Thursday, July 23, 2009

Luxury Marketing in a Recession

As the recession keeps depressing, most luxury brands are experiencing a wake-up call from this nasty cycle and a much-chastened, highly skittish luxury buyer.

For the first time, perhaps in our lives, even brands that have been successful by pursuing their strategies of “great product; major investments in image advertising” (the European model) are being forced to re-think the viability of this approach. Many are looking into tactics that are more “American packaged goods fully-integrated” in approach to grow revenues and margins.


What the media dubbed the “aspirational” or “symbolic” buyer – folks with household incomes of $250 to $500k – are gone.


True luxury will continue to be:

• Things or services distinguished by their inherent value or by what Mr. Stanley Marcus called, “the impact of the hand” – meaning the best that the mind of man can imagine and the hand of man create – that they stand out far above all others.

NOW, more than ever, great experiences are high on the value scale: experiences so rare and sensually orchestrated, the experience and memories of them so precious that they are actually luxury products. These include ‘TIME OUT’/vacations, travel, sensual comforts. Pick your fav.

The most educated consumer is putting a premium even on things or experiences that cost little or nothing AND provide immense satisfaction: good water, knowing how to tie a bow tie, dry firewood, a hot bath after a long day, superb olive oil, fresh caught fish, a smile, beautiful wrapping paper or elegant packaging, staying in shape, afternoon tea, museum visits, cultural experiences, time alone, time with family and friends. And, did I say, time, time, time, FREE TIME

At no point in 15 years has the “best customer” – the 3.2 million with liquid portfolios of $1million or more –better mirrored Milton Friedman’s view that “Nobody (these days, especially – my note) spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own.”

Focus on the best customer

Every thinking luxury brand is now obsessed with their best customers and focusing their marketing efforts on “surprising and delighting,” winning greater share of wallet, loyalty of and greater referral of customers from this elite group.

And here’s the bottom-line reason. This ‘best customer’ spends more, is more loyal over time, refers more IF asked and rewarded for referral, is willing to partner, wants favored/loved brands to succeed, forgives more readily IF a mistake is corrected, offers stronger word of mouth, is not PRICE but VALUE sensitive, is cheaper to keep than to find and increasingly more profitable over time.

This best customer, self-made, driven by middle-class values (only 10 percent of wealth in the U.S. is celebrity or inherited) is now: more curious about what is the best of the best and wants to articulate why great things/services are worth the price; demanding high-touch, sophistication, intimacy, intelligent ‘courting’ from brands; more demanding than ever in our lifetimes (loyalty is correlated directly to intelligence and quality of service/product); seeing wealth as something to be enjoyed rather than displayed; highly cynical about advertising and demanding more targeted, personal approaches to marketing and service; hungry to understand (‘the rise of connoisseurship’) what is the best and why it justifies premium price; searching for the unique the memorable and wanting to ‘tell the story of a great experience or product,” relying more on friends’ opinions and recommendations, social networks and ‘buzz’ than on traditional advertising.

What the smartest luxury brands are doing

• Increasingly marketing is seen as president’s job not just the marketing department’s. – And ‘marketing” which used to be seen as great product, great location and major investment in advertising is increasingly following a packaged goods model. Advertising is being cut and the remaining investment going to niche publications like Departures, Elite Traveler, The Robb Report, Modern Luxury, Niche Media titles and others.

• Marketing which used to be the first thing cut in tough times is now seen not as a cost but as an investment by the smartest brands. Those that continue to spend, while the rest of the herd is cutting, enjoy significant competitive advantage. Luxury Marketing Council research shows that those that continue to invest are putting their marketing dollars into: improving customer service and heightening the quality of interaction with best customers; investing in more ‘third-party-testimonial generating’ local public relations; engaging people/employees/sales folks” on the line”, with direct customer contact as strategic partners and genuinely soliciting their insights into the changing customer and market place and sharing with people/employess/sales folks insight into the bottom line in ways once deemed ‘for top management only.’

• Paying more than lip service to ‘competitive intelligence’. More companies are monitoring their top competitors’ advertising, public relations, merchandising, web-initiatives; special events and looking for ways to ‘one up’ their competition by being more creative, faster, more resourceful in the ways that engage their teams and the way their teams ‘touch’ their best customers.

• One-to-one top-management telemarketing. It’s no longer unusual to hear stories about how the president or CEO personally contact best customers to invite them to special events or solicit their thinking.

• The renewed interest in measure, qualitative and quantitative, as part of the discipline of doing business on a daily basis. Did it work? How do we know? What were the measures? If it didn’t work, why not? What should we do differently? All questions more aggressively asked than ever before.

• Loyalty rewards and programs, once seen as unnecessary COST and ‘money pit’ are more important than ever For best examples see Bergdorf Goodman and Neiman Marcus In-Circle.

• High -Touch Programs. Seadream Yacht club calls select guests after every cruise and offers to have the CEO fly out to their home and host at Seadream’s expense a brunch or reception for a dozen of the couple’s best friends. The cruisers tell the story of their cruise. Seadream offers a great rate to their guests and sell several cruises at $1,000 per person per night. Not to mention the friends of the couple telling their friends. This was so successful for Seadream that they abandoned most traditional advertising. When Steinway sells a Steinway Grand, they do something similar. They offer to host a social event for the buyer in their homes, have a Steinway artist perform. Both strategies are ‘out of the box’, highly personal and create a community of ‘brand evangelists’ who tell the story to prospective buyers/friends, precisely the right target group.

• Knowing the Best Customer Better and Segmenting that Customer more personally and more precisely. See Jack Mitchell’s “Hug Your Customers” if you haven’t already is all I can say.

• Rewarding best customers for referral. Something simple: a bottle of wine, an art book, a special offer on a passion of the customer. Too few brands ask. Too few brands reward

• Personal gifting, communications (hand written notes). The power of such a simple strategy multiplied is immense.

• Customer Councils. The conventional wisdom was that the richest of the rich won’t take time to share their thinking and time. Many won’t . Many will. Those companies that assemble that create customer councils enjoy disproportionate advantage.

• Collaborations and Partnerships. Any brand not engaging this way is missing a way to be smarter; to share costs; to win new customers by being more imaginative with ‘kindred spirit’ luxury brands. Example: Brioni, Escada and Mercedes worked together on the 11 city launch of a new top of the line Mercedes. They pooled their best customer lists having agreed upon confidentiality and each in 11 cities ‘won’ 600 new customers of the same profile.

• Scaling down and making more approachable ‘special events.’ Less about ‘wow’ and more about the right people in the room. Smaller, more discrete, more about taste than splash.

•¨One-to-one, with permission e-marketing: the greatest tool for cross selling and upselling; the best source of knowledge of the best customer; the greatest lever to work with other brands. Neiman Marcus in six years changed their e-business from a ‘remaindering’ business to a $500 million enterprise without cannibalizing their store or catalog businesses.

• Easy to say, harder to do but inspiring the entire team to have a passion for and placing a premium on creativity, ‘out of the box’ solutions and rewarding those who ‘raise the bar.’

• Focusing strategically on ‘niche markets’ often ignored: the millennials (young people 16 – 25); the black, African American community; the hispanic, latino community; the Asian community; the gay, lesbian, transgender, bi-sexual communities. There are consulting firms and publishers who specialize in reaching these people on their own terms.

• Instead of radical discounting, smarter luxury brands are turning to limited-time, special-price-off offers on categories that their customers haven’t purchased before. So, they – pick your category/brand – offer Brioni suit buyers a special opportunity to buy accessories or custom shirts or outerwear at a special price. This does two things: gives the loyal customer “a reason to shop” (critical these days), migrates the customer to new categories and preserves the pricing integrity of the product historically purchased , preserving profit and margins and avoiding the need to re-educated a ‘sale-price-off-‘trained’ customer back to full price when good times return.

One might think of the above list as a ‘recession cocktail’, the blend of any or all providing a way out of tough times and into the heart and mind and wallet of the best customer. And this is a laundry list of the best brands and how they are in fact thinking.

Footnote: The convergence of television, phone, computer, camera, fax, computer, web are revolutionizing the way the ‘new, young luxury consumer’ will buy and be influenced.

Wish I knew the answer to where this is going. But it’s definitely moving away from the old corporate model of PUSH, CREATE DESIRE to LISTEN, AND CREATE HAVING HEARD.


This ‘recession’ is a call to be more creative, to assemble communities, to share best practices and to win by redefining the entire marketing proposition based on what our customers say it should be.

by Greg Furman

Wednesday, July 15, 2009

The Impact of the current economic crisis

In his 1958 classic, The Affluent Society, Harvard Economist John Kenneth Galbraith made the argument that society as a whole had become affluent – after all most all families had tremendous modern conveniences previously known to be luxuries such as plumbing and heating, washing machines, electric stoves and refrigerators and two cars. He argued that as society becomes relatively more affluent, private business must “create” consumer wants through advertising to create an artificial demand for products beyond the individual’s basic needs. Given today’s economic crisis, it is hard to argue with this principle which he wrote about 50 years ago. This is a particularly relevant concept for luxury goods – especially if we accept the notion that luxury goods are by definition unnecessary and extremely expensive.

My review of the historical context of luxury suggests, in many respects the notion of what is luxury has not changed so much over time. However, the affluence that Galbraith wrote about has continued to increase across society. Affluent luxuries such as heating, plumbing and electricity have been augmented by air conditioning, color (and then cable and then satellite) TVs, computers and the internet. But in addition to this utilitarian affluence, over the past 50 years the Affluent Society really has become very affluent in wealth and in the number of wealthy.

Despite the fact that there is a growing gap between rich and poor, there has been enormous wealth created in this country and around the world over the past 50 years. There are nearly three million households in the US alone with a liquid net worth of over $1 million and there are literally tens of millions of households that have the buying power to purchase luxury goods from $500 – $5000. The disposable income households have to spend has been greatly enhanced by huge gains in the stock market and huge gains in the value of houses. But disposable income is not limited to gains in the stock market or house prices, it is also the result of the enormous growth in the American service economy and can also be attributed to the advent of dual income families. The result is that the majority of luxury goods products have become affordable to a much larger segment of the population. Louis Vuitton or Gucci hand bags are still relatively very expensive but never the less very affordable for millions of consumers.

One of the phenomenon’s (and attractions) of marketing luxury goods is the relative ease luxury brands have in convincing consumers to spend vast sums of money on things they simply don’t need! No matter how high the price, luxury consumers are typically very happy with their purchases even though they logically know that the cost of the item is far too high for its utilitarian worth. Luxury brands appeal to the visceral side of consumers. Advertising and promotional hype from the red carpet of Hollywood or the pages of glossy magazines are indisputably creating the demand or “wants” for these products much as Galbraith suggested. In the case of most consumer products, advertising creates a relative desire for a given product but that product typically has a utilitarian function such as cleaning your teeth or washing your clothes. The price paid is generally a market price that reflects the cost and value of the product.

Luxury goods, while sometimes having a utilitarian function such as clothes or shoes do not have a price which reflects their intrinsic cost or added value they provide – certainly not in comparison to an ordinary pair of shoes or an inexpensive handbag. The mark-ups on some luxury products is sometimes eight to ten fold. The price is irrational and is justified based on its uniqueness or creativity and its rarity. Luxury goods are typically of exceptional quality, but the prices charged to consumers are at a huge premium over cost.

As luxury brands have dramatically
increased their production quantities and sent manufacturing for many items to the Orient, the prices have been reduced in some cases. The combination of greater availability, greater affordability and in some cases diminished quality threatens the luxury status of many brands. If the notion of being extremely expensive is a defining component of being a luxury good, then affordability is another measure of a luxury good. If a brand becomes affordable to a large market then it brings into question its status as a luxury brand. If a luxury brand is too broadly available then it no longer is rare, which is one of the defining components of a luxury brand. In other words the tremendous success and expansion of some luxury brands may threaten their own status as a luxury brand.

Over the past 15-20 years the market for luxury goods has exploded due to the global expansion of luxury brands and the dramatic increase in consumer wealth. The current economic crisis is unlike anything we have ever experienced and will have profound effects on the luxury business. In the past, recessions did not dramatically affect the consumption patterns for luxury goods. The reason was because the truly wealthy were unaffected by the recession and so it did not have a dramatic affect on their luxury goods consumption. The last significant recession was in the early 90’s. In fact it was a pretty mild recession. The difference at the time was it was the first white collar recession. This was more a reflection of how much the economy had changed from manufacturing to services. At the time the global luxury goods business was just beginning its huge phase of growth. The luxury goods business grew tremendously throughout the nineties and was then hurt dramatically by a series of events at the arrival of the new millennium including the bursting of the dot com bubble, 9/11 and SARS. Nevertheless the market for luxury goods quickly recovered as stock markets recovered, the run up in housing prices began and the arrival of new luxury markets emerged in Russia, China,India, Brazil and the Middle East

The impact of the recession and the loss of wealth will have severe and profound affects on the luxury business. Essentially all luxury goods purchases are by definition unnecessary and therefore can be eliminated. In addition the luxury goods business has a huge travel component not only from sales of travel or duty free retail stores in airports, but also because major luxury goods boutiques are found in the major cities around the world. Unlike regular retail stores, luxury stores garner a significant portion of sales from tourists. Since travel is another discretionary purchase that consumers are cutting back on, it will be another drag on luxury sales.

by Dale Dewey