Differences: Pricing in SCM and SCMluxe

Luxury goods immediately translate to expensive, high priced goods. However simply increasing price on a product does not make it a luxury product – intrinsic value must be built up by quality and brand communications to justify the high price and its admittance into the world of luxury. We have also seen that a strategy of simply increasing price will backfire immediately since entry barriers are low – how long does it take for another company to increase its prices and advertising of such increased prices?

Pricing strategy is therefore an important element of SCMluxe and is very different from the traditional SCM. Let us look at some of the differences in pricing in SCMluxe Vs. traditional SCM

Characteristic of Price	Traditional SCM	SCMluxe
Perception of Price	In absolute quantitative terms ($ per unit or SKU)	More qualitative (world’s most expensive perfume – joy)
Price Elasticity (Coefficient of Elasticity)	Sales are always inversely proportional to price. Hence price has a negative coefficient of elasticity with sales	Sales tends to increase with price as a result of increase in perceived value of the luxury product (called Veblen effect) making the coefficient positive or null in most cases. We see that in some cases when price falls below a threshold value it ceases to be regarded as a luxury product and sales may eventually fall
Price curve over time	Almost always prices need to decrease over time to incorporate better SCM capabilities and to address competition	Price tends to remain stable or increase over time to showcase “timelessness” and increased value from product. SCM capabilities in reducing costs go towards increasing profit margins.
Perceived Value	Notion of perceived value is mostly not applicable	Perceived value is always maintained above actual value by brand communications since the luxury market is geared towards gifting and perceived value plays a very important role
Price Communications	Upfront and directly available either on product or in all communications	Almost never communicated directly. All price communications are couched in terms of the value it creates. Selling if of the product and its timeless value and not on its price
Discounts and Sales	Regular feature needed to clear inventory for new stock	Never resorted to with inventory being destroyed in most cases. Fragrances is one major exception to this rule
Global and local pricing	Large differences due to local market dynamics and cost structures	Typically follows uniform global pricing since the luxury customer is mobile and can shop worldwide. A stark example is from luxury retailers in India who have to bear very high customs duties but still retain prices at global levels by absorbing the costs into their lower profit margins

Thus we see that pricing and its management is not only crucial but also needs to follow a very different approach than one used for traditional industries. Veblen goods or not, luxury goods are unique in not following the herd in matters related to price – as widely seen in the increasing sales and prices of goods from the maisons of Richemont, LVMH, PPR etc. The recent recession is almost non-existent in the annual reports of these companies.