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Even Luxe Buyers Expect Discounts

Affluent consumers are joining in the national skittishness about spending money during a deep recession

With affluent consumers joining in on the national skittishness about spending money during a deep recession, discounts have become a fact of life in the luxury sector. But while this may have kept sales from grinding to a halt, the ploy is not without its long-term costs.

For some retailers, says Luxury Institute chief executive officer Milton Pedraza, offering discounts "was a matter of survival." And, indeed, the institute's August polling shows wealthy consumers are not immune to the lure of a bargain (relatively speaking). Twenty-eight percent said discounting has increased their overall expenditures on luxury goods and services, while 14 percent said it has decreased their outlays.

The Luxury Institute's polling numbers were quite different, though, when affluent consumers were asked how discounting has affected their "perception of the value of luxury goods and services." While 17 percent said their perception of luxury brands' value has been "improved" by such discounting, 29 percent said it has been "lowered." (The rest said their perception hasn't changed either way.)

"It does dilute the value in the minds of luxury consumers," Pedraza says of discounting. "If an item that used to cost $1,200 is suddenly on sale for $800, you'll never pay $1,200 for it again." The marketer may get a sale now, "but you lose your opportunity to price in the future," Pedraza adds. Greg Furman, chairman of the Luxury Marketing Council, concurs: "Radical discounting is a disaster," he says. "It tells people how big the margins were."

DEVALUING THE 'BRAND CACHET'

Moreover, promiscuous discounting may be especially off-putting to the people luxury marketers can least afford to lose these days: the really, really wealthy. Brands that indulge in such discounting "have added insult to injury because they are diminishing and devaluing their brand cachet, brand experience and brand value," says Mathew Evins, chairman and CEO of Evins Communications, a marketing firm that focuses on affluent consumers and the luxury market. "And in so doing they have disenfranchised their most valuable clientele -- high-net-worth and ultra-high-net-worth individuals."

Though it may sound odd to people who don't make a practice of buying luxuries, those who do so are inclined to believe (unless price fluctuations give them reason to wonder about it) that such items are worthwhile at their ordinary prices. In the Luxury Institute's August polling, for instance, 74 percent of respondents agreed with the statement, "I buy luxury items for quality. Luxury products last longer and keep their value." That far exceeded the number agreeing that "I buy luxury items purely for the enjoyment of it. I like to surround myself with beautiful, exclusive and unique products" (39 percent) or that "I buy luxury items as a reminder that I've made it" (19 percent). Likewise, more than eight of 10 affluent consumers surveyed for a recent Ipsos Mendelsohn report agreed that "When it comes to quality, I believe you get what you pay for."

Affluent consumers also reject the notion that they make luxury purchases in order to flaunt their wealth or to impress other people. Sixty-two percent of the Luxury Institute's respondents endorsed the statement, "I buy expensive items for myself, not to show off." By contrast, just 20 percent agreed that "Owning luxury items gives me a leg up in social and business situations."

ADOPTING SOCIAL MEDIA

While luxury consumers are attracted to products that will last -- and, often, to brands that have lasted for decades -- this doesn't mean marketers must confine themselves to media that have been around since the Year 1. Nor does it mean that luxury shoppers will look askance at brands that make use of new media.

For one thing, it's a mistake to think of the affluent as people who send their butlers off to deliver messages by hand rather than using e-mail. Furman makes the point that sophisticated, moneyed people tend to be the ones who are most comfortable with the Internet. He also rejects the notion that affluent consumers might feel a brand has cheapened itself by going online. "But it has to be done right," he cautions. "You don't take your old catalogue images and slap them on the Web. They're two different media." He cites Neiman Marcus as a good example of a luxury brand that has used the Internet as a way of engaging its customers, "without cannibalizing the store or the catalogue."

The Luxury Institute's recent polling finds lots of affluent consumers involved with social media, and willing to encounter luxury brands in that environment. Seventy-two percent reported being members of online social-networking sites. Even among those age 55 and older, 62 percent said they participate in such sites. More than four in 10 affluent social networkers said they notice advertiser brands on the sites they visit. And they don't seem to take umbrage at this. "The sense we get is that it's something that's accepted," says Pedraza. He makes the point that wealthy people tend to be savvy about how business works, so they realize the social sites must get revenue from somewhere. "Wealthy people understand that these sites need to be supported," he says.

If anything, luxury brands have tended to lag behind their customers in embracing the Internet. "In some cases, brands have said if they can't replicate the in-store experience, we don't want to be on the Internet," says Pedraza. But he says they're coming to see that being online is widely accepted by affluent consumers. Otherwise, he adds, "It would be like saying you can't have a luxury store in New York because anyone might walk by."

JOINING AN ONLINE BRAND COMMUNITY

Those taking the online plunge will draw comfort from a couple other of the Luxury Institute's survey findings: 24 percent of affluent social networkers said they'd be "likely to join a community dedicated to a luxury brand that is sponsored by the brand"; 20 percent would join an independent online community that's dedicated to the brand.

Luxury shoppers also want to make use of the "wisdom of the crowd" that's accumulated by online rating sites. Pedraza mentions TripAdvisor as an example, given the proclivity of affluent people for travel. "Peer-reviewed, aggregated recommendations become more important," he says -- even more so than the recommendations of family and friends. "A person has only so many family members and friends," he says, and their information on a travel venue may be out of date in any case. "The wisdom of the crowd becomes more important than the fewer data points you get from friends and family."

Even if high-tech venues are widely accepted in luxury marketing, this won't crowd out high-touch efforts. Furman sees luxury-market money "going into 'bespoke' special events, smaller and more intimate." And he sees a parallel movement into "smaller niche publications."

WHAT'S THE POINT OF LUXURY?

Whatever media they use, luxury marketers' messages must be in sync with the temper of the times. As the economy fitfully emerges from the long recession, what will affluent people really want to derive from their luxury spending? Furman sees affluent consumers evolving toward a stage in which they're less "obsessive" about acquiring luxuries and more intent on the satisfying experience that a luxury good can give them.

People won't lose interest in luxuries, to be sure, but they'll be more discriminating about them. "I call it a rise of connoisseurship," says Furman. Or, as Evins puts it, luxury is "not about riches, but about enrichment. It's not about being acquisitive but about being inquisitive and having meaning." And this naturally shapes luxury consumers' expectations for the sorts of messages luxury marketers will address to them. "A lot of the luxury market is about education," says Furman. Affluent consumers "want to be told in a non-condescending way" why a particular good or service is special and valuable.

The past year has seen numerous stories in the media telling of a general backlash against conspicuous consumption in particular and unnecessary spending in general. Will a lingering influence of such talk tend to dissuade wealthy consumers from indulging in luxuries even after the recession has ended? Furman, for one, doubts it. "I think there's always going to be a community of people who appreciate great things and great experiences," he says, and what they may have seen in the media won't deter them from continuing to do so.

Still, that's not to say the level of affluent consumers' spending in the long run will be unaffected by the trauma of the past year or two. A report this fall by the American Affluence Research Center says about 80 percent of the affluent have changed their spending since the recession began. And of this cohort, "about a quarter do not plan to return to pre-recession levels of spending. This equals roughly 20 percent of the wealthiest 10 percent of U.S. households."

PROSPECTS FOR A REBOUND

Meanwhile, some luxury categories are apt to rebound more briskly than others. When the Luxury Institute's August polling asked the affluent to predict their spending through the rest of 2009, travel, dining and health/fitness were atop the list of sectors in which respondents said they expect to increase their outlays. Jewelry, home furnishings and watches/gifts led the roster of sectors in which respondents expect to spend less during the rest of this year.

More broadly, the long-term prospects for any given luxury category may vary with the "risk" entailed in making purchases in it. The experience of the past couple years -- notably the plunge in equity and real estate prices -- is apt to have a durable effect on affluent consumers' tolerance for risk, and this will carry over to their luxury spending. That's actually good news for some "low-risk" product and service categories that have suffered from a downturn in affluent consumers' spending, according to David Thompson, managing director, affluent market at Phoenix Marketing International, a marketing firm whose specialties include the affluent market.

"Sectors like restaurants, entertainment, clothing, jewelry and destinations should recover," says Thompson. "These sectors felt the sting of affluent consumer cutbacks on discretionary spending more than others. But these are more associated with everyday spending and are not the high-risk sectors that will be impacted by the change in affluent consumer risk-acceptance. The higher-risk luxury categories that we feel will be impacted the most are in collectibles and high-end autos, yachts, etc."

— Nielsen Business Media