June 2015, by James Harrison, Associate Director
Luxury brands hold sway over us all.
With their objects of desire and empires of renown – they succeed in creating an enigmatic world that drives consumer demand and compels investor confidence. Both, of course, translate into impressive business performance. The last few years have seen a boom in luxury companies coming to market, with luxury indices outperforming those indicative across sector. A quick comparison of the S&P Global Luxury Index versus the S&P Global BMI index of companies evidences this story; the former witnessed 10-year annual returns of +5.78%, vis-à-vis just +2.16% for the Global BMI.
Whilst many might admire the success of the most valuable groups, few would look often to luxury to learn. True, businesses in luxury may benefit from a rather different makeup to other sectors – from the nature of the products and services offered, to the impressive margins and sheer capital invested. But it is worth remembering that what luxury brands do very well has become the sole pursuit of almost every other sector.
Whether your business flaunts luxuries or markets commodities – the Holy Grail is being able to command a premium for your products or services. Even more so when businesses of all shapes and sizes face stiffening competition, wrestle with new channels, platforms or modes of distribution, and fight the prevailing trend of commoditisation. Against this context – what is a brand if not the single most important asset to help businesses drive differentiation? And what is luxury if not a lesson in the branding of desire?
Across all categories of luxury, the same old brand challenges play out – and some to a heightened degree. Reflecting on the quest for differentiation, for example, the products of one luxury brand are near the same as those of the next – at least in principle. Swatch Group furnishes many luxury watch brands, including those in the stable of giants LVMH and Richemont, with equipment and parts; meanwhile, many luxury fashion and accessories companies will manufacture their wares in China – but a breath away from those of the high street retailers.
So, in kind, it’s all the same – yet this doesn’t feature in the consciousness of the consumer.
And still luxury brands manage to command a significant premium for their products and services – implying yet one further stretch of the imagination is required. Louis Vuitton, the world’s most valuable luxury brand according to Forbes World’s Most Valuable Brands list – is said to enjoy profit margins approaching 40% – a startling example of pricing power yielding astronomic returns.
So, if the challenge of differentiation is even tougher, and that price premium yet stronger – how does luxury win out?
If there’s one thing that luxury brands truly understand, it’s how to mythologise their brand and ensure that ‘difference’ is clearly felt. Of course, the often-cited attributes of craftsmanship, authenticity, exclusivity – and so forth – hold true; and they’re fundamental to building the kind of emotional connections with consumers that engender deep brand loyalty. But what really gets consumers over the line when it comes to a price premium is the brand experience.
Luxury brands succeed by creating an entire world in which everything from products and services to channels and interactions is refracted through the lens of consumer aspiration. The result is an end-to-end experience that feels coherent and considered – and deeply in tune with consumers’ own needs and desires. Such carefully crafted experiences overall yield great potential for brands. A 2014 McKinsey study revealed that maximising customer satisfaction across the experience journey has the potential to create revenue uplifts of some 15%, whilst reducing the cost of serving customers by up to 20% – all the while increasing customer satisfaction by a further 20%.
Whilst brand owners must consider the customer journey in its totality, a powerful brand experience doesn’t require pouring infinite resource or making elaborate investments in every element or stage of the customer journey. Being savvy, brands should identify the pivotal touchpoints that most influence perceptions of the brand – together with those with the greatest potential for impact upon the bottom line. These can be either rational or emotional, but they must deliver critical benefits together with impact.
On the rational side, Amazon provides testament to the general rule that customers will pay a premium for products or services that make their lives easier. The success of Amazon is built on removing the pain points of slow and unreliable online delivery. The average revenue per active user is a staggering $352p.a. – over six times greater than that of eBay. Amazon metrics reveal that a 0.1 second delay in page rendering can translate into a 1% drop in customer activity – making this a clear priority touchpoint. What’s more, Amazon tracks its performance against some 500 measurable goals, and nearly 80% of these relate to customer-focused objectives.
In luxury and beyond, identifying these pivotal touchpoints is also about understanding the emotional needs of customers: tapping into their social aspirations; helping them to reflect and project their identities through the lens of your products, or by subscribing to your services. Indeed, the aforementioned McKinsey survey concludes that emotionally engaged customers are typically three times more likely to recommend a product and to repurchase it themselves. So winning on this front means leveraging the emotional currency that lies within everything that you do.
But luxury brands don’t just play to customer aspirations; they nurture those of employees as well. A key strength of luxury brands is their ability to deliver world-class service through sales staff that build genuine and lasting relationships with their customers. Inspiration may be taken from Audi; in the US, the luxury car brand was able to boost its customer loyalty scores by 7.5% from 2009 to 2013, by redefining the experience of its employees. Establishing a clear and compelling brand purpose, and running a series of immersive road shows and events – Audi created an experience that employees could ultimately replicate and transfer to their customers. It goes to show that value-generating experiences can only be delivered by harnessing the knowledge and passion of employees – and establishing a culture of excellence.
Whether it’s the internal or the external experience in question, learning from luxury isn’t just about improving the bottom line, it’s an exercise in creating deeply loyal followers. And when a brand has loyal followers, it’s less likely to have to resort to competing on price… Ultimately, it strengthens its ability to trade at a premium. And isn’t this, in the end, what every brand is after?
1. Brand experience is what brings your difference to life – building pricing power
2. It’s created through the customer journey in its entirety, but it can be engineered with a focus on priority touchpoints
3. These must deliver a critical benefit with impact – but can be rational or emotional in nature
4. The brand experience is as much the realm of your employees as your customers
5. Loyalty through both customers and employees will insulate your brand from price sensitivities – helping realise a premium