Description
While recent news of a global rebound in the luxury
market has encouraged retailers, this comeback
may be very different from those to which they are
accustomed. Rather than finding a mainstay among
older, brick-and-mortar shoppers, luxury retailers
will encounter younger and savvier shoppers
who tend to buy online and at a discount. While
ultra-luxury retailers may still be able to play by
previously well-established rules—such as avoiding
online sales to engender a sense of prestige—
mass-market luxury players must adapt to their
new customers and the shopping dynamics they
bring with them. In particular, luxury retailers will
find that a carefully designed online presence,
usable insights into competitive pricing, and more
sophisticated channel and promotional strategies will
be critical to success.
The Premium of Value: Pricing and
Promoting Luxury to the New Consumer
By Tom Jacobson, Ray Florio, and Tiago Salvador
1
While recent news of a global rebound in the luxury
market has encouraged retailers, this comeback
may be very different from those to which they are
accustomed. Rather than finding a mainstay among
older, brick-and-mortar shoppers, luxury retailers
will encounter younger and savvier shoppers
who tend to buy online and at a discount. While
ultra-luxury retailers may still be able to play by
previously well-established rules—such as avoiding
online sales to engender a sense of prestige—
mass-market luxury players must adapt to their
new customers and the shopping dynamics they
bring with them. In particular, luxury retailers will
find that a carefully designed online presence,
usable insights into competitive pricing, and more
sophisticated channel and promotional strategies will
be critical to success.
Introduction
2
The Changing Luxury Consumer
Few would argue that
the luxury market has
not changed a great
deal in recent years. As
growth has slowed in
developed nations such
as the United States
and Japan, luxury-
goods companies have
intensified the search for
competitive advantages
in order to capture
share from others. The
recession created large-
scale shifts in consumer
buying behaviors, and
retailers—even those
serving the luxury
space—have taken steps
to adapt.
To be sure, the luxury market
experienced an upturn during the
2010 holiday shopping season. As
Swiss private bank Pictet & Cie’s
luxury-focused fund manager Caroline
Reyl noted, "The luxury sector was
the sector to be in [during] 2010."
1
However, one should not assume
buyers and retailers are returning to
pre-recession behaviors. Consumers,
particularly those in the United States,
are eager to embrace convenience and
value, and are unlikely to revert to
their prior mindset, as numerous retail
segments have discovered.
Indeed, recent Accenture research
shows that luxury shoppers now
are younger; that shoppers over age
35 were less likely to purchase a
luxury good during the past holiday
season, and that those seeking
luxury goods cite value and price as
key considerations when making a
purchase. Moreover, the majority of
these shoppers intended to make most
of their purchases online.
2
Further,
value has become so important that
some consumers, particularly in Japan,
have begun traveling to less-developed
countries to purchase luxury goods at
lower prices.
Seeking to capitalize on these trends
are the new breed of invitation-
only “flash sales” sites dedicated to
luxury shoppers, which have grown
tremendously in a short period of
time. These sites cater to an emerging
demographic segment described by
Brand Channel’s Barry Silverstein as
“luxury newcomers.” In his words,
such a consumer is “a web-savvy,
discerning fashionista who knows
her way around sites such as Gilt.com
and relishes a good discount and
interactive shopping experience.”
3
According to Brand Channel, this new
segment comprises 61 percent of
luxury consumers and 36 percent of
luxury spending, an amount equal to
traditional luxury consumers prior to
the recession.
4
Feeling the pressure to respond to
these changes, many retailers had
begun the shift from mid-range
luxury goods to less expensive and
more accessible luxury goods prior
to the recession, with Deutsche
Bank noting that the traditional
pyramid of luxury levels bore a
greater resemblance to a pear.
5
Smart
mass-luxury retailers are learning
from the past two years, leveraging
different channels and seasonal
shopping behaviors to tailor their
offerings and promotional strategies
to distinct customer segments and
preferences. The transparency and
wealth of information available
to consumers via the Internet
can help—rather than hurt—those
companies that embrace a more
sophisticated go-to-market strategy.
However, luxury retailers still face
many potential pitfalls in their pursuit
of growth. While promotions and
discounting can boost their financial
performance, especially in the short
term, there are dangers in using these
tools haphazardly. Loss of margin and
prestige among more traditional luxury
shoppers, for instance, are a real
concern. “The losers in this recession
will be the ones who destroyed their
brand through the discount model,”
Janet Hoffman, global managing
director of Accenture’s retail practice,
told BusinessWeek. “We won’t see the
damage from that necessarily today,
but we’ll come back in a year and be
able to notice.”
6
Furthermore, despite the positive
effect of discounts on segments of
the luxury market, overall spending
intentions are not increasing, and
upselling customers to a more
prestigious product is unlikely if the
discounted price is still significantly
beyond their budget.
7
Therefore,
unless a promotion is targeted to the
correct segment, it will only erode
brand image and margins. While this
is challenging for all retailers, it is
particularly difficult for luxury brands,
which tend to have less discounting
experience. Because of this, such
brands likely will struggle to balance
long-term image management, short-
term financial gain, margin protection,
and fulfilling the preferences of
traditional and new shopper segments.
3
Five Key Success Factors for the
New Luxury Market
How can luxury
providers overcome
these hurdles and
capitalize on the new
reality of retail?
In Accenture’s view,
there are five key areas
luxury retailers must
manage in concert
to derive maximum
value from today’s
transformed luxury
marketplace:
1. Embrace the online channel
2. Gain deeper insights into
competitive pricing
3. Develop enhanced and coordinated
channel strategies
4. Understand price sensitivity for
each product in each channel
5. Launch highly targeted, carefully
measured pricing and promotion
strategies.
Retailers that neglect these areas may
witness the erosion of a brand image
they have spent decades cultivating.
Online presence
In the recent past, luxury retailers
commonly presumed that the Internet
was a channel for discounted,
damaged, and counterfeit items,
and believed that online sales
risked overexposing brands built on
exclusivity. Some also thought that
the channel was not equal to the task
of marketing the sensory aspects of
luxury goods, such as smell, touch,
and feel.
8
As a result, many luxury
goods companies have been slow
to create their own online channels,
ceding control over the online segment
to other players such as online-only
retailers. In fact, as reported by The
Economist, just one-third of the
luxury retailers surveyed by Forrester
Research in 2008 sold their products
online. And while that figure has since
risen, as of 2010 half of luxury firms
still did not have an online presence.
9
To be sure, brick-and-mortar channels
will remain important, as they appeal
to more traditional, brand-loyal,
prestige-hunting luxury consumers.
However, given the shifts in luxury
buyer behavior discussed earlier,
and the fact that new, younger, and
discount-hunting luxury shoppers
prefer to shop online, establishing
a powerful online presence is the
first key step for luxury goods
manufacturers and retailers.
Online sales are expected to continue
growing rapidly: In fact, even through
the depths of the current downturn,
luxury pure-play online retailers
experienced 87 percent year-over-
year growth.
10
Thus, overlooking
the channel will only become more
costly. Losses are especially likely
among shoppers who research
product features and advantages
online prior to making in-store
purchases. In such cases, luxury
providers that do not have an online
presence are allowing another party
to control the message this segment
receives. For brands that tie much
of their value to a carefully crafted
image, this could prove disastrous.
The experience of well-known
designer Oscar de la Renta illustrates
the power the online channel has
to drive sales of luxury goods. The
company has had an online store
for several years, which Oscar de la
Renta anticipated would primarily
serve customers shopping for smaller
items. However, bucking expectations,
the online store recently has hosted
transactions for much larger-ticket
items such as fur coats and high-end
cocktail dresses.
11
Had these items
not been available from the brand’s
own site, customers likely would have
purchased them from competitors
or from channels that allowed the
retailer less control over its image,
and eroded its profits. Having
established its own online presence,
Oscar de la Renta has minimized
any loss of prestige and cachet.
Competitive price
intelligence
Understanding the complete pricing
landscape in which their product
portfolio plays is now more critical
than ever for luxury brands. While
luxury retailers and brands have
highly sophisticated capabilities
and means to control their image,
many have not exhibited the level of
concern with competitive pricing that
other retail segments have. With the
rising popularity of alternative online
shopping methods, from online auctions
to flash sales sites to price comparison
engines, the need to avoid undercutting
4
by competitors is high. Indeed, being
perceived as overpriced is a clear
threat, and is a particular concern for
manufacturers with their own retail
stores, whose customers likely will react
negatively upon seeing significantly
lower prices in other outlets.
To be sure, while luxury retailers
that have built brands on image
and lifestyle can withstand greater
competitive pricing differences than
discount retailers that have built their
brand on price, there are still limits. It
is not feasible for a company such as
Fendi to match the price of every seller
on eBay, but it should understand
the range of prices in the market,
especially among core competitive
channels. A trend of consistently lower
prices available elsewhere erodes the
impression of value that potential
customers cite as so critical to their
purchase decision.
For example, recently a high-end
fashion house conducted a global
pricing study of its top competitors in
key countries. It collected pricing data
on comparable products across brands
and statistically modeled profitability
and growth for each. Based upon
these results and the company’s
desired brand positioning, it set
target price ranges for all of its major
products. Pricing within those ranges
significantly improved customer price
satisfaction, thus increasing volume,
revenue, and profits, while enabling
the company to establish a consistent
brand image that was positively
differentiated from its competitors.
Enhanced channel
strategies
The disparities between online, outlet,
department store, and boutique
shoppers in the luxury space is just
as striking as it is in other retail
segments. Not only is price sensitivity
different, but access to information
and shopping seasonality display wide
variation as well. For instance, online
shoppers obviously can compare prices
across multiple competitors more
easily than those shopping in a brick-
and-mortar location. But even that is
changing, as mobile phone apps such
as The Find enable shoppers in physical
stores to scan a product on the shelf
and instantly know the price for that
same item at nearby brick-and-mortar
outlets as well as online merchants.
One way luxury retailers can tailor
promotions to such divergent customer
needs is by emphasizing temporary,
special discounts available through
the online storefront (which also
are available to brick-and-mortar
customers who leverage online
information), while stressing other
features for the brick-and-mortar
channel. Furthermore, retailers
can meet customer needs without
cannibalizing sales or eroding brand
image for valuable boutique shoppers
by tailoring assortments across each
channel. For retailers that still are
concerned with eroding their brand
image or limiting future flexibility,
increasingly popular flash sales sites
provide a way to test promotional
strategies through a seemingly
unrelated venue. These sites not only
have a degree of separation from the
brand, but also tend to emphasize the
scarcity and limited duration of their
discounts. As long as this channel is
not overused, it allows luxury providers
to avoid incorporating these lower
prices into its brand image.
Several high-end retailers are
responding to the pressures of
increased competition and price-
conscious shoppers by aggressively
investing in the expansion of outlets,
similar to the strategy taken by some
manufacturers. Indeed, high-end
manufacturers such as Coach and
Polo Ralph Lauren have a legacy
of using outlets to liquidate excess
goods without diluting brands. These
manufacturers also have extended
this strategy to outlet-specific
products and promotions, and to
online promotions. Neiman Marcus,
Bloomingdale’s, Saks, and Nordstrom
are following this example, each
ramping up their expansion of outlet
stores.
12
By adopting this strategy,
retailers can maintain a high degree
of control while reaching a wider
base of customers and shifting
discounting away from their regular
stores. Neiman Marcus, in particular,
began testing a store concept in April
2011 called Last Call Studio that
sells outlet-only merchandise. This
new breed of outlet stores targets
a growing group of deal-conscious
customers while minimizing margin
pressure and brand erosion with
distinct made-for-outlet products.
Price sensitivity
In the past, a high price played an
important role in the full experience
of buying a luxury item, and retailers
believed discounting such a product
eroded its perceived value. However,
that’s not necessarily the case,
especially during peak shopping
seasons such as the holidays. In
fact, in a recent holiday shopping
survey, Accenture found that only
one percent of respondents said a
discount would negatively impact
their impression of a luxury brand,
while 70 percent said discounts
were the biggest influence in their
decision to purchase a luxury good.
13
Yet luxury retailers should not
discount across the board. Many
retailers in other segments have
experienced substantial improvements
in both long-term brand image
and margin by understanding the
price sensitivity of different items.
Contrary to their expectations, they
have found that cutting price, within
reason, only drives sales for a small
portion of their product portfolio.
For example, Accenture’s work with
home improvement retailers found
that their customers are most sensitive
to pricing on products that serve
to start a project, such as faucets
or tiles, and pay far less attention
to the associated grout, caulking,
screws and hand tools. Purveyors of
luxury are very likely to see similar
results, and thus should focus their
promotional efforts on the products
that make a difference, rather than
taking a broad-stroke strategy that
erodes their images and margins.
In recent years, a well-known retailer
incorporated such sensitivity metrics
into its overall pricing and assortment
strategy. The retailer set the most
competitive prices for the small
number of price-sensitive products
5
that brought customers into the
store, while setting prices for the
larger number of less price-sensitive
items that would bolster its margins.
This strategy has helped boost the
company’s profit margins to its highest
level, while also convincing customers
they had managed to get a good deal.
Luxury retailers also can improve
their results by understanding
price sensitivity for each product
through each channel. With such an
understanding, retailers can determine
which items to promote in each
channel, differentiating promotions
based on clear evidence of customer
behaviors. By taking such an approach
retailers can prevent the higher
sensitivities of online customers from
muddying in-store behavior, thus more
narrowly targeting their efforts for the
greatest impact.
Performance
Measurement
It is hard to overemphasize the value
of actual testing and learning from
one’s mistakes. As with measuring
price sensitivity, luxury retailers can
learn from the success others have had
in establishing a price and promotion
testing process, and then thoroughly
analyzing the results. Quantifying
and measuring success is critical for
discovering the optimal allocation of
limited promotional dollars.
Understanding both the financial and
brand effects of an actual promotion
or a price change will shape and
refine the overarching pricing and
promotion strategy in each channel
in a continuous cycle, allowing the
company to adapt as customer
preferences change. This will help
retailers avoid outdated promotional
strategies that do nothing other than
hurt margins without any positive
financial impact. Furthermore, just as
deep, attention-getting promotions
will limit flexibility by setting
customer expectations, less impactful,
frequently-repeated discounts will
do the same, revealing a clear need
for retailers to change with the
market, as quickly as possible.
A high-end department store
demonstrates the value to be derived
from promotional metrics. Responding
to limited returns from its advertising
and promotion activities, the retailer
embarked on an effort to improve
the marketing decision support data,
tools, and frameworks available to its
merchants. This allowed merchants
to quantify and act on advertising
performance based upon the item
selected, the discount, the messaging,
and several other factors. The result
was an almost immediate increase
in advertisement effectiveness,
driving increased sales and store
traffic through smaller markdowns.
In essence, the retailer was able
to generate the returns it needed
through much less risky and less
potentially brand-eroding promotions.
Conclusion
Although many luxury retailers
stand to benefit from the recent
rebound in demand for their goods,
they must ensure they are equipped
to properly serve a market that is
very different—both technologically
and demographically—than the one
they served prior to the recession. In
particular, a greater portion of luxury
consumers are younger, shopping
online, and seeking value. They
have grown up with technology and
have learned to leverage it in more
sophisticated ways to truly understand
the quality and value they receive for
each dollar they spend.
The smart luxury retailer will cast
off long-standing misconceptions
standing in the way of fully leveraging
channel and promotion strategies
to serve their disparate customer
segments. For many, this will mean
putting in place carefully designed
online capabilities, striving to
understand how competitors are
pricing and how channel strategies
can be optimized, and tapping into the
full power of price sensitivity analysis
and promotional metrics. Fortunately,
the way forward is illuminated by the
experiences of other retail segments
that have faced similar situations
in recent decades. By learning from
these segments, luxury retailers can
continue to provide their customers
with premium value, thereby
supporting their pursuit of high
performance.
6
Thomas Jacobson
Thomas G. Jacobson is a senior
executive leading the Accenture
Pricing & Profit Optimization practice
globally. Working with clients on their
strategy, processes, organization and
technology, he helps them transform
their capabilities to maximize their
growth and earnings. Mr. Jacobson has
led a number of engagements across
a variety of industries for board-level
clients in the areas of growth and
transformation around the world. He
also previously spent four years in an
executive role at a price and profit
optimization software company. Mr.
Jacobson is based in Boston.
[email protected]
Tiago Salvador
Tiago Salvador is a Senior Principal
in the Accenture Global Pricing and
Profit Optimization Practice. Based
in Chicago, Mr. Salvador works with
clients across a variety of industries,
focusing in the areas of pricing
transformation, pricing strategy and
execution, customer strategy and
segmentation, organizational structure
design, and product development.
Mr. Salvador holds an MBA from the
University of Chicago Booth School
of Business, and a B.B.A. from the
University of Michigan.
[email protected]
Raymond C. Florio
Ray Florio is a member of the
Leadership team of Accenture’s
Global Pricing and Profit Optimization
Practice. He is based in the New
York area, and focuses primarily on
pricing and marketing issues across
a wide variety of industries. Prior
to joining Accenture, Ray held a
position in venture capital, assisting
in the development of new business
plans and venture designs. Ray
received a B.S in Economics from the
Wharton School of the University of
Pennsylvania.
[email protected]
The authors would also like to
acknowledge the contributions from
Tracy Cohen and Vukieali Amonju.
About Authors
Copyright
©
2011 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.
About Accenture
Accenture is a global management
consulting, technology services and
outsourcing company, with more than
223,000 people serving clients in
more than 120 countries. Combining
unparalleled experience, comprehensive
capabilities across all industries and
business functions, and extensive
research on the world’s most successful
companies, Accenture collaborates
with clients to help them become
high-performance businesses and
governments. The company generated
net revenues of US$21.6 billion for the
fiscal year ended Aug. 31, 2010. Its
home page is www.accenture.com.
11-1582_LL/11-3568
References
1
“Luxury-Goods Stocks are Flying
High”, MSN Money, December 20, 2010
2
2010 Accenture Holiday Luxury
Shopping Survey
3
“’Luxury Newcomer’ Recharges
Recession-Battered Luxury Market,”
Brand Channel, Barry Silverstein,
January 19, 2011
4
“’Luxury Newcomer’ Recharges
Recession-Battered Luxury Market,”
Brand Channel, Barry Silverstein,
January 19, 2011
5
“July 2007 Luxury Report,” Deutsche
Bank, July 2007
6
“In the Luxury Sector, Discounting
can be Dangerous,” Businessweek,
July 23, 2009
7
2010 Accenture Holiday Luxury
Shopping Survey
8
“Sustaining the luxury brand on
the internet,” Journal of Brand
Management, 2009
9
“The Chic Learn to Click,” The
Economist, July 24, 2010
10
“AmEx Research Homes in on Luxury
Market,” CardLine, May 28, 2010
11
“The Chic Learn to Click,” The
Economist, July 24, 2010
12
“Tony Retailers Find Niche in
Outlets,” The Wall Street Journal Asia,
August 10, 2010
13
2010 Accenture Holiday Luxury
Shopping Survey
doc_328324359.pdf
While recent news of a global rebound in the luxury
market has encouraged retailers, this comeback
may be very different from those to which they are
accustomed. Rather than finding a mainstay among
older, brick-and-mortar shoppers, luxury retailers
will encounter younger and savvier shoppers
who tend to buy online and at a discount. While
ultra-luxury retailers may still be able to play by
previously well-established rules—such as avoiding
online sales to engender a sense of prestige—
mass-market luxury players must adapt to their
new customers and the shopping dynamics they
bring with them. In particular, luxury retailers will
find that a carefully designed online presence,
usable insights into competitive pricing, and more
sophisticated channel and promotional strategies will
be critical to success.
The Premium of Value: Pricing and
Promoting Luxury to the New Consumer
By Tom Jacobson, Ray Florio, and Tiago Salvador
1
While recent news of a global rebound in the luxury
market has encouraged retailers, this comeback
may be very different from those to which they are
accustomed. Rather than finding a mainstay among
older, brick-and-mortar shoppers, luxury retailers
will encounter younger and savvier shoppers
who tend to buy online and at a discount. While
ultra-luxury retailers may still be able to play by
previously well-established rules—such as avoiding
online sales to engender a sense of prestige—
mass-market luxury players must adapt to their
new customers and the shopping dynamics they
bring with them. In particular, luxury retailers will
find that a carefully designed online presence,
usable insights into competitive pricing, and more
sophisticated channel and promotional strategies will
be critical to success.
Introduction
2
The Changing Luxury Consumer
Few would argue that
the luxury market has
not changed a great
deal in recent years. As
growth has slowed in
developed nations such
as the United States
and Japan, luxury-
goods companies have
intensified the search for
competitive advantages
in order to capture
share from others. The
recession created large-
scale shifts in consumer
buying behaviors, and
retailers—even those
serving the luxury
space—have taken steps
to adapt.
To be sure, the luxury market
experienced an upturn during the
2010 holiday shopping season. As
Swiss private bank Pictet & Cie’s
luxury-focused fund manager Caroline
Reyl noted, "The luxury sector was
the sector to be in [during] 2010."
1
However, one should not assume
buyers and retailers are returning to
pre-recession behaviors. Consumers,
particularly those in the United States,
are eager to embrace convenience and
value, and are unlikely to revert to
their prior mindset, as numerous retail
segments have discovered.
Indeed, recent Accenture research
shows that luxury shoppers now
are younger; that shoppers over age
35 were less likely to purchase a
luxury good during the past holiday
season, and that those seeking
luxury goods cite value and price as
key considerations when making a
purchase. Moreover, the majority of
these shoppers intended to make most
of their purchases online.
2
Further,
value has become so important that
some consumers, particularly in Japan,
have begun traveling to less-developed
countries to purchase luxury goods at
lower prices.
Seeking to capitalize on these trends
are the new breed of invitation-
only “flash sales” sites dedicated to
luxury shoppers, which have grown
tremendously in a short period of
time. These sites cater to an emerging
demographic segment described by
Brand Channel’s Barry Silverstein as
“luxury newcomers.” In his words,
such a consumer is “a web-savvy,
discerning fashionista who knows
her way around sites such as Gilt.com
and relishes a good discount and
interactive shopping experience.”
3
According to Brand Channel, this new
segment comprises 61 percent of
luxury consumers and 36 percent of
luxury spending, an amount equal to
traditional luxury consumers prior to
the recession.
4
Feeling the pressure to respond to
these changes, many retailers had
begun the shift from mid-range
luxury goods to less expensive and
more accessible luxury goods prior
to the recession, with Deutsche
Bank noting that the traditional
pyramid of luxury levels bore a
greater resemblance to a pear.
5
Smart
mass-luxury retailers are learning
from the past two years, leveraging
different channels and seasonal
shopping behaviors to tailor their
offerings and promotional strategies
to distinct customer segments and
preferences. The transparency and
wealth of information available
to consumers via the Internet
can help—rather than hurt—those
companies that embrace a more
sophisticated go-to-market strategy.
However, luxury retailers still face
many potential pitfalls in their pursuit
of growth. While promotions and
discounting can boost their financial
performance, especially in the short
term, there are dangers in using these
tools haphazardly. Loss of margin and
prestige among more traditional luxury
shoppers, for instance, are a real
concern. “The losers in this recession
will be the ones who destroyed their
brand through the discount model,”
Janet Hoffman, global managing
director of Accenture’s retail practice,
told BusinessWeek. “We won’t see the
damage from that necessarily today,
but we’ll come back in a year and be
able to notice.”
6
Furthermore, despite the positive
effect of discounts on segments of
the luxury market, overall spending
intentions are not increasing, and
upselling customers to a more
prestigious product is unlikely if the
discounted price is still significantly
beyond their budget.
7
Therefore,
unless a promotion is targeted to the
correct segment, it will only erode
brand image and margins. While this
is challenging for all retailers, it is
particularly difficult for luxury brands,
which tend to have less discounting
experience. Because of this, such
brands likely will struggle to balance
long-term image management, short-
term financial gain, margin protection,
and fulfilling the preferences of
traditional and new shopper segments.
3
Five Key Success Factors for the
New Luxury Market
How can luxury
providers overcome
these hurdles and
capitalize on the new
reality of retail?
In Accenture’s view,
there are five key areas
luxury retailers must
manage in concert
to derive maximum
value from today’s
transformed luxury
marketplace:
1. Embrace the online channel
2. Gain deeper insights into
competitive pricing
3. Develop enhanced and coordinated
channel strategies
4. Understand price sensitivity for
each product in each channel
5. Launch highly targeted, carefully
measured pricing and promotion
strategies.
Retailers that neglect these areas may
witness the erosion of a brand image
they have spent decades cultivating.
Online presence
In the recent past, luxury retailers
commonly presumed that the Internet
was a channel for discounted,
damaged, and counterfeit items,
and believed that online sales
risked overexposing brands built on
exclusivity. Some also thought that
the channel was not equal to the task
of marketing the sensory aspects of
luxury goods, such as smell, touch,
and feel.
8
As a result, many luxury
goods companies have been slow
to create their own online channels,
ceding control over the online segment
to other players such as online-only
retailers. In fact, as reported by The
Economist, just one-third of the
luxury retailers surveyed by Forrester
Research in 2008 sold their products
online. And while that figure has since
risen, as of 2010 half of luxury firms
still did not have an online presence.
9
To be sure, brick-and-mortar channels
will remain important, as they appeal
to more traditional, brand-loyal,
prestige-hunting luxury consumers.
However, given the shifts in luxury
buyer behavior discussed earlier,
and the fact that new, younger, and
discount-hunting luxury shoppers
prefer to shop online, establishing
a powerful online presence is the
first key step for luxury goods
manufacturers and retailers.
Online sales are expected to continue
growing rapidly: In fact, even through
the depths of the current downturn,
luxury pure-play online retailers
experienced 87 percent year-over-
year growth.
10
Thus, overlooking
the channel will only become more
costly. Losses are especially likely
among shoppers who research
product features and advantages
online prior to making in-store
purchases. In such cases, luxury
providers that do not have an online
presence are allowing another party
to control the message this segment
receives. For brands that tie much
of their value to a carefully crafted
image, this could prove disastrous.
The experience of well-known
designer Oscar de la Renta illustrates
the power the online channel has
to drive sales of luxury goods. The
company has had an online store
for several years, which Oscar de la
Renta anticipated would primarily
serve customers shopping for smaller
items. However, bucking expectations,
the online store recently has hosted
transactions for much larger-ticket
items such as fur coats and high-end
cocktail dresses.
11
Had these items
not been available from the brand’s
own site, customers likely would have
purchased them from competitors
or from channels that allowed the
retailer less control over its image,
and eroded its profits. Having
established its own online presence,
Oscar de la Renta has minimized
any loss of prestige and cachet.
Competitive price
intelligence
Understanding the complete pricing
landscape in which their product
portfolio plays is now more critical
than ever for luxury brands. While
luxury retailers and brands have
highly sophisticated capabilities
and means to control their image,
many have not exhibited the level of
concern with competitive pricing that
other retail segments have. With the
rising popularity of alternative online
shopping methods, from online auctions
to flash sales sites to price comparison
engines, the need to avoid undercutting
4
by competitors is high. Indeed, being
perceived as overpriced is a clear
threat, and is a particular concern for
manufacturers with their own retail
stores, whose customers likely will react
negatively upon seeing significantly
lower prices in other outlets.
To be sure, while luxury retailers
that have built brands on image
and lifestyle can withstand greater
competitive pricing differences than
discount retailers that have built their
brand on price, there are still limits. It
is not feasible for a company such as
Fendi to match the price of every seller
on eBay, but it should understand
the range of prices in the market,
especially among core competitive
channels. A trend of consistently lower
prices available elsewhere erodes the
impression of value that potential
customers cite as so critical to their
purchase decision.
For example, recently a high-end
fashion house conducted a global
pricing study of its top competitors in
key countries. It collected pricing data
on comparable products across brands
and statistically modeled profitability
and growth for each. Based upon
these results and the company’s
desired brand positioning, it set
target price ranges for all of its major
products. Pricing within those ranges
significantly improved customer price
satisfaction, thus increasing volume,
revenue, and profits, while enabling
the company to establish a consistent
brand image that was positively
differentiated from its competitors.
Enhanced channel
strategies
The disparities between online, outlet,
department store, and boutique
shoppers in the luxury space is just
as striking as it is in other retail
segments. Not only is price sensitivity
different, but access to information
and shopping seasonality display wide
variation as well. For instance, online
shoppers obviously can compare prices
across multiple competitors more
easily than those shopping in a brick-
and-mortar location. But even that is
changing, as mobile phone apps such
as The Find enable shoppers in physical
stores to scan a product on the shelf
and instantly know the price for that
same item at nearby brick-and-mortar
outlets as well as online merchants.
One way luxury retailers can tailor
promotions to such divergent customer
needs is by emphasizing temporary,
special discounts available through
the online storefront (which also
are available to brick-and-mortar
customers who leverage online
information), while stressing other
features for the brick-and-mortar
channel. Furthermore, retailers
can meet customer needs without
cannibalizing sales or eroding brand
image for valuable boutique shoppers
by tailoring assortments across each
channel. For retailers that still are
concerned with eroding their brand
image or limiting future flexibility,
increasingly popular flash sales sites
provide a way to test promotional
strategies through a seemingly
unrelated venue. These sites not only
have a degree of separation from the
brand, but also tend to emphasize the
scarcity and limited duration of their
discounts. As long as this channel is
not overused, it allows luxury providers
to avoid incorporating these lower
prices into its brand image.
Several high-end retailers are
responding to the pressures of
increased competition and price-
conscious shoppers by aggressively
investing in the expansion of outlets,
similar to the strategy taken by some
manufacturers. Indeed, high-end
manufacturers such as Coach and
Polo Ralph Lauren have a legacy
of using outlets to liquidate excess
goods without diluting brands. These
manufacturers also have extended
this strategy to outlet-specific
products and promotions, and to
online promotions. Neiman Marcus,
Bloomingdale’s, Saks, and Nordstrom
are following this example, each
ramping up their expansion of outlet
stores.
12
By adopting this strategy,
retailers can maintain a high degree
of control while reaching a wider
base of customers and shifting
discounting away from their regular
stores. Neiman Marcus, in particular,
began testing a store concept in April
2011 called Last Call Studio that
sells outlet-only merchandise. This
new breed of outlet stores targets
a growing group of deal-conscious
customers while minimizing margin
pressure and brand erosion with
distinct made-for-outlet products.
Price sensitivity
In the past, a high price played an
important role in the full experience
of buying a luxury item, and retailers
believed discounting such a product
eroded its perceived value. However,
that’s not necessarily the case,
especially during peak shopping
seasons such as the holidays. In
fact, in a recent holiday shopping
survey, Accenture found that only
one percent of respondents said a
discount would negatively impact
their impression of a luxury brand,
while 70 percent said discounts
were the biggest influence in their
decision to purchase a luxury good.
13
Yet luxury retailers should not
discount across the board. Many
retailers in other segments have
experienced substantial improvements
in both long-term brand image
and margin by understanding the
price sensitivity of different items.
Contrary to their expectations, they
have found that cutting price, within
reason, only drives sales for a small
portion of their product portfolio.
For example, Accenture’s work with
home improvement retailers found
that their customers are most sensitive
to pricing on products that serve
to start a project, such as faucets
or tiles, and pay far less attention
to the associated grout, caulking,
screws and hand tools. Purveyors of
luxury are very likely to see similar
results, and thus should focus their
promotional efforts on the products
that make a difference, rather than
taking a broad-stroke strategy that
erodes their images and margins.
In recent years, a well-known retailer
incorporated such sensitivity metrics
into its overall pricing and assortment
strategy. The retailer set the most
competitive prices for the small
number of price-sensitive products
5
that brought customers into the
store, while setting prices for the
larger number of less price-sensitive
items that would bolster its margins.
This strategy has helped boost the
company’s profit margins to its highest
level, while also convincing customers
they had managed to get a good deal.
Luxury retailers also can improve
their results by understanding
price sensitivity for each product
through each channel. With such an
understanding, retailers can determine
which items to promote in each
channel, differentiating promotions
based on clear evidence of customer
behaviors. By taking such an approach
retailers can prevent the higher
sensitivities of online customers from
muddying in-store behavior, thus more
narrowly targeting their efforts for the
greatest impact.
Performance
Measurement
It is hard to overemphasize the value
of actual testing and learning from
one’s mistakes. As with measuring
price sensitivity, luxury retailers can
learn from the success others have had
in establishing a price and promotion
testing process, and then thoroughly
analyzing the results. Quantifying
and measuring success is critical for
discovering the optimal allocation of
limited promotional dollars.
Understanding both the financial and
brand effects of an actual promotion
or a price change will shape and
refine the overarching pricing and
promotion strategy in each channel
in a continuous cycle, allowing the
company to adapt as customer
preferences change. This will help
retailers avoid outdated promotional
strategies that do nothing other than
hurt margins without any positive
financial impact. Furthermore, just as
deep, attention-getting promotions
will limit flexibility by setting
customer expectations, less impactful,
frequently-repeated discounts will
do the same, revealing a clear need
for retailers to change with the
market, as quickly as possible.
A high-end department store
demonstrates the value to be derived
from promotional metrics. Responding
to limited returns from its advertising
and promotion activities, the retailer
embarked on an effort to improve
the marketing decision support data,
tools, and frameworks available to its
merchants. This allowed merchants
to quantify and act on advertising
performance based upon the item
selected, the discount, the messaging,
and several other factors. The result
was an almost immediate increase
in advertisement effectiveness,
driving increased sales and store
traffic through smaller markdowns.
In essence, the retailer was able
to generate the returns it needed
through much less risky and less
potentially brand-eroding promotions.
Conclusion
Although many luxury retailers
stand to benefit from the recent
rebound in demand for their goods,
they must ensure they are equipped
to properly serve a market that is
very different—both technologically
and demographically—than the one
they served prior to the recession. In
particular, a greater portion of luxury
consumers are younger, shopping
online, and seeking value. They
have grown up with technology and
have learned to leverage it in more
sophisticated ways to truly understand
the quality and value they receive for
each dollar they spend.
The smart luxury retailer will cast
off long-standing misconceptions
standing in the way of fully leveraging
channel and promotion strategies
to serve their disparate customer
segments. For many, this will mean
putting in place carefully designed
online capabilities, striving to
understand how competitors are
pricing and how channel strategies
can be optimized, and tapping into the
full power of price sensitivity analysis
and promotional metrics. Fortunately,
the way forward is illuminated by the
experiences of other retail segments
that have faced similar situations
in recent decades. By learning from
these segments, luxury retailers can
continue to provide their customers
with premium value, thereby
supporting their pursuit of high
performance.
6
Thomas Jacobson
Thomas G. Jacobson is a senior
executive leading the Accenture
Pricing & Profit Optimization practice
globally. Working with clients on their
strategy, processes, organization and
technology, he helps them transform
their capabilities to maximize their
growth and earnings. Mr. Jacobson has
led a number of engagements across
a variety of industries for board-level
clients in the areas of growth and
transformation around the world. He
also previously spent four years in an
executive role at a price and profit
optimization software company. Mr.
Jacobson is based in Boston.
[email protected]
Tiago Salvador
Tiago Salvador is a Senior Principal
in the Accenture Global Pricing and
Profit Optimization Practice. Based
in Chicago, Mr. Salvador works with
clients across a variety of industries,
focusing in the areas of pricing
transformation, pricing strategy and
execution, customer strategy and
segmentation, organizational structure
design, and product development.
Mr. Salvador holds an MBA from the
University of Chicago Booth School
of Business, and a B.B.A. from the
University of Michigan.
[email protected]
Raymond C. Florio
Ray Florio is a member of the
Leadership team of Accenture’s
Global Pricing and Profit Optimization
Practice. He is based in the New
York area, and focuses primarily on
pricing and marketing issues across
a wide variety of industries. Prior
to joining Accenture, Ray held a
position in venture capital, assisting
in the development of new business
plans and venture designs. Ray
received a B.S in Economics from the
Wharton School of the University of
Pennsylvania.
[email protected]
The authors would also like to
acknowledge the contributions from
Tracy Cohen and Vukieali Amonju.
About Authors
Copyright
©
2011 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.
About Accenture
Accenture is a global management
consulting, technology services and
outsourcing company, with more than
223,000 people serving clients in
more than 120 countries. Combining
unparalleled experience, comprehensive
capabilities across all industries and
business functions, and extensive
research on the world’s most successful
companies, Accenture collaborates
with clients to help them become
high-performance businesses and
governments. The company generated
net revenues of US$21.6 billion for the
fiscal year ended Aug. 31, 2010. Its
home page is www.accenture.com.
11-1582_LL/11-3568
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2010 Accenture Holiday Luxury
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