being "superior" to those who do not have it. That is why you see what seems of no "value" for a higher price- like an antique sold for millions, or the last memory of a long-forgotten ancient soldier auctioned to the highest bidder, which may seem of no value in the modern world. But it is, due to "limited" supply.
A detailed case analysis can be done, and one can use it on their own product. Exclusive are the ones who dominate the market. "Koenigsegg" is the best example. The car is not only considered the most luxurious car, but it is also limited in supply. Millionaires who get everything in a mere phone call have to actually book a car, far in advance. This challenges the human brain, and has statistically increased the drastic demand for cars over the past few years. An enterprise can earn more and more revenue, theoretically to an infinite amount by selling goods which are limited in supply, actively promoting them, and positioning them as "high-end."
Lesson 1- Position your goods as "hard to find" luxurious products, limiting supply intentionally and undertaking active promotion.
But how do you pose your brand as "luxurious" or "elite?" This brings me to my next point.
• Brand Value:
“Brand Value and Premium Product Demand”
Tell me. Two brands are selling the same product. Ignoring (or assuming) price as a constant factor, which brand would you prefer buying from?- "Starbucks", or "London Caf'e Hub." Most would prefer a well-known and reputable brand. Starbucks is a much more global company, well-known and more uniform in quality, ensuring sufficient consumer satisfaction, compared to a local cafe hub that may or may not have a consistent rate of product, and may be less likely to provide "prestige" by purchasing. A company that has a more consistent goodwill, built over years, is more preferred than an enterprise with little to no goodwill. If positioned as a luxurious item, purchasing it would increase the buyer's social status- i.e posting pictures with your Starbucks drink, flaunting a newly purchased car and so on. A company with goodwill ensures satisfaction and security.
How can a business enterprise position itself as an elite brand in this market? A recent research was undertaken by a group of behavioural economists where two shops were set up side by side. One named "Palessi" sells locally bought shoes, and another local brand was set up. A few fake actors were installed, the interior was set up to match the ambience of any luxury brand, with white lights, a perfect display, and a higher price tag. Results showcased that "Palessi" made an enormous amount of profits, where consumers praised the quality of those shoes, and the wide range of varieties, offering to pay thousands for a pair, whereas the same shoes, when placed on a street setup, are discarded. This proves that with the right set of ambience, name, enough "pomp and show", promotion, and unconventionally higher prices can just make goods more valuable.
Lesson 2- To position your product as a "status symbol", market it as such- with the use of the right name, right ambience, consumer support, quality, and prove to the consumer that it is of high value.
• Limited Supply:
Remember the last time you went into a store and quickly grabbed a chocolate, because it was the only one on the shelf? Without checking the price? What if I told you the chocolate shelf was intentionally kept empty? Businesses exploit the human need for scarcity, a principle of economics, to increase demand. Humans are competitive in nature, as previously proved. They are especially motivated and driven when "acquiring" a rare commodity, which increases their status or provides them with prestige in their society. Getting something so rare, which no one has, or even something which no one has, provides us with a triumphant feeling of being "superior" to those who do not have it. That is why you see what seems of no "value" for a higher price- like an antique sold for millions, or the last memory of a long-forgotten ancient soldier auctioned to the highest bidder, which may seem of no value in the modern world. But it is, due to "limited" supply.
A detailed case analysis can be done, and one can use it on their own product. Exclusive are the ones who dominate the market. "Koenigsegg" is the best example. The car is not only considered the most luxurious car, but it is also limited in supply. Millionaires who get everything in a mere phone call have to actually book a car, far in advance. This challenges the human brain, and has statistically increased the drastic demand for cars over the past few years. An enterprise can earn more and more revenue, theoretically to an infinite amount by selling goods which are limited in supply, actively promoting them, and positioning them as "high-end."
Lesson 1- Position your goods as "hard to find" luxurious products, limiting supply intentionally and undertaking active promotion.
But how do you pose your brand as "luxurious" or "elite?" This brings me to my next point.
• Brand Value:
“Brand Value and Premium Product Demand”
Tell me. Two brands are selling the same product. Ignoring (or assuming) price as a constant factor, which brand would you prefer buying from?- "Starbucks", or "London Caf'e Hub." Most would prefer a well-known and reputable brand. Starbucks is a much more global company, well-known and more uniform in quality, ensuring sufficient consumer satisfaction, compared to a local cafe hub that may or may not have a consistent rate of product, and may be less likely to provide "prestige" by purchasing. A company that has a more consistent goodwill, built over years, is more preferred than an enterprise with little to no goodwill. If positioned as a luxurious item, purchasing it would increase the buyer's social status- i.e posting pictures with your Starbucks drink, flaunting a newly purchased car and so on. A company with goodwill ensures satisfaction and security.
How can a business enterprise position itself as an elite brand in this market? A recent research was undertaken by a group of behavioural economists where two shops were set up side by side. One named "Palessi" sells locally bought shoes, and another local brand was set up. A few fake actors were installed, the interior was set up to match the ambience of any luxury brand, with white lights, a perfect display, and a higher price tag. Results showcased that "Palessi" made an enormous amount of profits, where consumers praised the quality of those shoes, and the wide range of varieties, offering to pay thousands for a pair, whereas the same shoes, when placed on a street setup, are discarded. This proves that with the right set of ambience, name, enough "pomp and show", promotion, and unconventionally higher prices can just make goods more valuable.
Lesson 2- To position your product as a "status symbol", market it as such- with the use of the right name, right ambience, consumer support, quality, and prove to the consumer that it is of high value.
• Products Make Consumers Feel Rich:
Another reason people buy products is to feel a sense of accomplishment and happiness. “How Luxury Goods Make Consumers Feel Rich.” When people are unable to do things they want, they resort to doing things that show them succeeding. That is why "fake" goods have a sizeable market share. For example, the demand for anything presented as luxury skyrockets. Recently, cafes and commodities found a quick way to increase the prices for their products. Gold is often associated with luxury and richness. So gold-plated foods, gold-plated dishes, or even fake gold-associated items demand high value, and make the consumer feel "rich." This can even connect back to the previous point of increasing sales by "ambience." A good example to assume can be the popular Taj Hotel, situated in India. With luxurious dressings of gold and diamonds, a café with velvet seating, gilded decor, and gourmet treats makes customers feel wealthy just by being there. This gives the consumer a justification for paying a high price for a specific product.
Lesson 3- Focus on not only your product, but also the environment surrounding your products. Provide all justifications to charge a high price for your product.
•Emotional Storytelling and Personal Narrative
A good business never sells products. Never. It sells emotions, or in extreme cases, desperation. A business enterprise, especially focused on the luxurious-service sector, sells a "story." Not a service. Imagine a friend recalls a moment when he went wine tasting in Italy. It would give him instant fame, validity, and credibility in the social circle. People do not buy products or services. They buy an exclusive and personal experience, which no one else does. A consumer justifies the purchase as a way to savour life’s fleeting moments, seeing the experience as worth more than the price on the tag." This exploits the human quality of "drama" or the need to be the hero of their own story. Hence, wine-tasting conventions, luxury invite-only operas, or even Michelin-starred restaurants, are so highly demanded to the point where price becomes tertiary after fame and the narrative of one person. One would prefer being remembered as healthy, wealthy and successful, rather than setting a future narrative for himself of being poor. This provides us with a valuable lesson. Luxury isn’t always about what you own—it’s about experiencing something that few others can. When a product or service offers an exclusive experience, it makes consumers feel part of a rarefied group, enhancing their perception of wealth and status.
Lesson 4- Sell narratives. Not services.
Conclusion and summary.
The appeal of luxury goods is both tangible and intangible. Buyers are keen on experiencing the emotion and narrative that comes with every luxury item. People have the willingness and the capability of paying for such goods because they offer more than just the physical attribute. It fulfils the longing for the narrative of luxury that comes with owning such goods. Buying luxury goods is considered a form of aspiration and a way to buy affirmation.
There is value in the lessons for businesses. A great product is just the starting point. With the help of great positioning and storytelling, along with the injection of ambience, the essence of exclusivity, along the brand’s reputation, the end result can be more than just a great product. An item of luxury becomes more than just a great product; it becomes a transaction that offers a lifestyle, a narrative, and a status that is passionately pursued.
The thesis of the luxury market is the emotion of aspiration and the basic nature of humans, which is to compete. Those who have the products and experiences intertwined with the psychology of aspiration stand to gain the greatest customer loyalty and brand esteem. People don’t just buy the products. They buy the lifestyle that comes with it.
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