© 2012 Third Eyesight All Rights Reserved

© 2012 All Rights Reserved

Luxu-Re Back to the Roots

The definition of luxury changes with time, and with the

emergence of new markets of luxury such as India &

China, it is important to understand the two drivers of

price premium: the social esteem achieved and the

possessor’s own experience of the product or service.

DEVANGSHU DUTTA

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Luxu-re: Back to the Roots

© 2012 All Rights Reserved

‘It is the intangible that

differentiates what is

luxurious from what is not’

uxury is dichotomous, conflicted and conflict-creating by its very nature.

“Luxuria” is Latin for “Lust”, the first in the list of the Seven Deadly Sins. The

British poet Edith Sitwell is quoted as saying, “Good taste is the worst vice

ever invented.” Luxuries are not a basic fundamental need to start with, yet to seek

them out is innate in our nature.

For the most part, the term luxury has been and continues to be applied to tangible

goods whether found naturally, hunted or manufactured, rather than to intangible

services. Yet, it is the intangible that differentiates what is

luxurious from what is not.

Certainly, the definition of luxury changes with time. There was a

time, in today’s advanced markets, when hot water baths were a

luxury and available frequently to only a few people. Indian pepper was once more

expensive than gold. In fact, a significant part of European exploration of the world

during the last millennium was driven by the craze for spices from “the Indies”

before morphing into empire-building. Today, most modern Europeans would call

neither a hot bath nor spices as a luxury, and many would gladly delegate to

someone else their share of global travel.

Understanding Luxury If we want to understand the shifts in the luxury market and how the emerging

markets of luxury such as India and China might evolve in future, we must

understand the two most fundamental drivers of price premium: the social esteem

achieved and the possessor’s own experience of the product or service.

When viewed together in the Experience-Esteem Price Premium Model (see

graphic), we see the relationship of price premium and these two factors zig-

zagging in an N-shape for immature or rapidly evolving markets (“New”), whereas

in more mature markets the premium would follow more of an S-curve (“Stable”).

The term “market” here refers to not just geography but consumer segments,

including segments defined by need/use rather than by demographics such as

income or age.

L (This article appeared in a special issue of the Strategist on March 26, 2012.)

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Luxu-re: Back to the Roots

© 2012 All Rights Reserved

In rapidly evolving markets there is a significant premium available on products and

services that are conspicuously expensive, whose price (or at least the apparent

price level) is known in the buyer’s social circle. It’s a positive feedback loop: high

social recognition keeps the price up, which in turn improves the social esteem of

the buyer. Expensive cars and gadgets, designer brand apparel and accessories,

holidays that would be the envy of others, Big Fat Indian Weddings (for and by

Indians) all fit into this category. Beyond social recognition, however, the buyer’s

own experience and satisfaction also plays a role in driving the price premium: the

better the buyer’s own experience is for a given amount of social recognition, the

higher the price premium is likely to be. This gives rise to the familiar pyramid for

the luxury market, where the highest price is available for products and services

that deliver both high social status and a superlative personal experience.

In “New” or evolving markets, more of the premium is attributable to social status;

the buyer’s thought process is: “if you’ve spent a million Rupees or Yuan on

something and no one knows about it, it’s not that valuable”. In more evolved or

“Stable” markets, on the other hand, where tastes have had longer to evolve,

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Luxu-re: Back to the Roots

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‘By and large, the luxury

industry, as it has evolved

over the last 30-40 years,

feeds on this status insecurity

that is multiplied and

amplified by media’

personal experience becomes important in driving premium for at least some

products: for example, high-fidelity unbranded speakers bought by music

aficionados or a vacation in an unknown destination fit the bill. The satisfaction,

and the premium, is driven more from the personal high-quality experience, not

from receiving recognition or respect from someone else.

Developing taste needs time both at the personal level and for the society. On the

other hand, status difference is a factor in all societies, at any given time. The pull

between conspicuous and inconspicuous consumption at the higher price end plays

out between indulgence and luxury versus opulence. Opulence may or may not

enhance the buyer’s experience, but its main function is to make a status-

statement, including instances such as millions being spent on “public” spaces to

enhance a political leader’s own standing.

The thing with status is this: If others see you as worse off than them it is their

problem; if you think you’re worse off than others, it is yours. By and large, the

luxury industry, as it has evolved over the last 30-40 years, feeds

on this status insecurity that is multiplied and amplified by media.

Luxury used to mean something that was expensive because it was

highly desirable but also scarce. Today ubiquity seems to be the

driving force of luxury not scarcity. As economic growth has

created nouveau riche worldwide, brands (especially logo-bearing

ones) have emerged to deliver instant gratification and legitimacy.

Distinct, recognisably expensive brands are the accepted currency in the world of

cachet. In the final price, the share of marketing spend is often higher than the cost

of the core product. In a consumer society that is more conscious of the status that

the product offers rather than its utility, it is the recognition and identification that

matters most.

This has led to the trickle-down effect with luxury brands becoming increasingly

more accessible, not just in terms of physical availability but also in terms of price

units through bridge, diffusion and prêt lines, and licensing. A particular consumer

may not be able to buy a Chanel dress or Dior gown, but she can surely scrounge

enough to buy a perfume that promises at least a whiff of celebrity status!

The vintage of the product or service is an important component of the status or

recognition premium, especially when the buyer has newly come into money. This

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‘The Indian operations of most

brands that have been launched

in the last few years are bleeding,

and seem unsustainable’

is why the market is dominated by European luxury brands that can claim ancestry

of at least a few decades, if not centuries, while there are barely any brands of note

from other geographies. This is not conclusive evidence of European tastes being

better or more acceptable, just the economic cycles through which societies

around the world have been.

India & Luxury So where does India stand for luxury marketers? The Indian operations of most

brands that have been launched in the last few years are bleeding, and seem

unsustainable. And yet, it is tempting to compare the emerging golden bird of India

to the golden dragon of China.

In our work with brands and marketers from

around the world, we have to constantly remind

people that not all emerging markets are the

same. The explosion of luxury and premium

brands in China during the last decade or so has been aided by sudden economic

growth that came after a long cultural and economic vacuum. When the new

money wanted links with the old and when uniform grey-blue suits needed to give

way to something more expressive, well-established western premium and luxury

brands provided the most convenient bridge. As China evolves further and

consumer become more discerning, I believe we will see the emergence of Chinese

and smaller new international brands that differentiate themselves on the core

product, rather than relying on a long foreign history.

India’s case is slightly different. Discernment may be a new experience to some

Indians who have come into money recently, for whom brands can be a valuable

guide and “secure” purchase. Globally well-known premium and luxury brands or

products that are endorsed by “people in the know” (including works of art) are the

first to benefit from this spending.

However, discernment and taste are not new to India and, more importantly,

differentiation and self-expression never disappeared even during the darkest

years of “socialistic” economics. Therefore, India will see a layered approach to the

luxury market and grow in a more fragmented manner, with slower expansion of

individual brands. There would be multiple tiers of growth for international as well

as Indian luxury products. For international brands customisation and Indianisation

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‘In a world of hyper-

information, self-promotion

and instant celebrity,

invisibility may be the

greatest indulgence of all.’

About Third Eyesight: Founded in 2003, Third Eyesight is a specialist

management consulting firm that works with

market leaders with annual sales of ranging to

over US$80 billion. These include retailers, brands,

manufacturers, service and technology

companies, investors, trade and government

organisations. Third Eyesight helps with research

and assessing market opportunities, developing

business strategy, business launch, sourcing and

supply chain, product strategy and other areas.

will be important, as is already visible in bespoke products by Louis Vuitton and

Indian products by brands such as Canali (jackets) and Lladro. And there is a real

prospect of luxury Indian brands emerging to respectable size, if they can stay the

course and travel the distance.

As the market matures spending by Indian consumers on indulgences will also

grow, driven by the need to satisfy themselves rather than for the status they could

gain. In fact, another market to watch out for is India itself is a source of

indulgences for foreigners – luxurious Indian experiences in which price is not the

object but the experience – Big Fat Indian Weddings, ayurvedic treatments and

meditation holidays for non-Indians are a case in point.

While on indulgences, in closing, I refer back to the ExEs Price Premium Model. For

a limited number of people the price premium curve follows a clockwise-D, starting

from Indulgences. For them invisible or inconspicuous products whose only

function is to enhance the owner’s or buyer’s own

experience are the most prized. In many cases, the fewer

people that know about it, the better and more premium it

would be.

In fact, perhaps invisibility itself could be the greatest

indulgence of all in a world of hyper-information, self-

promotion and instant celebrity. Increasingly we will find that anonymity and

invisibility will be treated as luxuries, and service providers will charge a huge

premium for taking you down below the radar, making you invisible.

Actually, we don’t really need to wait to see that emerge. That world of luxurious

anonymity is already here, and its most valuable service providers are banks in

offshore tax havens!

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