Luxury - the point of no return

An interesting point Kapferer and Bastien bring about in their seminal work on luxury (The Luxury Strategy) is the non-return effect or Ratchet effect. Simply stated this means that once someone has tasted luxury in whatever area, it is very difficult for them to go turn away from it even when their financial circumstances have gone down hill and spending on luxury items are no longer feasible. Luxury has also been defined as something that extraordinary people find ordinary. There can be any number of examples to illustrate this – the tycoon now in tough times who would prefer to keep his expensive to maintain mansion and sell off his less expensive apartments in the city, the stockbroker with a series of bad investments who would prefer to keep his Ferrari in his garage but cycle to work under the pretext that cycling is good for the health and the environment, the heiress with a dwindling fortune who would prefer to cut down on social engagements than having to travel to them in a commercial airline, wearing last year’s fashion and  staying in a non-luxury hotel…and the list goes on. It’s easy to dismiss this phenomenon as the ego of the privileged  but one must remember it goes beyond the ego or status and luxury defines a sense of security, comfort and well-being which is psychologically a necessity for the user (a case of the extraordinary becoming the ordinary for the customer). I was intrigues by this phenomenon and decided to look at how this would impact the supply chain? One obvious impact would be on the sales or revenue side where demand in luxury goods is seen to be stable even in recessionary times. However another impact would be on the after sales services for luxury goods. Often neglected, this could be a good revenue booster as well as help in customer retention by providing the customer with alternatives to buying newer versions or increasing after sales service levels till the tough times pass.



Sotheby's  auction of the interiors of
Versace's Lake Como Villa 



What could these after sales services be? Some could be as simple as providing for an easy warranty and repair and replacement service (servicing your Rolex or re-stitching your custom fitted leather shoes) or more complex returns services coupled with a cross or upsell (trade in your Matisse for that rare Ming vase that you always wanted but came up for auction at that inconvenient time of the year when liquid funds were in short supply). The important points to consider in designing a strategy around the ratchet effect would be:

 

·    Ensure customer discretion (nobody likes the world to know that one is flying in a private jet to file for bankruptcy)

·    Custom design the after sales service to suit the product strategy – simple or complex schemes

·    Design all strategies around the longer time horizon when the customer will bounce back into happier economic climes  - this might mean small sacrifices on the margins in the short term in view of the longer term market potential

Very few industries have the benefit of  ratchet effect, and the luxury industry being one of the lucky few, must define strategies to exploit this effect to its fullest in order to retain its already small customer base vis a vis other industries