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Luxury markets and premium pricing

Article  in  Journal of Revenue and Pricing Management · January 2006

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 Journal of Revenue and Pricing Management Volume 4 Number 4

RESEARCH PAPERS
Luxury markets and premium pricing

Ian Yeoman* and Una McMahon-Beattie

Received (in revised form): 15th September, 2005

*VisitScotland, Ocean Point One, 94 Ocean Drive, Edinburgh EH6 6JH, UK

Tel: +44 (0)131 332 2388; Fax: +44 (0)131 472 2223; E-mail: [email protected]

Ian Yeoman is Scenario Planner at Visit- tion needs and trading down for products which
Scotland, the national tourism organisation, they perceive as commodities. This paper
where he is responsible for economic fore- addresses the issue of the luxurification of society
casting, scenario contruction and trends and how organisations are using premium pric-
analysis. He is the founding Editor of the ing effectively through a series of case studies.
Journal of Revenue & Pricing Management
and co-editor of six books in the fields of INTRODUCTION
tourism management. His latest book Many readers of the Journal of Revenue and
Tomorrow’s Tourist is due for publication in Pricing Management may think that, ever
2006. He has a Ph.D in Management since the arrival of low-cost carriers and the
Science from Napier University, Edinburgh Internet, revenue management has been in
and was recently appointed to the World crisis. For example, the airlines have wit-
Tourism Organisation expert panel. nessed falling revenues, and this has resulted
in many traditional carriers filing for bank-
Una McMahon-Beattie is a lecturer in mar- ruptcy. In fact, air travel has actually
keting at the University of Ulster. Her become a commodity where the pressure is
research interests include revenue man- for prices to fall rather than rise. Economists
agement, pricing and consumer trust. She call this disinflation. Customers are no
has published widely in journals, books and longer willing to accept price rises for air
conferences in these areas in the UK and travel and this, coupled with a market char-
internationally. She is Practice Papers acterised by openness and a lot of competi-
Editor of the Journal of Revenue and tion, has resulted in falling revenues.
Pricing Management. The opposite to the world of disinflation
is affluence and luxury. Here, prices are
ABSTRACT rising rather than falling, as they play to
KEYWORDS: premium pricing, luxury, consumers’ aspirations. Silverstein et al.
marketing (2005) tell the story of how social and eco-
nomic forces have fuelled the luxury phe-
The world is getting richer and the consumer has nomenon in the USA. The consumer today
more real disposable income. This phenomenon has more disposal income than at any other
is being repeated all over the world, whether in time in history. This is due to low interest Journal of Revenue and Pricing
Management, Vol. 4, No. 4, 2006,
China or the USA. This means that consumers rates, rising house prices and associated pp. 319–328
# Palgrave Macmillan Ltd,
are trading up for products that meet their aspira- equity, low inflation, falling commodity 1476–6930/06 $30.00

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Luxury markets and premium pricing

prices and low unemployment. It means aged their wives and daughters to wear
that consumers have more aspirations and complicated trappings of wealth. Veblen
will spend more money on things that make thought that the purpose of acquisition was
them feel good. Fundamentally, they are public consumption of esteem, status and
trading up. To the marketer, this signals anxiety displayed by materialism. What
opportunities for premium pricing in Veblen termed as conspicuous consumption
luxury markets. Premium pricing and were the trophies such as salves or property
luxury markets, however, have received where people would show off their wealth.
little attention in the literature, and there- The ideas contained in Veblen’s study of
fore they are the focus of this paper. luxury and conspicuous consumption were
developed in the works of John Galbraith,
LUXURY such as The Affluent Society (1958) and
Vance Packard’s The Hidden Persuaders
A theory of luxury (1957), The Status Seekers (1962) and The
When Marie Antoinette supposedly said Pyramid Climbers (1959). Galbraith’s work
‘let them eat cake’, she was seen as a moved us from an understanding of luxury
luxury junkie whose out-of-control spend- based upon royalty and those that were
ing grated on the poor and unfortunate born into money to those that made their
French people. But today, cake has become money, such as the Carnegies and steel,
one of the favourite luxury foods. A revo- Ford with the motor car or Hughes with
lution has taken place where individuals in aircraft. Further works by Schor at Har-
the world have got richer. Luxury is no vard University (1991, 1998) explored how
longer the embrace of the kings and queens Middle America was becoming more afflu-
of France but the mass marketing phenom- ent. Luxury goods where no longer luxury
enon of everyday life. Simply put, luxury goods but everyday household goods (Sil-
has become luxurification of the common- verstein et al., 2005).
place (Twitchell, 2001; Berry, 1994). The The concept of luxury is incredibly fluid,
word luxury is derived from luxus, mean- and changes dramatically across time and
ing sensuality, splendour, pomp, and its culture. In the past, it was associated with
derivative luxuria, means extravagance, riot champagne, caviar, designer clothes and
etc. The rise of the luxury in the Western sports cars. Nowadays, with increased
society is associated with increasing afflu- affluence, luxury is a blurred genre which
ence and consumption. It is a phenomenon is no longer the preserve of the elite. More
that has been creeping up in society for and more consumers have traded up as the
hundreds of years. At the turn of the 20th old values of tradition and nobility have
century, it was Thorsten Veblen (1899) become less important. People are enjoying
who coined the term ‘conspicuous con- much more material comfort in compari-
sumption’ in his theory of the leisure class. son with previous generations, resulting in
Veblen’s argument is based upon the belief a trend of a cultural shift for personal fulfil-
that, as wealth spreads, what drives consu- ment and aspiration through experience.
mers’ behaviour is increasingly neither sub- Therefore, it could be argued that luxury is
sistence nor comfort but the ‘attainment of increasingly about experience and authenti-
esteem and envy of fellow men’. Because city (Yeoman et al., 2005), rather than
male wage earners are too circumspect to monetary value. This is not to say that
indulge themselves, they deposit consump- luxury is about status, but luxury is more
tion on surrogates. Vicarious ostentation is than monetary value. Indeed, they run side
observed in Victorian men who encour- by side. This focus on aspiration and

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 Yeoman

experience means increasing emphasis on rise in real incomes and home equity, the
personal transformation through, for cash windfall delivered by mass retailers,
example, well-being and travel. It means the changing role of women and the
that consumers want to improve their family structure, the rise in divorce, the
lives. This is what Danziger (2005), Israel increasing worldliness and sophistication of
(2003) and Gambler (1997) identify as the the US consumer and the increased focus
feminisation of luxury, where luxury has on emotions and growing cultural permis-
moved on from its male trophies and status sion to spend. All these have been the dri-
symbols towards experience and indul- vers of luxury.
gence. This is perhaps attributed to On the supply side, the impact of the
women’s increasing buying power in role of the entrepreneur, shifts in the
society, which is driving luxury markets dynamics of retailing and the increased
such as well-being, clothes and tourism. access to flexible supply-chain networks
Therefore, luxury is becoming a lot more and global resources has been witnessed. As
difficult to define, as the language has chan- consumers trade up, they spend 20–200 per
ged. Luxury today is neither a necessity cent above the norm for the product or the
nor necessarily expensive. It can be mass service. Consumers have woken up to
market, not traditional, but personal, appreciate better-quality wines or how
authentic and experiential. The old world they have a desire for far away exotic holi-
luxury of consumption and elitism, how- days. Goods and services have traded up,
ever, stills prevails. and this can be seen in such products as
cosmetics, sandwiches, white goods and pet
Luxurification in society foods. The basis of trading up is access and
As luxurification becomes commonplace, aspiration. Examples would include the
owing to the rise in disposable income Mercedes-Benz C-class, which constituted
(Twitchell, 2001) of the middle classes, the affordable version of a product that has
consumers start to trade up. Silverstein et traditionally been bought only by more
al.’s (2003, 2005) work on trading up wealthy consumers. Such goods offer an
explores the US phenomenon of middle emotional engagement, whether it is pre-
market, middle income earners who are mium vodka or an environmentally sensi-
willing to pay premium prices for products tive cosmetic range, such as Aveda.
and services that possess higher levels of It is also interesting how consumers are
quality, taste and aspiration than other trading up to aspirational new luxury
goods in the same category. These ‘new goods and trading down to products and
luxury’ goods have flouted conventional services that are less important to them.
wisdom that suggests the higher the price This type of product and service mixing
the lower the volume. These new luxury (disharmony of consumption) is occurring
goods sell at higher prices and at higher in retail as consumers shop at Wal-Mart or
volumes than traditional luxury goods. Sil- Asda, but drive a Mercedes. The analogy
verstein et al. highlight how the middle- in the tourism sector is apparent in the use
market consumer selectively trades up to of budget air travel and the purchase of
better products and services and trades quality accommodation and food in the
down in others to pay for his or her pre- host destination.
mium purchases. This is a person who tra- In terms of consumer drivers, the
vels with a budget carrier but stays in a demand for luxury is affected by demo-
five-star hotel. Much of this change on the graphics and cultural shifts. In addition, the
demand side has come about owing to a degree and amount of disposable income

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Luxury markets and premium pricing

has increased significantly. This has been Drivers of luxury

catalysed by the growth in consumer credit . Discretionary income has reshaped
and the contribution to consumer wealth household incomes since the 1980s. The
made by large discount retailers. In recent standard of living has doubled, and this
years, they have reduced the costs of living is expected to growth further (Cornish,
substantially for middle-market consumers. 2003). Driving this discretionary income
Furthermore, the increasingly active role of has been the rise of spending on leisure
female consumers has helped catalyse and the decline of spending on housing.
luxury demand at a range of levels. The With low interest rates, cheap credit and
fact that couples are getting married later low inflation, consumers have spent that
in life (if at all) and are having fewer chil- money on themselves, therefore
dren (often later in life) means that the consumers have upgraded.
amount of disposable income for luxuries . Capital growth rather than income
has grown substantially. The increasing growth has been fuelled by property
number of singles and the growing divorce booms across the world. Especially
rate means that the amount of money strong growth in the UK, USA,
spent on the individual has increased. Such Sweden, Spain and Australia has been
expenditure is often used to help rebuild fuelled by rising houses prices (OECD,
lives, confidence and provide a panacea for 2004). There has also been a rise in the
emotional distress. In such cases, the pro- popularity of equity release schemes,
pensity of the consumer to spend on where consumers take money out of
luxury products and services will increase. their properties to fund consumer
A further influence on the luxury spend spending. Record numbers of second-
profile is the relative sophistication of the home owners, equity release schemes in
consumer. In the UK and the USA, the the UK and record levels of wealth
middle market consumer is increasingly have driven luxury spending (Stokes,
better educated, better travelled, more 2005).
adventurous and more discerning. The pres- . With low inflation rates, consumers are
sure to increase the number of graduates in reaping the benefit of a low-cost world.
the UK workforce will continue to drive Consumer will think nothing of staying
the growth of the sophisticated consumer. in a five-star hotel in a far away destina-
Other key impacts include the availabil- tion, but will travel as cheaply as
ity of luxury products and services, not just possible owing to the rise of budget
in traditional retail contexts, but also in carriers such as easyJet and SouthWest
electronic format via the internet. Travel Airlines (Silverstein et al., 2005;
buying, data on destinations and the con- Yeoman, 2004).
tinual emergence of new locations means . In 1992, 35 per cent of UK consumers
that luxury availability has increased signif- had no qualifications whatsoever,
icantly. Furthermore, the disinflation of compared with 20 per cent today.
travel supply and the continued downward Furthermore, across the world, levels of
pressure on prices has served to ‘democra- educational attainment are increasing,
tise’ travel, and in some senses this has especially in higher education. In 2004,
democratised ‘luxury’. Previously exclusive 2,176,000 of all school leavers in
destinations and products, from cruises to England and Wales went into higher
resorts, have become more widely avail- education compared with 721,000 in
able, and their relative badge of exclusivity 1970 (Yeoman, 2004). Education is a
has become more mainstream. driver of luxury, as the consumer is

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 Yeoman

more discerning and more liberal, along with a society that is bound in
according to research by the Future knowledge and creativity means a
Foundation (Cornish, 2003). growth in the cultural sector and the
. Increased affluence and educational rising importance of cultural capital
attainment mean that the consumer is (Willmott and Nelson, 2003). This
more ‘travelled’ and experienced reflects not only the role of cultural
compared with previous generations capital as a means of differentiation and
(Willmott and Nelson, 2003). Changing advantage but also the related and
gender roles, a decline in the importance growing interest in experiences and
of religion, sexual freedom and a multi- fulfilment. Therefore, according to
cultural society mean that society is Eurostat, consumer spending on culture
more liberal and cosmopolitan in its has been growing for the last 50 years.
outlook. This opens opportunities for The consumer is spending and taking
new product developments, as greater more trips to the theatre, galleries and
tolerance increases people’s desire for libraries. But cultural capital is more
choice and variety. As people experience than ‘highbrow’ activities. It is the value
new worlds, they re-create that world and interest in, for example, Italian
in their daily lives. This trend accounts cuisine or being a Greenpeace activist or
for the increase in the variety of multi- just watching ‘Big Brother’. This
cultural foodstuffs and African furniture. combination of highbrow and lowbrow
. Consumers are more aspirational, as activities is now called ‘no-brow’, as
they are demanding more of themselves culture is realised as capital and its role
and their lifestyles, particularly with in everyday language and currency is
attitudes towards leisure times and witnessed.
holidays. Personal development is . Consumers increasingly feel under time
becoming increasingly important, with pressure, and families are particularly
luxury products and services responding affected by this. As leisure time becomes
to the desire for experiences and self- more important, the luxury of a time
fulfilment. Research by the Future oasis becomes more important.
Foundation shows that, in 1980, the Therefore, households are trying to
total expenditure on enrichment activ- create time, resulting in an increase in
ities and experiences was £46bn (2002 the amount of personal service such as
prices) and, by 2002, this had risen to the personal shopper, shirt ironing
£95bn (Cornish, 2003). services and dog walking (Scase, 2000).
. There has been a cultural shift towards
individualism and the willingness to try CASE STUDIES OF LUXURY MARKETS
new things. This has resulted in a shift AND PREMIUM PRICING
away from conformity, which in turn
has resulted in an increase in expenditure The luxury destination: Dubai
on a wider range of products and According to Mintel (2004), Dubai has suc-
experiences. According to Stevens ceeded in pitching itself as an all-year-
(2005), this movement towards indivi- round luxury getaway, in which extrava-
dualism is seen in the increase in gance is the norm. It is Crown Prince
sporting activity, where consumers are Sheikh Mohammed Al Maktoum who is
trying a range of sports rather than determined to position Dubai as the finan-
concentrating on one particular sport. cial and tourism centre of the Middle East
. A higher level of educational attainment before the oil wells run dry. To facilitate

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Luxury markets and premium pricing

this, laws have been relaxed to allow for- chefs create an individual flair. Hotel
eigners both to buy property and to estab- rooms are of the highest comfort, with all
lish residency. Iconic stars such as David the latest technologies. Indulgence and
and Victoria Beckham (‘Posh and Becks’) escapism is found in the latest spa treat-
are buying property at the Jumeirah Beach ments. Authenticity is the aspiration
Resort, a man-made island oozing with (Yeoman et al., 2005) that is not comprised
luxury. Thirty years ago, there was noth- — this is the brand essence that is protected
ing in Dubai but a creek, a Sheikh’s palace by a premium price. Access is restricted to
and a bad reputation as the smuggling those that can afford it.
capital of the world. Today, Dubai boasts
272 hotels with 30,000 rooms and 30 shop- Sexuality: Victoria’s Secret
ping malls. As a city state, the extrava- Women as luxury earners are very different
gances of luxury are everywhere, including from the housewife consumers of the 1950s
The Dubai World Cup, which is the rich- (Silverstein et al., 2003), as the majority of
est horse racing event in the world with a women in the Western world now partici-
$6m prize (BBC, 2004). But Dubai is not a pate in the workforce. For instance, 60 per
destination just for the super rich; luxury is cent of all women aged 16–64 work, either
for the masses. It has become affordable for full time or part time. Seventy-six per cent
the middle classes of the world, whether as of women aged between 25 and 44 (the
a stopover point, a short break or a two- peak of earning) work. Not only are more
week holiday. Dubai is a luxury destination women working, they are earning higher
for all travellers, not just for the Beckhams. salaries than ever before. Combined with
the fact that women are getting married
Authenticity: RF Hotels later, there is a cohort of young, single
RF Hotels is a chain of luxury hotels that women that are spenders. This cohort is
represents the best traditions and old-fash- highly educated compared with other
ionedness of service and history. They cohorts (Future Foundation, 2005), is more
represent famous-name hotels that offer liberal in attitudes to sex and is dating
first-class service, such as the Balmoral more. The average woman now has ten
Hotel, Edinburgh, and the Hotel Savoy, sexual partners before marriage compared
Florence. At the forefront of these hotels is with half that number in the 1970s. Men
Sir Rocco Forte, a hotel entrepreneur and women are even more demanding and
whose name is synonymous with first class explicit about their sexual behaviour, atti-
luxury. No two properties are the same, as tudes and expectations. The combination of
these famous hotels are brands within these facts has resulted in changes in the UK
themselves. Each hotel is rich in history, high street. Anne Summers, once seen as a
nationality and location. They represent an seedy lingerie and sex toys concept mainly
authentic experience of character, quality sold at parties, is now in the high street of
accommodation, fine food and the highest most major towns in the UK (Storr, 2003).
level of service, which is individually cus- Even Selfridges, a leading upmarket depart-
tomised for each guest (Schmenner, 1995). mental store in London, is selling upmarket
The detail of each hotel means furniture diamond clustered vibrators!
and fabrics that match an authentic five- Victoria’s Secret is an upmarket brand of
star elegance of individualism in which lingerie based on the assumption that
ornaments and personal touches create a American women want to wear lingerie
welcoming and indulgent atmosphere. rather than underwear. It is positioned on
Restaurants are award winning, where top the proposition that European women’s

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attitude about lingerie is different from that The Mini is a well-designed car that is fun
of American women. There is a void in to drive and looks good. It has aspiration,
the American market between high aspira- history and nostalgia. The iconic film The
tion and high volume brands. Lingerie in Italian Job, starring Michael Caine, immor-
the USA has been seen as stale and not talises the car, giving social cachet, there-
sexy. Therefore, on the basis of these fore allowing BMW to sell the car at a
observations, Leslie Wexner developed a premium price.
vision to create beautiful, European-
inspired products, made of the best fabrics, Health and well-being: The mineral
in the best way and at a price that was water sommelier, Ritz Carlton Hotel,
affordable. At the core of the Victoria’s New York
Secret is a story of sexiness, good taste, Just imagine for a moment Samantha from
European heritage, sophistication and Sex in the City ordering a lunch at the Ritz
femininity which is the brand. Sales of Carlton Hotel, but instead of seeking advice
Victoria’s Secret lingerie in USA in 2004 from the sommelier on which wine she
reached $2.4bn, based upon the concepts of should have, she decides to choose Glen-
aspiration, liberalness, sex and the power of eagles Spring Water, a light and refreshing
women as luxury spenders. Victoria’s water from Scotland which is naturally low
Secret is an aspiration of European design in salts and minerals. This is a perfect
for the American consumer. Sexuality is accompaniment for her darne of chilli sea
the added value which the consumer pays bass. The water sommeliers at the Ritz
extra for. That consumer is female with Carlton are there to advise diners on water’s
greater affluence and wants to wear a qual- clarity, taste, brightness and parity with
ity product for ‘me’. food. In the USA, a staggering $6.5bn is
spent on bottled mineral water each year.
Design and nostalgia: The Mini As people turn away from carbonated
In 2001, the new Mini Cooper was drinks such as Coke and 7-Up and drink
launched. The car was in fact a new car. It less alcohol, mineral water sales are rising,
included a six speed, 163 horsepower engine, based on the trend of well-being, health and
a six-speaker CD, air conditioning and air- purity. Restaurants are offering professional
bags. The Mini was launched in the USA advice to help diners choose between Per-
with the theme line ‘Live me, dress me, pro- rier, Highland Spring, Ty Nant, Pellegrino
tect me, drive me’ (Silvestein et al., 2005). or Evian. Filip Wretman, the water somme-
The Mini is taking the USA by storm. Take lier at the Ritz Carlton, will suggest a range
the story of Mini driver Candace Sleeman, of still and sparkling waters to accompany
from New Jersey (BBC, 2005): cheeses, spicy dishes or sweet offerings. He
meets the aspirations of the customers,
‘People I meet are fascinated by it. offering expert advice with a product that
They’re always asking if they can sit in offers purity. By providing such a service,
it, so of course I let them. A couple of the Ritz Carlton can offer a premium price
times I’ve been at the supermarket, and and create added value for ‘water’.
burly men have stopped, rolled down
their windows and asked if I was going Fairtrade: Paying a premium for ethical
to put my car in the ‘‘trolley return’’ consumption
section. They view them as Mr Bean Progresso coffee bars are a joint venture
cars, but I think generally people love between Oxfam (a leading charity for the
them here.’ third world), farming cooperatives and

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Luxury markets and premium pricing

trust funds, paying a fair price for coffee. Salvation Army are switching to fair-trade
Progresso opened their first branch in food (Jones, 2004). Fairtrade appeals to con-
Covent Garden, London, in January 2005. sumers’ consciences about ethical trading by
The sales in the first financial quarter using the Fairtrade kite mark.
exceeded all expectations. The principle is
based upon fair trading, where consumers KEY FACTORS IN PREMIUM PRICING
pay a premium for ethical consumption. AND BRANDING
Fairtrade is a mainstream trend nowadays. Luxury has a psychological association
With leading UK supermarkets like Tesco with premium pricing. Allsop (2004) states
operating their own fair-trade brands on that premium value is price and quality
orange juice, roses, coffee and chocolate. plus the intangibles of style, uniqueness,
The Fairtrade foundation, an organisation occasion and experience. Here, goods and
that promotes better working conditions services such as home furnishings, holiday
and trade terms for developing world pro- accommodation, food for a dinner party,
ducers, says annual fair trade sales have hit restaurants and home electronics have a
the £100m mark. Growth in the Fairtrade high perception of value. But goods such
label since it was launched in 1995 has stood as aeroplane tickets and electricity have no
at between 40 and 90 per cent a year, added value. Therefore, the implication for
expanding from one brand of coffee to 250 marketing is that consumers are willing to
foods, including fruit, juices, vegetables, pay more for certain goods and not for
snacks, wine, tea, sugar, honey and nuts. others. To the marketer, it means creating
Britain is the second largest market after a brand equity or value for which the con-
Switzerland, with the concept expanding sumer is willing to pay extra. Marketers
across the world. The history of Fairtrade is view luxury as the main factor differentiat-
found in aid organisations wanting to pro- ing a brand in a product category, as a cen-
mote fair trade by enabling producers to tral driver of consumer preference and
sell their handicrafts directly to Western usage (Vigneron and Johnson, 2004). In
consumers, often in their charity shops. order to understand the ‘extra value’, it is
While the schemes pulled some families out important for marketers or pricing man-
of poverty, Fairtrade recognised the need agers to identify the key factors from a
for programmes to include a greater consumer perspective. All the case studies
number of goods, be embraced by com- mentioned so far rely on these factors (Sil-
mercial manufacturers and to bring fair verstein et al., 2005). The factors are:
trade into the supermarkets where most
people shop. Fairtrade also extends into . Never underestimate the customer, as
fashion. For example, People Tree is a fair- consumers have a desire, interest, intelli-
trade fashion company which works with gence and capability to trade up. They
70 fair-trade groups in 20 developing coun- are willing to pay for that extra value,
tries to showcase its lines. The company time or aspiration.
pays its suppliers 20–30 per cent more than . Consumers will shatter the price–
they receive without fair trade deals and volume demand curve. Consumers are
guarantees. Fair trade is now mainstream not looking for an incremental
with UK. The supermarket chain Co-op improvement. Pricing managers must
was the first supermarket to take substantial go for premium prices and higher
quantities of fair trade, and Café Direct is volume, not being scared to take a risk.
now Britain’s sixth biggest coffee company. . Always create a ladder of genuine
Even the Youth Hostel Association and the benefits rather than confusing the

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 Yeoman

consumer with meaningless innovations. trading up. The rising middle classes of the
This means technical and functional world are now experiencing luxury, the
benefits that result in emotional like of which their forefathers would have
advantage for the consumer. Addition- never imagined. No longer is it uncom-
ally, do not pretend to be something mon to take several holidays a year, to
you are not. have a second home or dine in an award-
. Escalate innovation, elevate quality and winning restaurant. Therefore, the chal-
deliver a flawless experience. The lenge for the future is to enhance particular
market for luxury is growing, but it is strategies for premium pricing. It is hoped
unstable. This is because the market that this paper has contributed to the
does not stand still as new competitors debate.
enter. It is a constant battle to keep
ahead, as there will always be a lower- REFERENCES
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