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Understanding luxury goods

A luxury good gets its value from its lack of utility and value. A typical consumer would look at what it costs and what it does and say, "that's ridiculous."

When a good like this (and it might be a service as well) comes to market, it sometimes transcends the value equation and enters a new realm, one of scarcity and social proof. The value, ironically, comes from its lack of value.

The owner of a $12,000 Birkin bag might tell you that it's worth every penny. Obviously, one can carry a wallet and a few other essentials in bag that costs less than 1% of what this bag costs, and we can even imagine making something just like a Birkin for a fraction of the price. But that would be a copy, not the real thing, and so the story, the narrative, the specialness and most of all, the social element would go out the window. A Birkin bag is at its most valuable when your friends admire you for owning it, not when they admire its ability to carry your stuff.

The ring in the blue Tiffany box or the speaker cables that cost more than a car--these are purchased as (perhaps perverse) testaments to the (take your pick) power/taste/wealth of the person buying or owning it.

Discount luxury goods, then, are an oxymoron. The factory outlet or the job lot seller or the yoga studio that's selling the "same thing but cheaper," isn't selling the same thing at all. They don't offer scarcity, social proof or the self-narrative of a splurge. What they sell is, "you're smarter than other people, but you know, you're also a little bit of a fraud because this isn't actually a luxury good, because it's a better value." Circular, but true.

It takes guts to invent a brand new luxury good from scratch. Shinola watches don't tell time any better than a $16 Timex, but they do tell a better story. Their creation is part of that story, but so is the identity of the stores that sell them and the fact that they sell out regularly.

Jean-Baptiste Colbert, who invented the industry (yes, one person invented luxury goods as a category) understood something that flies in the face of the non-scarcity of the internet: social proof among the wealthy is based on beauty plus scarcity plus expense. The fact that others believe a good is overpriced is precisely why a certain segment of the market chooses to purchase it.

This even works in b2b situations. McKinsey certainly offers a luxury good (only the biggest, wealthiest corporations can afford them) as do furniture makers like Herman Miller.

We're also seeing luxury goods being purchased by people not ordinarily thought of as wealthy. A teenager with a rare pair of new sneakers qualifies as luxury in her tribe.

It's interesting to note that first class travel isn't the luxury good it once was. The airlines stumbled, started playing with both service and scarcity, and unravelled the myth. Hence the need for a private jet as a luxury good, even when there's a perfectly fine commercial jet going to that very destination.

One place where the luxury goods idea has been underutilized is philanthropy. The rich guy who gives $20 million to a university isn't doing it because the school is likely to spend his money in the most efficient way. He's doing it because they will name a building after him. The building is a scarce good, overpriced for what it appears to deliver, which is precisely why it's a form of luxury.

One opportunity for non-profits is to use their true needs as only part of the conversation about giving. The dreaded gala, for example, is best seen as a luxury good. All the time and coordination and busywork are actually providing utility... not to the charity, but to those attending.

Sorry to drone on... wrapping up then, when luxury intersects with the web, conflicts ensue. First, because the net makes pricing transparent, which inevitably makes some people feel stupid for paying full price (and stupidity doesn't work with the other pillars of luxury). And second, because the new sorts of social proof have to do with how connected and respected you are, not how much you paid for that handbag.

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