Why Luxury Brands Hold Their Prices
Luxury houses hold their prices on a theory from 1899, a grocery-panel literature on promotion and a study of hotel guests. The case is coherent, and none of it followed real luxury purchases through different markdown policies.
Answer to the question
Why do luxury brands refuse to discount?
Because a markdown may lower the brand in the eyes of its best customers and teach others to wait. Packaged-goods panels found promotion's long-run effect on sales negative, and a luxury-hotel study found status-seeking guests rated the hotel lower after learning of discount-website promotions, but no study found followed real luxury purchases across markdown policies.
Key takeaways
- In 1899 Thorstein Veblen argued that what many people can afford cannot confer rank, and that a limited edition guarantees scarcity. He wrote nothing about markdowns.
- Kamel Jedidi and colleagues found in 1999, in a packaged-goods category, that the long-run effect of promotion on sales was negative, about two-fifths the size of its short-run gain.
- Wan Yang and colleagues found in 2016 that luxury-hotel guests high in need for status viewed the hotel less favourably after learning of discount-website promotions. Guests low in need for status were not affected.
- A 2020 model by Kenan Arifoğlu and colleagues found that stronger exclusivity-seeking can push a luxury retailer towards rationing first and marking down later, and the searches run for this piece found no study of real luxury purchases across markdown policies.
A markdown tells the customer who paid full price that the price was negotiable, and tells the next one to wait. That is the case luxury brands make for holding their prices, and this piece sets it beside the studies. The table lists what the case rests on. The searches run for this piece found no study that followed real purchases of a luxury brand through years of different markdown policies, so every row is a stand-in: grocery panels, laboratory promotions, a study of hotel guests' attitudes, one bank's card upgrades, a mathematical model and an 1899 theory of taste.
| Study | Setting | What was measured |
|---|---|---|
| Mela and colleagues, 1997 | A packaged good, eight and a quarter years of purchases | Sensitivity to price and promotion |
| Jedidi and colleagues, 1999 | A packaged-goods category, over eight years of panel data | Brand equity and sales, short and long run |
| Raghubir and Corfman, 1999 | A service, three laboratory studies | Brand evaluation before purchase |
| Yang and colleagues, 2016 | Luxury hotels, discount-website promotions | Attitude to the hotel and intention to return |
| Arifoğlu and colleagues, 2020 | A luxury retailer, mathematical model | Pricing and rationing, no data |
| Bursztyn and colleagues, 2018 | An Indonesian bank, real customers | Take-up of card upgrades, including one discounted offer |
Veblen on common goods
What is common is within the (pecuniary) reach of many people.
Thorstein Veblen made the oldest version of the argument in 1899, without a word about markdowns. In Chapter Six of The Theory of the Leisure Class he held that what many people can afford cannot serve as a mark of rank: "What is common is within the (pecuniary) reach of many people. Its consumption is therefore not honorific, since it does not serve the purpose of a favorable invidious comparison with other consumers."
The same chapter gives the scarcity version: "A limited edition is in effect a guarantee--somewhat crude, it is true--that this book is scarce and that it therefore is costly and lends pecuniary distinction to its consumer." He also thought the judgement hardens into taste, and that the pleasure itself is partly this: the gratification of costly, supposedly beautiful things is, he wrote, "in great measure a gratification of our sense of costliness masquerading under the name of beauty." People who began by disapproving of an inexpensive way of living because it showed a lack of success, he wrote, "end by falling into the habit of disapproving cheap things as being intrinsically dishonorable or unworthy because they are cheap."
On the reading luxury brands give it, the price is the fence round the group of buyers, and a markdown moves the fence. The extension to prices is the house's, not Veblen's. Whether demand climbs as price does is a separate claim, taken up in The Veblen Effect Is Mostly Folklore.
Promotion and long-run sales
Over eight and a quarter years of purchases of one frequently bought packaged good, shoppers grew more sensitive to price and promotion, and a 1997 study led by Carl Mela, which separated medium-term from long-term effects, tied the drift to less advertising and more promotion. The sales did not stay.
A 1999 model fitted to more than eight years of panel data from a packaged-goods category found that promotions lowered brand equity, and that their long-run effect on sales was negative, about two-fifths the size of the short-run gain. Advertising did the opposite and raised brand equity. Raising promotion was unprofitable for all the brands modelled, and regular price cuts generally lowered long-term profits too (Kamel Jedidi and colleagues).
Whether a promotion hurts a brand's evaluation, Priya Raghubir and Kim Corfman found in three laboratory studies of a service, depends on whether it matches the brand's earlier promotions, how usual promoting is in the industry and how expert the consumer is; experts, who have other ways to judge quality, relied on promotions less than novices did. A luxury brand that has never marked down departs from its own past on the first markdown, and from its trade's practice if promotions are rare there.
Status-seeking guests and discounts
Guests high in need for status viewed a luxury hotel less favourably, and were less likely to return, once they learned it would run promotions through online discount websites. Guests low in need for status were not affected, so the people with the most status at stake were the ones who minded. The channel is a growing one for luxury hotels, and Wan Yang and colleagues' 2016 study asked how guests react to it. The abstract gives neither the design nor the sample, and the outcomes are attitudes and intentions, not bookings.
Where luxury marks down anyway
Luxury brands do mark down, and one 2020 model says some of them are right to. In it, a retailer of seasonal goods sells to buyers who want exclusivity and who also wait for lower prices. It may sell fewer units than demand at first, a buying frenzy that raises what people will pay, and mark down later, and stronger exclusivity-seeking can push it towards that pattern and away from a single price. Kenan Arifoğlu and colleagues built the model on mathematics alone and report no data. Ignoring buyers who wait for the sale, they add, can be costly.
Rationing without markdowns has its own model, with no price cuts in it. A seller of a high-quality product can credibly signal quality by making it scarce, most often when the cost gap between high and low quality is small, when buyers' valuations of the high-quality product vary widely and when the number of informed consumers is moderate, Axel Stock and Subramanian Balachander showed in 2005, and they offered it as an account of why scarcity is common in discretionary and specialty goods and rare in commodities.
At an Indonesian bank, customers who had declined a benefits-only card upgrade were offered a 25 per cent discount, and take-up rose to an estimated 17.4 per cent. It is the best field evidence on a status good and it points the other way on price, with limits: Leonardo Bursztyn and colleagues did not randomise price, the upgrade was the plain card and not the platinum one, and the version read here is the working paper.
The premium a luxury brand is protecting was measured in the same study: at the same price, 21.0 per cent of the bank customers offered it took the platinum card, against 13.7 per cent for identical benefits on a plain one. It is covered in What the Luxury Label Actually Buys. Stock that is not marked down has to go somewhere.
Burberry's annual report put the cost of finished goods physically destroyed in 2017/18 at £28.6 million, up from £26.9 million the year before, and in September 2018 the company said it would no longer destroy products it could not sell, and would expand its work to reuse, repair, donate or recycle them.
The reporting read for this piece gives no reason for the destruction, and the figure is a cost of goods, not a measure of what markdowns would have cost the brand. None of the six studies in the table makes the comparison a luxury brand would need, destroyed stock against a lowered premium.
Common questions
Why do luxury brands refuse to discount?
Because a markdown may lower the brand in the eyes of its best customers and teach others to wait, and because the oldest theory of status goods, Veblen's, treats what is common as unfit to rank anyone. In packaged goods, Jedidi and colleagues found the long-run effect of promotion on sales was negative. In a study of luxury hotels, guests high in need for status rated the hotel lower after learning of discount-website promotions.
Do luxury brands ever discount?
Yes. Luxury hotels sell through online discount websites, and in a 2020 model by Arifoğlu and colleagues, stronger exclusivity-seeking could push a luxury retailer towards rationing first and marking down later instead of charging one price.
Does discounting hurt a luxury brand?
The evidence is thin. Studies in groceries and services found long-run costs of promotion, and one luxury hotel study found lower attitudes among status-seeking guests. We found no study that followed real luxury purchases across different markdown policies.
Sources
Veblen, T. (1899). The Theory of the Leisure Class. New York: Macmillan. Chapter Six, 'Pecuniary Canons of Taste', cited by chapter (Project Gutenberg ebook 833, unpaginated).
Mela, C. F., Gupta, S., & Lehmann, D. R. (1997). 'The Long-Term Impact of Promotion and Advertising on Consumer Brand Choice.' Journal of Marketing Research, 34(2), 248-261. doi:10.1177/002224379703400205
Jedidi, K., Mela, C. F., & Gupta, S. (1999). 'Managing Advertising and Promotion for Long-Run Profitability.' Marketing Science, 18(1), 1-22. doi:10.1287/mksc.18.1.1
Raghubir, P., & Corfman, K. (1999). 'When Do Price Promotions Affect Pretrial Brand Evaluations?' Journal of Marketing Research, 36(2), 211-222. doi:10.1177/002224379903600206
Stock, A., & Balachander, S. (2005). 'The Making of a “Hot Product”: A Signaling Explanation of Marketers' Scarcity Strategy.' Management Science, 51(8), 1181-1192. doi:10.1287/mnsc.1050.0381
Yang, W., Zhang, L., & Mattila, A. S. (2016). 'Luxe for Less: How Do Consumers React to Luxury Hotel Price Promotions? The Moderating Role of Consumers' Need for Status.' Cornell Hospitality Quarterly, 57(1), 82-92. doi:10.1177/1938965515580133
Bursztyn, L., Ferman, B., Fiorin, S., Kanz, M., & Rao, G. (2018). 'Status Goods: Experimental Evidence from Platinum Credit Cards.' The Quarterly Journal of Economics, 133(3), 1561-1595. doi:10.1093/qje/qjx048. Working paper read; published version not read.
Arifoğlu, K., Deo, S., & Iravani, S. M. R. (2020). 'Markdowns in Seasonal Conspicuous Goods.' Marketing Science, 39(5), 1016-1029. doi:10.1287/mksc.2020.1223. Read at the level of the repository abstract.
Retail Dive (2018, 7 September). 'Burberry to stop destroying unsold merchandise.' Quoting Burberry's 2017/18 annual report: the cost of finished goods physically destroyed in the year was £28.6 million, against £26.9 million the year before.