Luxury used to mean something that was expensive because it was highly desirable but also scarce. Today ubiquity seems to be the driving force of luxury not scarcity. The definition of luxury has changed with time, and with the emergence of new markets of luxury such as India & China, it is important to understand the drivers of price premium.

1. Luxu-Re
Back to the Roots
The definition of luxury changes with time, and with the
emergence of new markets of luxury such as India &
China, it is important to understand the two drivers of
price premium: the social esteem achieved and the
possessor’s own experience of the product or service.
DEVANGSHU DUTTA
© 2012 Third Eyesight All Rights Reserved
© 2012 All Rights Reserved

2. Luxu-re: Back to the Roots
(This article appeared in a special issue of the Strategist on March 26, 2012.)
L
uxury is dichotomous, conflicted and conflict-creating by its very nature.
“Luxuria” is Latin for “Lust”, the first in the list of the Seven Deadly Sins. The
British poet Edith Sitwell is quoted as saying, “Good taste is the worst vice
ever invented.” Luxuries are not a basic fundamental need to start with, yet to seek
them out is innate in our nature.
For the most part, the term luxury has been and continues to be applied to tangible
goods whether found naturally, hunted or manufactured, rather than to intangible
services. Yet, it is the intangible that differentiates what is
‘It is the intangible that
luxurious from what is not.
differentiates what is
luxurious from what is not’ Certainly, the definition of luxury changes with time. There was a
time, in today’s advanced markets, when hot water baths were a
luxury and available frequently to only a few people. Indian pepper was once more
expensive than gold. In fact, a significant part of European exploration of the world
during the last millennium was driven by the craze for spices from “the Indies”
before morphing into empire-building. Today, most modern Europeans would call
neither a hot bath nor spices as a luxury, and many would gladly delegate to
someone else their share of global travel.
Understanding Luxury
If we want to understand the shifts in the luxury market and how the emerging
markets of luxury such as India and China might evolve in future, we must
understand the two most fundamental drivers of price premium: the social esteem
achieved and the possessor’s own experience of the product or service.
When viewed together in the Experience-Esteem Price Premium Model (see
graphic), we see the relationship of price premium and these two factors zigzagging in an N-shape for immature or rapidly evolving markets (“New”), whereas
in more mature markets the premium would follow more of an S-curve (“Stable”).
The term “market” here refers to not just geography but consumer segments,
including segments defined by need/use rather than by demographics such as
income or age.
© 2012 All Rights Reserved
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3. Luxu-re: Back to the Roots
In rapidly evolving markets there is a significant premium available on products and
services that are conspicuously expensive, whose price (or at least the apparent
price level) is known in the buyer’s social circle. It’s a positive feedback loop: high
social recognition keeps the price up, which in turn improves the social esteem of
the buyer. Expensive cars and gadgets, designer brand apparel and accessories,
holidays that would be the envy of others, Big Fat Indian Weddings (for and by
Indians) all fit into this category. Beyond social recognition, however, the buyer’s
own experience and satisfaction also plays a role in driving the price premium: the
better the buyer’s own experience is for a given amount of social recognition, the
higher the price premium is likely to be. This gives rise to the familiar pyramid for
the luxury market, where the highest price is available for products and services
that deliver both high social status and a superlative personal experience.
In “New” or evolving markets, more of the premium is attributable to social status;
the buyer’s thought process is: “if you’ve spent a million Rupees or Yuan on
something and no one knows about it, it’s not that valuable”. In more evolved or
“Stable” markets, on the other hand, where tastes have had longer to evolve,
© 2012 All Rights Reserved
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4. Luxu-re: Back to the Roots
personal experience becomes important in driving premium for at least some
products: for example, high-fidelity unbranded speakers bought by music
aficionados or a vacation in an unknown destination fit the bill. The satisfaction,
and the premium, is driven more from the personal high-quality experience, not
from receiving recognition or respect from someone else.
Developing taste needs time both at the personal level and for the society. On the
other hand, status difference is a factor in all societies, at any given time. The pull
between conspicuous and inconspicuous consumption at the higher price end plays
out between indulgence and luxury versus opulence. Opulence may or may not
enhance the buyer’s experience, but its main function is to make a statusstatement, including instances such as millions being spent on “public” spaces to
enhance a political leader’s own standing.
The thing with status is this: If others see you as worse off than them it is their
problem; if you think you’re worse off than others, it is yours. By and large, the
luxury industry, as it has evolved over the last 30-40 years, feeds
‘By and large, the luxury
on this status insecurity that is multiplied and amplified by media.
industry, as it has evolved
Luxury used to mean something that was expensive because it was
over the last 30-40 years,
feeds on this status insecurity highly desirable but also scarce. Today ubiquity seems to be the
driving force of luxury not scarcity. As economic growth has
that is multiplied and
created nouveau riche worldwide, brands (especially logo-bearing
amplified by media’
ones) have emerged to deliver instant gratification and legitimacy.
Distinct, recognisably expensive brands are the accepted currency in the world of
cachet. In the final price, the share of marketing spend is often higher than the cost
of the core product. In a consumer society that is more conscious of the status that
the product offers rather than its utility, it is the recognition and identification that
matters most.
This has led to the trickle-down effect with luxury brands becoming increasingly
more accessible, not just in terms of physical availability but also in terms of price
units through bridge, diffusion and prêt lines, and licensing. A particular consumer
may not be able to buy a Chanel dress or Dior gown, but she can surely scrounge
enough to buy a perfume that promises at least a whiff of celebrity status!
The vintage of the product or service is an important component of the status or
recognition premium, especially when the buyer has newly come into money. This
© 2012 All Rights Reserved
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5. Luxu-re: Back to the Roots
is why the market is dominated by European luxury brands that can claim ancestry
of at least a few decades, if not centuries, while there are barely any brands of note
from other geographies. This is not conclusive evidence of European tastes being
better or more acceptable, just the economic cycles through which societies
around the world have been.
India & Luxury
So where does India stand for luxury marketers? The Indian operations of most
brands that have been launched in the last few years are bleeding, and seem
unsustainable. And yet, it is tempting to compare the emerging golden bird of India
to the golden dragon of China.
‘The Indian operations of most
In our work with brands and marketers from brands that have been launched
around the world, we have to constantly remind in the last few years are bleeding,
people that not all emerging markets are the and seem unsustainable’
same. The explosion of luxury and premium
brands in China during the last decade or so has been aided by sudden economic
growth that came after a long cultural and economic vacuum. When the new
money wanted links with the old and when uniform grey-blue suits needed to give
way to something more expressive, well-established western premium and luxury
brands provided the most convenient bridge. As China evolves further and
consumer become more discerning, I believe we will see the emergence of Chinese
and smaller new international brands that differentiate themselves on the core
product, rather than relying on a long foreign history.
India’s case is slightly different. Discernment may be a new experience to some
Indians who have come into money recently, for whom brands can be a valuable
guide and “secure” purchase. Globally well-known premium and luxury brands or
products that are endorsed by “people in the know” (including works of art) are the
first to benefit from this spending.
However, discernment and taste are not new to India and, more importantly,
differentiation and self-expression never disappeared even during the darkest
years of “socialistic” economics. Therefore, India will see a layered approach to the
luxury market and grow in a more fragmented manner, with slower expansion of
individual brands. There would be multiple tiers of growth for international as well
as Indian luxury products. For international brands customisation and Indianisation
© 2012 All Rights Reserved
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6. Luxu-re: Back to the Roots
will be important, as is already visible in bespoke products by Louis Vuitton and
Indian products by brands such as Canali (jackets) and Lladro. And there is a real
prospect of luxury Indian brands emerging to respectable size, if they can stay the
course and travel the distance.
As the market matures spending by Indian consumers on indulgences will also
grow, driven by the need to satisfy themselves rather than for the status they could
gain. In fact, another market to watch out for is India itself is a source of
indulgences for foreigners – luxurious Indian experiences in which price is not the
object but the experience – Big Fat Indian Weddings, ayurvedic treatments and
meditation holidays for non-Indians are a case in point.
While on indulgences, in closing, I refer back to the ExEs Price Premium Model. For
a limited number of people the price premium curve follows a clockwise-D, starting
from Indulgences. For them invisible or inconspicuous products whose only
function is to enhance the owner’s or buyer’s own
‘In a world of hyperexperience are the most prized. In many cases, the fewer
information, self-promotion
people that know about it, the better and more premium it
and instant celebrity,
would be.
invisibility may be the
In fact, perhaps invisibility itself could be the greatest greatest indulgence of all.’
indulgence of all in a world of hyper-information, selfpromotion and instant celebrity. Increasingly we will find that anonymity and
invisibility will be treated as luxuries, and service providers will charge a huge
premium for taking you down below the radar, making you invisible.
Actually, we don’t really need to wait to see that emerge. That world of luxurious
anonymity is already here, and its most valuable service providers are banks in
offshore tax havens!
About Third Eyesight:
Founded in 2003, Third Eyesight is a specialist
management consulting firm that works with
market leaders with annual sales of ranging to
over US$80 billion. These include retailers, brands,
manufacturers, service and technology
companies, investors, trade and government
organisations. Third Eyesight helps with research
and assessing market opportunities, developing
business strategy, business launch, sourcing and
supply chain, product strategy and other areas.
© 2012 All Rights Reserved
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