FINANCE & PRICING

STRATEGY
Pricing Luxury

Mushegh Harutyunyan
m.harutyunyan@imperial.ac.uk
 Luxury

• Most product categories have a luxury segment

• Cars

• Fashion

• Watermelons!

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 Luxury

• What is a luxury product?

• Standard definition: a product for which demand grows as

consumer’s income increases

• Key characteristics
• High quality and service
• Uniqueness and authenticity
• Scarcity (demand vs supply driven)
• Signalling ability

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 Luxury

• What is a luxury product?

• Standard definition: a product for which demand grows as

consumer’s income increases

• Key characteristics
• High quality and service
• Uniqueness and authenticity
• Scarcity (demand vs supply driven)
• Signalling ability
• High price
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 Conspicuous consumption

• Send a signal
• Wealth, status, achievements,…
• Consumers willing to pay a premium to send a signal

• What is needed for conspicuous consumption to work?

• Visibility
• Awareness

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 Discussion – Birkin bags

• Watch the report

• https://www.youtube.com/watch?v=IAW7MjpD4fQ

• What are the factors that drive the prices of Brikin bags up?
• What are the differences from other luxury goods?

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 Pricing scarcity

• Pricing based on WTP (perceived-value pricing)

• Two components of WTP

• Core: quality, design, brand, prestige, etc.
• Value of scarcity

• Scarcer => higher WTP

• Allows the firm to charge a scarcity premium

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 Example - Kiro

• Kiro is a Japanese brand of watches

• The brand boasts long traditions and top-notch craftsmanship

• Kiro targets a small segment of wealthy consumers

interested in exquisite watches

• Kiro is about to launch a new line of watches, Hinode from

Kiro

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 Example - Kiro

• Based on past data and market research, Kiro estimates that

targeted customers will pay ￥2,000,000 (about $18,000)

• However, Kiro’s CEO wants Hinode watches to be more

exquisite and hard-to-get than other Kiro watches

• This will have a positive effect on the brand as a whole

• Will also allow the firm to charge a higher price

• Scarcity premium

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 Example - Kiro

• Scarcity premium
• The extra price consumers are willing to pay for marginally more
scarce product

• Scarcity threshold
• The quantity threshold below which product is perceived as scarce
• Not scarce if Q > scarcity threshold

WTP = ¥2,000,000 + ¥25,000 * (200 – Q)

Per unit Scarcity
scarcity premium threshold

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 Example - Kiro

• What will be WTP if only 1 watch is produced?

• ￥6,975,000

• What is the optimal Q to maximize profit?

• Assume that it costs ￥1,000,000 to produce each watch

• Maximize Q*(Price – 1,000,000)

• Q*(2,000,000 + 25,000*(200 – Q) – 1,000,000)
• Use WolframAlpha
• Optimal Q is 120 units. Gross profits = ￥360,000,000
• Each watch will cost ￥4,000,000

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