As far back as anyone can remember, luxury has been associated with high prices, custom service and a sense of exclusivity. For over a century haute couture, chauffeurs, ski villas and butlers have been enjoyed only by those privileged enough to own them. But a new class of competitors is changing this. Digital challengers are redefining luxury as they change the economics and access points to many of these goods.
To understand the economics of luxury, one needs to go back over 100 years to the writings of American economist, Thorstein Veblen. He focused on the theory of demand which says that as the price of an item goes up, the demand goes down. But Veblen realized that certain goods did not follow this rule and that as prices increased, they became more desirable. These goods came to be known as Veblen goods or what we now call luxury goods. In his book, The Theory of the Leisure Class, he explained the Veblen effect and coined the phrase, conspicuous consumption. Veblen recognized the psychology behind buying expensive and luxurious goods. Buyers weren’t looking for just utility; they wanted a status symbol to flaunt their wealth.
Today, the laws of luxury are in flux. Companies offering access to butler services, drivers and gourmet meal delivery are emerging as a new class of luxury players. Digital technology has enabled access through websites and mobile apps. Temporary staffing models have lowered price points. It seems that today, luxury goods and services are affordable and available to more people than ever before. Companies like Uber, AirBnB and NetJets are emblematic of this trend.
Accenture Interactive, through it's Fjord Design & Innovation division, has highlighted this trend in its 2016 Trends study and calls it the “flattening of privilege.” Fjord CEO and founder, Olof Schybergson, explains this change and why it is happening, "There is a meta-trend at play here. We are observing the shift from ownership to access. Before, privilege meant you owned a villa or a car. Now privilege is characterized by variety. It is about having flexible access to the things you want, when you want them."
The shift is significant because it calls into question the very premise of Veblen’s theory. If digital business models make luxury goods more available and affordable, are they still luxury goods? Will buyers and owners of these goods still consider them status symbols if the masses can also enjoy them? Will luxury, as we know it, change?
The distinction is about whether something is owned or just accessed for a short period of time. The item or service itself isn’t being diminished in quality. But the brand might be severely diminished if it doesn’t hold the same prestige and exclusivity. And in luxury, brand matters.
Consider a designer gown which may cost USD $3,000 to own, but may only cost USD $100-$200 to rent for a few days from a service like Rent the Runway. While a sharing or renting business model makes luxury goods, like designer gowns, more accessible to new market segment, those who buy luxury items because of their high prices and exclusive appeal may turn away and never come back if they believe that a once prestigious brand has become a mass market play. The digital knife cuts both ways and can be unforgiving. The wrong strategic moves can render a Veblen good into just an ordinary item with a typical demand curve.
It has become a difficult situation for the luxury goods sector, which is being squeezed between low growth rates, a millennial generation with unprecedented digital tastes and an increasingly digital competitive playing field. According to consultancy, Bain & Co., the luxury market saw a growth rate of only 1% in the first quarter of 2016, with little change expected for the remainder of the year. Bain Partner, Claudia D’Arpizio based in Milan, has stated, “The luxury market is stuck in a holding pattern for the foreseeable future.”
To escape this holding pattern, the brands are experimenting with omni channel initiatives and digital marketing to increase brand awareness in new markets, especially in Asia. While other consumer brands have been online for over a decade, the luxury sector has always lagged the market in its use of web, e-commerce and social media, and for good reason. Introducing a luxury brand online, to a new market can be tricky. The challenge is to retain its unique heritage and exclusive appeal using media and channels that were designed for quite the opposite. Brands like Burberry and Rolex have creatively wielded digital capabilities to enhance their identity, but it doesn’t always work for everyone. For certain segments of luxury goods, especially the most personal items that aren't suited for sharing, digital might not be big game-changer. Schybergson notes, "For the luxury sector, the transition is difficult. Personal luxury goods like wallets, watches and handbags can explore connectivity and new digital technologies, but for the most part they will remain the same."
Perhaps the real effect of digital is in the exploration of nuances. Digital challengers are forcing the maisons to carefully consider whether an item should be restricted for ownership or renting, whether it should be connected or offline and whether it should be marketed through digital channels or only in limited, retail locations. These questions have a refining quality and the brands that can answer them with innovation and creativity may enjoy a more lucrative future.
