Module 6 – Framework of Luxury

This module is going to give us a very, very deep look into the framework of luxury. So we are going to build on everything that we’ve seen in the last modules and now bring this all together and conceptualize it in one unified system of what luxury really is. So let’s get started. One very important point that I want to reiterate and this is when you look into the the change of the clients in the luxury industry, especially the shift from millennials increasingly to gen z and also the rapid shift of technologies and the massive change that we see all around us. There’s one thing that is very important to remember and this is that the customers that we are selling to are exposed to all this change. And this means that the customers today feel more vulnerable than ever before. And this also means for brands that they need to take this into consideration when they build brand stories, but also when they build products and services. Because on one hand, It’s a huge opportunity, but at the other hand is also a risk by not putting the customer in the client at the center. And I think by the end of the module, when we see full framework, we will understand why customer centricity is so important when it comes to luxury. Another big change that we have is that the realities between physical realities and digital realities are not any more binary. It’s not digital versus physical. It’s one. And it’s the customer that decides case by case how he or she wants to access the brand. Sometimes it may be by text message, sometimes it may be in an event, sometimes it may be in a cozy dinner with on a very special location that the brand is hosting and sometimes it may be in the store and sometimes on the website and sometimes on social media. But if you think about the holistic client experience, it’s a full fusion between physical and digital experiences. Also as part of the change, many today still see luxury as artistry. And craftsmanship. And while we discussed artistry and craftsmanship are still important, it’s not enough to win in the new game of luxury. Also many still see luxury as architecture and stunning design, but also as we’ve seen when we discussed about hospitality of the other categories. While design is important, I always like to say it’s priced in. Anyone who does a purchase in luxury expects a stunning design, expects stunning architecture, So it becomes the minimum expected product. Not anymore, the differentiator, Ed has been many years ago. And also many still see as we discussed in one of the previous modules, heritage, and exclusivity. As the defining factor in luxury, but it’s not enough in the new game. As we saw that gen z value experiences sometimes over heritage. So what is luxury? How can we how can we put this into a framework and how can we really conceptualize this? So let’s have a look into how customers are buying luxury first. So today, in the majority of cases, The creation of desirability happens through digital channels. You are somewhere on Instagram or on TikTok on any other digital channel. And while you’re on these channels, you’re exposed to messages and these messages now drive your desirability. This is how today according to our research In about ninety five percent of cases, a purchase in the luxury space is initiated. I say this again in about ninety five percent of cases. A purchase today is initiated in the digital realm. Independent whether the purchase happens in a physical store or whether the purchase happens online. So we have now a reality in which the client is exposed to a message and then reacts and decides where to buy So client centricity becomes extremely important. And this now has an enormous effect on practically all product categories. And, you know, we already discussed in the in the module where we spoke about innovating and influencing how categories can change dramatically depending on how the view of customers are. So what is luxury? If we ask Google and you know, type the the term luxury into Google. We get a result very similar to what you see on this picture. And it may be different depending on your location, on your browser history, and also on the time when you ask, this, but this was a snapshot that we got when we put luxury in Google. And what you can see is mega mentions yachts, fast cars, exciting and exceptional moments. But, luxury means different things to different people. So we cannot assume that for every person this is what for them actually looks like. So when we did discussions and, you know, focus groups with ultra high net worth individuals to understand what for them is luxury. We get terms like fun, feels young, the need to qualify and adventure makes me feel special. And then even I can’t describe why but I just loved it. So you can see if we ask people, we get no very different definitions than when you look at those pictures. So the customer centric view is extremely important. And if we go further, you know, other findings that we had all of these interviews. People saying it’s beyond the ordinary. Unique exclusive has to have an added value. Memorable. So the memory comes back experiences. Only certain people can afford, set someone apart in great comfort. So when we look at these terms, we can already see that actually seems to be a little bit more complex than it looks at the first glance. Many more dimensions. And in one of our first modules, I proposed that we should think about luck therefore in a bit of a different way and think of luxury as extreme value creation. Which to me is still the best definition and the best guidance for what luxury is. And as we saw, extreme value creation means we have to solve a problem and provide meaning in an authentic way and in a relevant way. So authenticity relevance and meaning plus the ability to solve a problem really becomes part of the luxury equation. And then when we look at brands, that are extremely successful. We see patterns. And I think now we will see in the next couple of slides how this all comes together. The ability to change innovate and influence a huge driver value. Remember when we spoke about romantic relationships and how we can use them to describe luxury. The term I fell in love with this brand is a huge driver of value. At the same time, also the feeling of taking care of ourselves. Connecting with friends and loved ones. Time. These aspects become very important drivers of luxury. And then, you know, some people say fundamentally, it’s an experience that I never forget. An experience that I’ll never forget. And what is this? This is exactly what we discussed when we spoke about brand experiences, that our aim has to be to create memories. Because a memory in the end is the result of an experience that people never forget. And that luxury is also about connecting past with future. And here it becomes very critical. It’s not about heritage. Heritage alone is irrelevant. Heritage only is relevant If heritage can be translated into the now, but even better into the tomorrow. If I know this brand existed for two hundred years and therefore most likely what I will buy today still will be relevant in one year two years five years ten years and twenty years from now because of the track record that this brand has in terms of heritage. So we always have to think that we want to give our clients a reassurance that they are part of history. That they belong to something. So it’s a sense of space, a sense of time, and a sense of belonging that the best luxury brands great. So if we want to try to come up with a definition, a kind of universal definition, of what is luxury. Then what I would always propose is never use the price. Because a prices can vary, b prices mean very different things to different people. If someone has, let’s say, a net worth of ten billion US dollars, their perception of what is cheap and expensive will be very different to someone who has ten million dollars of net worth or hundred thousand dollars of net worth or ten thousand dollars of net worth. It will change dramatically. And so the price should not be the defining factor. So years of research led to the following definition that I published the very first time as part of my doctoral thesis. And still to me, one of the most precise definitions of what luxury is. It comprised of seven dimensions. Luxury typically is a combination of the following items. It has to be rare and hedonic. And rare and hedonic means there’s not so many of them. And then there is a very, very, very strong emotional reaction. So if you have many or there is a very little emotional reaction, then most likely whatever it is, a product serve as a brand is not going to be seen as luxury, rare and hedonic. And then there are two dimensions of difficulty. Which I find very, very fascinating. The very first one is probably one that you would expect and this is the difficulty to acquire. Now price can lead to such a difficulty of acquisition for some people. But it’s not the only factor. Difficult to acquire can just be also availability. It can be that as some brands, are having the practice, maybe certain items you can only buy if you are already a trusted customer of the brand. This is difficulty of acquisition. But then there’s a second dimension of difficulty that I find even more fascinating and this is the difficulty of use. Think about that. Typically, when we think about innovation and everyday products, what we try to do is make products as simple and easy to use as possible. You will find many definitions that say the core and most purest definition of innovation is to make the life of a customer easier. But now in the definition of luxury, you find difficulty of use. Or I should say difficulty of proper use. So how does this get together? I give you a few examples. Imagine you own a very rare, very beautiful handbag, and this is done of a very intricate white leather. You will probably not be really willing to store this bag in the overhead bin of a plane exposing it to other passengers kind of shoveling in their their carry ons next to it and potentially destroying it or scratching it. If you have a super sports car, I can almost guarantee you that there will be not a lot of trunk space And there will also be quite a bit of a difficulty in parking that car, especially if you are in very narrow streets and parking spaces in Tokyo, or in any European metropolis. So these are just two examples that show that if you want to use something And now you have a very valuable product that somehow has some kind of extreme properties. It’s not so easy. And we can even make the case for a fine wine. Yes, of course, anyone can open a bottle of Petrice and drink it. But are you really going to appreciate the flavor of it and the intricate craftsmanship of producing it. Most likely not. So this means to fully appreciate a petrus, you have to know a little bit about wines. The same goes for fine cigars or many other things. So the difficulty of consumption now becomes very interesting because if this is part of the definition of luxury, difficulty and acquisition and difficulty of assumption, we have just unlocked maybe a bit of a hidden dimension of how to manage luxury. Different than other brands. And then luxury products and brands and services provide a unique experience or they should provide a unique experience. Think about the memories that we said before. But now there’s a catch if you have a unique experience, how often can you experience it? Exactly. Only once. So in luxury, we have to build the capabilities to be able to provide a unique experience again and again and again. And this is what we discussed in one of the previous modules where I told you that luxury is about the perpetual delivery or management of surprise. There always has to be a little bit of a surprise baked in. And then Luxury also has two additional dimensions that are kind of interconnected a little bit A, it’s a enhancement of the social position, but it’s also a social marker and differentiated. So several elements, rare hedonic, difficult to acquire and difficult to use, providing a unique experience enhancing the social position and being a social marker and differentiated. In other words, we can say if we want to compress this into two things and all of this we put a check mark to it. It’s actually can be me, yes, others, no. So we want to differentiate from others through a purchase of luxury. And if we now put an additional framework on top of this and group these seven elements into dimensions, we can say rare anhedonic means, luxury is actually pretty difficult to create. The difficulty of acquisition and use means it’s difficult to consume. Providing an unique experience means luxury is fundamentally difficult to repeat. And enhancing the social position of being a social market and differentiator means it’s difficult to maintain. Because someone else can come in the way and dethrone your brand from being the social marker and differentiator. So we have to work on these four groups. So now I ask you, in your organizations, how many people do you have that take care of those four dimensions of difficulty? How many people manage the difficulty of creation? Do you have a department that manages the difficulty of consumption? Is someone in your organization responsible for the difficulty of repetition to create unique experiences again and again. And last, not least, do you have a strategy how to maintain the difficulty of creating and maintaining a social marker and differentiated. So this means, and this now gets fascinating because these seven dimensions you know, by by by, by the on their own by themselves may look like nice to know. But now we can see that they have dramatic impact on how we manage brands. We have to have all those seven dimensions, all those four groups under control, and we cannot leave them to random. All of them are equally important. In our second module, we already looked into the this model that shows functional value and emotional value and then added luxury value. Remember, I showed you the prop where I showed you the Chanel bottle on one side without the logo, and then I turned around on the other side with the logo with and without the story. So the added luxury value is a huge part of the value that a luxury brand can create. So now let’s look a little bit deeper into this and try to get a sense of it. And maybe you remember that when I was turning the bottle, we switched on and off that signal just by a turn of the bottle. And this means that added luxury value is very tricky. A is intangible and unstable. If you don’t understand it, it’s not there. The moment you see the signal and understand the signal it’s very clear and tangible. But as I mentioned, it’s unstable and intangible. This means we have to put utmost attention on nurturing it all the time because if we don’t do everything can fall apart. This is why sometimes you have luxury brands that perform wonderfully five years, ten years, twenty years, fifty years, and then they collapse because sometimes people forget what actually makes them so valuable and they forget how instable added luxury value is. And this even becomes compounded because added luxury value is the most important driver of value. It can exceed all the other value components sometimes by ten x hundred x thousand x or ten thousand x. I repeat. Added luxury value can exceed all the other components, ten x hundred x thousand x or more. This is how important this is. If you don’t manage this ride, everything collapses in no time. Maybe you are able to sell something for ten thousand dollars and because you’re not paying attention, A months later, you don’t sell any item anymore because people don’t understand the value. This is how unstable it is and this is how much the story that we talked about drives the value. What we also see is even the best luxury brands in the world very often don’t put enough attention on added luxury value. And if you don’t happen to work at the three or four or five best of the best that get it right. Chances are that you’re not really unlocking the true potential of your brand. Not managing at a luxury value properly means brands are put at risk and the profitability will be reduced sometimes in an extremely significant way. So if your task which I assume is to increase revenue and profitability of your brand, you have to pay attention to creating added luxury value. It’s the single biggest opportunity for your brand. And as we’ve said, it’s very much connected to the story. I want to take you now to a quick experiment to underline how much value can be created if things are done right. And we use the car category to illustrate. What you see here is four cars. In this case, it’s the passenger car lineup of Mercedes. You see the CLA, you see a c class, you see an e class and an s class. And we can argue that they follow a relatively linear pricing policy policy. This means that each of these model models is a little bit bigger And with each of the modules, the price goes up in a relatively linear fashion. We can say in a near linear fashion. So for illustration, we can say maybe one car is about forty thousand dollars. The other car may be around sixty thousand dollars one is maybe eighty thousand dollars and the other one is around one hundred thousand dollars. These may vary a little bit, but you get the point. We have a relatively linear distribution of prices, and a lot of brands follow a linear distribution. And then there’s a huge logic to it. And when I do this exercise and I ask people typically, you know, describe the difference between the count, the left, and the count, the right. And maybe you take a moment to look at this and see for yourself. But the answers I get are typically Of course, bigger size. So more metal is used. And then they are more comfortable. There are more options. The wheels may be bigger. The engine is probably bigger and so on and so forth. So there is a very clear logic why the car on the bottom left is less expensive than the car, the top right. So you get more, and because you get more, you pay more. So that is fundamentally the logic. But what you can see is that the logic of the pricing is relatively connected to the features of the car. So in the normal to premium world, we are typically in a world where everything makes sense, where we can apply a very clear logic and this is a feature focused logic. So what if we leave that realm? So now let’s go into the luxury field. And when we go into the luxury field, As you can see on the next slide, suddenly there’s a huge jump in value. So you have now suddenly cars that are one hundred and fifty thousand dollars, two hundred thousand dollars, three hundred thousand dollars, five hundred thousand dollars one million dollar, five million dollars, ten million dollars. So we are not jumping any more like in twenty thousand dollar increments. Now we are jump starting to jump in hundred thousand and million dollar increments. The distance just becomes dramatically higher. So you can see if we plot this on a kind of graph, we see an exponential curve. That starts somewhere between the sweet spot of where premium ends and luxury starts. So when we want to analyze categories, this can be a huge helper because it doesn’t matter whether we look at cars or hospitality or jewelry watches any other product category. Typically, we find a lot of brands somewhere in this near linear field And this is always a good indication that we are probably around the premium and and normal brands. And then we find these incredible jumps. So, but now let’s look at the at the cars on the right. Something very interesting happens. They get smaller. They have less seats. Some of them doesn’t even have a roof, don’t even have a roof. And some people may argue they may get also maybe a little bit less comfortable because of course they’re optimized for sportiness. The conversation in some of these cars may not be easy anymore because the engine gets very loud. And so on and so forth, think of difficulty of consumption. Suddenly starts to increase. And it’s now very fascinating because we were in a world where everything makes sense. Things get bigger and with more features and they get more expensive. Now we start reducing certain features we make things less comfortable and smaller. For sure we make them maybe more exciting but we reduce the the visible features and the tangible features and now intangibles take over. And what’s happened what happens with the value as a with the reflection of value in its price, the price explodes. There’s a huge jump So you always want to look in your categories for these moments of a nonlinear jump in the category. This is typically where luxury starts. And sometimes I like to say it’s like if we are two different planets, We have one planet where everything follows logic, and then we have a second planet where everything follows emotion, desirability, and fundamentally the enhancement of our own narrative, of our own story as we saw when we looked at the at the study. So this is very important for the framework that we are going to look at right now. And the framework of luxury works as follows. Some tangible and intangible factors have to come together. And then within a given category, our brain starts to understand, oh, this is luxury. It’s a bit like a light switch. When we think about the example of the Chanel bottle, it’s the difference between seeing it from one side and not knowing what it is then there are not really a lot of signals. And because there are not a lot of signals, this looks like a very normal product and then we turn it around, the signal appears, and suddenly everything changes. And believe me, I’ve done this experiment with this particular bottle in front of thousands of people. And every time I turn it around, the ice dilute, ice go up, and everyone says, wow, of course, it’s Renal. Of course, it’s something completely different. So there has to be a signal. And these are sometimes very tangible factors, like in this case, the logo, but often very intangible sometimes can be materials, can be just things we are not used to, can be what we said in one of the last modules, something we’ve never seen for, something that makes us feel wow. They come together in this what we call preconditions, antecedents. When they come together, we see something as luxurious. So it’s like a signal. We can switch it on or off. And once the signal is on and we see something as luxury, then we see the effects. And these effects are what we called before added luxury value. This is the anticipation of a perception shift. So we have antecedents. These send a signal. The signal is processed in our brain. We now say to something, this is luxury. And now this something, sends a so called social status effect or added luxury value and this added luxury value is the anticipation of the change in perception. So now This can be the signal can be moderated. And a moderation of a signal means it can be strengthened or it can be weakened. The sender can be a huge source of signal moderation, but also the purchase and consumption situation. If a person doesn’t seem to fit to the luxury brand, Then there is some kind of confusion. So the moderator is able to to kind of intercept with the signal and make the signal weaker. Then also the purchase and consumption situation can change it completely. You know, maybe and we discussed a couple of examples already in the previous modules. Maybe we are not very happy with what we experienced at the point of sale. Or even worse, we are upset how we were treated. And then the product and the brand per se don’t change, but our perception of the brand change because the signal is moderated. And we have to be aware when we manage luxury that this is this very fragile, set up that we have to manage. Who buys us is as important as where we are seen and in which context we are seen. So the context matters. So the framework of luxury really helps us to understand that fundamentally we have to manage the signal. And by managing the signal, we manage the outcome, and the clearer and more consistent, more clear and stronger the signal is, the more added luxury value we are creative. So now let’s look at the different aspects of added luxury value in a summary because they’re so critical. And what is fascinating is the first five are most likely what you would have any way expected. When you think about luxury? Luxury is for sure about social dominance. It is an ultimate treat. There is added self esteem, and it’s a signal of financial liquidity and economic power, and for sure it’s about an enhanced self perception. All of these five elements are if we would really reflect about luxury somehow the logical elements of luxury that we will probably all agree on. But then what we saw in the study that there are what I sometimes call the hidden factors of luxury. One is being a head turner and enhanced attractiveness. Remember when we did the deep dive into the study, being a head turner and enhanced attractiveness. The other is adding the aura of being a connoisseurant expert. Another one is a mindset change towards new experiences And then Luxury is also the ultimate protector and last, not least, a signal of higher decision quality. And these last five are not that obvious on a first glance. Enhanced attractiveness was something that we clearly saw in the study. People simply rated someone in a luxury setting much more attractive than someone in a not luxury setting. And as I said, the study was done in five countries, US France, Germany, China, and Japan. The aura of being connoisseurant expert means that we believe that someone who is connected with something of extreme value automatically sense some kind of expert signal. So we we rate this person much more of having much more expertise than someone else. The mindset changed towards new experiences. We looked in-depth when we spoke about, you know, the ability to influence and innovate and why this is so critical for clients. We also spoke about the ultimate protector where luxury gives us sometimes just more opportunities. Maybe we can be a little bit more spontaneous. And then last but not least higher decision quality, When we don’t really know about a category, are we opt for a luxury solution within the category? Most likely, we will feel ourselves that we did a much better decision. If you are the expert in a category, if you know everything about all items in a category. All brands are every single thing. Maybe the luxury category will not necessarily help you in your decision quality. But if you don’t know, probably you will feel that you take a higher decision quality in luxury releases. This is what our study what our study suggested. So how can we unlock now the potential of a brand, bring this all together. And I want to give you two examples of the Bugati brand. You see on the left side, a picture of the bugatti chiron, and you see on the right side, a picture of the limited edition Bugati Divoo. Both are extraordinary cars, probably some of the best cars ever produced in the world. The one on the left has a very straightforward story and this is being fast on a straight line. It has been always one of the most powerful, if not the most powerful car in the world, sixteen cylinders more than one thousand horsepower, and the brand has always been priding itself of creating an exceptionally fast car. One of the fast motor cars money can buy. So the story of this particular car was fast. And then they understood that there could be a problem still for their customers because although they bought the fastest car money can buy, there could be a use case where other cars could be faster. And this is on a racetrack when you have to go through many curves. And this was the rationale to launch devo. Divo was particularly optimized with a very, very particular engineering of aerodynamics to be the fastest car in a curvy situation. So we have fast on a straight lane and then they solve the problem for the drivers that wanted not only fast on a straight lane, but also fast in a curve. Two stories that are very, very simple to understand. Everyone understand it’s the fastest. And everyone understand, okay, I maybe need to optimize one to be very fast where it’s more or less straight. And then I optimize a second car to be very fast when I have a very curvy environment. So think about what I said before difficulty of acquisition, the brand did not allow anyone to buy the devo if you were not already customer of the sharon. So being customer of sharon was a precondition to buy diesel. And sharon was sold for two million dollars and vivo, which is based on the core technology of Jean, just as a different aerodynamic kit was sold at five million dollars So we can see how the attractiveness of creating a hurdle of acquisition plus a limited edition plus a wonderful story that is very simple to understand increases the value quite dramatically. And the combination of both cars have a value of at least seven million dollars for the lucky few that were able to buy them. So what we can learn from that is we need a story We need an easy to understand story and the story has to be distinctive. And to make the story distinctive, ideally, we find a unique extreme performance point because we are all about creating extreme value. So we have to have an extreme performance point. Whatever that point is, that can be technical or emotional. But we have to own something like fast on a straight lane or fast on a curve that no one else can match. And then fundamentally, the price that we are willing to pay is nothing else than a reflection of value. The best brand stories always combine a rational outline with an emotional call. In one of the previous modules, I introduced to you the logic of Nike’s brand story. Everybody is an athlete is the rational positioning of the brand. It gives a context but by its own, it’s not yet that engaging. But we, if we combine now, everybody’s an athlete which was the emotional core of just do it. Now it becomes a story. Now we speak to both Hemisphere of the brand. We position it very clear very clearly into the more rational hemisphere, and then we give a call to action and provide the emotional core in the just do it. And brand stories that combine both are the most powerful ones. And what you want to do in this case always is to tell like in the case of Nike, the story of the brand through the eyes of the client. Everybody is an athlete just do it doesn’t tell you exactly what Nike key is doing It doesn’t tell you exactly how many shoes they have and what is the facts and figures for each and every shoe because it’s irrelevant when you tell the story of the brand. What Nike rather tells you is why they are there? What are the core values? They give you something to connect with and with the something to connect with, they create extreme value. So extreme value creation is to summarize what we just did in this module. Is starting with an understanding that is all about the customer. It’s all about centricity of the client. It’s also understanding that there is not just this one word definition for luxury, but luxury has different dimensions. We looked into dimensions from innovating, inspiring, creating, memories, creating things that we have never seen before or done before, and also taking care of ourselves just to name a few. We spoke about luxury in the context almost of a romantic relationship where we say we fell in love with this brand. And then we looked at the framework that basically starts with having a couple of factors coming together that signal to our brand this particular item, particular item is luxuries. And when we see the signal, then the added luxury value kicks in. And we saw that actual added luxury value is unstable and intangible. So we have to nurture it. We have to make sure that it never gets lost. This is again why the role of the brand story in a customer centric way cannot be underestimated ever. It’s the most critical in the entire delivery of the brand’s promise is the story of the brand. And the question is, How is your brand performing on that dimension? Thank you very much for your attention.