The success of luxury pricing lies in quantifying the emotion-based value-to consumer regardless of costs, competitor or market prices. Luxury companies need to precisely measure the perception of their brands’ value within their customer segments in order to set their prices.
Why are luxury products expensive? Luxury products are expensive as their perceived value by consumers is very high. This perceived value is linked to the emotional value drivers that come in addition to the functional ones. Besides, a higher priced product is often perceived as being of a higher value. Thus, for consumers looking for rarity, quality and refinement, pricing is one of the most efficient ways to indicate these factors.
As a result, luxury is the only industry where demand can increase together with prices. Nevertheless, this does not mean that prices can be increased and demand will rise indefinitely. At some point, a higher price will hurt demand. The profit potential is limited by the overall emotional value of a product and the key is knowing where this point lies.
How different are the cost of production and price of a specific product - generally? There should not be any correlation between the cost and the value of a luxury product since the right way to set the price of a luxury product is based on its perceived value and is independent of costs. Therefore, cost of production can sometimes be a fraction of the price (even less than 10 per cent). Whereas in other industries, many companies set prices ‘x percent over cost’ (cost-plus pricing). In those cases, the cost of production is closely linked to the selling price of a product.
Are the prices of luxury products harmonized across markets around the world?
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