Chioma’s wedding ring is worth two Rolls-Royce cars. $1.5 million for an ‘ordinary small metal.’ Jeez! This was the reaction of many Nigerians to this news. How else do you explain why a pair of shoes (comparable to those produced in Aba) would cost $350,000 in a designer’s store in America?
My friend, Salvador, loves using expensive phones. The most expensive phone he has used cost about $800,000. I thought he was obsessed with phones until I met someone who uses a phone that costs ₦2.2 million. Surprisingly, none of these folks are celebrity entertainers who need this stuff for showbiz. Why should anyone spend so much on a smartphone? How are these phones different from my phone that I bought for ₦63,000 in 2021 and used for 3 years?
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I may not own any luxury products yet, but I have used Nigeria’s only five-star hotel several times. From the ambience and state-of-the-art facility to the menu list and customer service, they gave me a great experience. If it was possible, they would take my anus to the toilet and poop for me. As many celebrities kept moving in and out of the restaurant, I felt like a celebrity too.
The words ‘luxury’ and ‘exclusive’ are two of the most abused words in the African marketplace. Some house owners who use white paint on their buildings now tag it ‘luxury apartment.’
Luxury products are about brand equity, not production costs
Did you see that trending bag made by one of the popular designer brands? It cost only $57 to produce that bag, but it was sold for $2,780. Looking at the wide margin, it looks like a fraud-pricing model. When it comes to selling a luxury product, you must understand that the cost of production is meaningless. People are paying more for the brand name than the product quality. This is why luxury brands have big markups. It’s all about brand equity.
A luxury product is about perceived value, not actual value
Perceived value is subjective, not objective. Perceived value, like beauty, is in the eye of the beholder and the heart of the purchaser. For luxury products, perceived value equals exclusivity. So, the price of a luxury product is whatever the buyer is willing to pay. As long as the buyer derives value from it, the noise doesn’t matter. The buyer’s satisfaction is based on the perception other people seeing them with these luxury products will have of them. Have you wondered why most real estate developers pay upcoming architects and structural engineers less than $400 to draw a building plan and a structural analysis while an Instagram influencer is paid $1,000 to post the same building on his Instagram page? People pay you depending on how much you value yourself and your product. How you dress your product is how it will be priced.
Luxury products are about the symbol that the product confers on the buyer
The fact that everyone cannot afford it is what gives a luxury product its perceived value. If everyone has it, then it ceases to be a luxury. The perceived value of a luxury product makes no sense to the average person, which is why it is fascinating to some individuals who seek to make a statement. You are paying to tell others that you can afford to spend an obnoxious amount on a product. You are paying to show everyone how rich you are. Classism is a hallmark of the elite, even for silent billionaires. The I-better-pass-my-neighbour gene is dominant in African blood.
Luxury is not the same as premium
Oftentimes, business owners confuse a premium product with a luxury product. The premium product uses a tiered pricing strategy where products have different prices by either reducing or increasing their features or functionalities. The main idea behind this strategy is that the prices and features should be tailored according to the various needs of potential customers who know what they want and how they will benefit from all the advanced features your product offers. It is centred around choice and flexibility. It gives potential customers the option of choosing between different versions of the same product.
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Luxury products require luxury marketing
If the cost of producing a plastic bag is $57 and the selling price is $2,780, does that mean that the company made a profit of $2,723? No. Marketing a luxury brand requires luxury marketing. To sell a luxury product, you need to invest heavily in your brand. A huge part of the production cost covers the amount paid to influencers and celebrities to promote and position the brand as a luxury.
You must look like what you are marketing
To market a luxury product, you must have a wealthy aura and be situated in a high-brow location. You must look like what you are marketing. You cannot be marketing a luxury product if your head office is at Oshodi or your shop is at Nyanya Market. You cannot be marketing a luxury product, and you are sending broadcast messages to potential customers on WhatsApp. You cannot be selling a luxury product and have a field salesperson distribute fliers to passersby on the road. In fact, most luxury products are not priced in local currency.
Luxury products are less about the product
People buy luxury products because of their status and prestige, not necessarily because of their aesthetics, functionality, technology, or durability. You are buying the heritage, messaging, packaging, experience, and exclusivity. The materials used to make a luxury product are not necessarily special. It is all about having the prestigious logo prominently displayed. People buy luxury products because it gives them a psychological feeling that they belong to the 1 percent. It is a great way to trickle down the money.
Luxury products are items that customers want but don’t need
Most of these big guys who buy luxury products have high purchasing power. These rich kids believe that the more expensive a product is, the more valuable it is, and luxury brands take advantage of that. No matter how cheap they produce, they have to sell high to attract their numbers. Owning a luxury product is a great way to take some of their money from their bank accounts back to society to show their class. So, don’t ever include any element that suggests ‘cost-friendly’ in your marketing message.
Luxury goods are Veblen goods
Most luxury wineries don’t produce more than 100 bottles of a variety in a lifetime. This strategy follows the economic principle that states that scarcity creates value. Although the law of demand states that the higher the demand, the lower the price, luxury goods are velvet goods. Their demand rises as the price increases. That is, they have an inelastic demand that is not sensitive to price changes. This defies the general assumption of rationality in consumer theory (even though luxury consumers are less worried about the selling price, there is still an acceptable price range for a luxury product).
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A luxury product requires strategic marketing
If Michael needs to sell 5 bottles of a luxury perfume to make $4 million in revenue and Charles needs to sell 400 bottles of a ‘regular’ perfume to generate the same amount, who is supposed to be more aggressive with marketing? While Charles needs to adopt a guerrilla approach, Bola needs to be more strategic and creative. Only high-net-worth individuals can afford to buy Michael’s perfume. However, Michael needs to create a luxury perception for his perfume.
It is important to note that price control mechanisms may not work for luxury products. Their cost of production and the selling price are not the business of the government unless there are illegal activities involved.
Kingsley Ndimele is a Financial Economist and Business Consultant.
