Pricing in every business venture is a major topic. Fashion and Luxury are no different. The right price can express the intangible brand value that every fashion and luxury entrepreneur wants to showcase, or it can make the product look like cheap shit. From an operational and cash flow standpoint, a price must cover multiple things:
- Production cost per unit
- Shipping cost per unit
- Overhead (Salaries, Factory, Legal, Bills, License fee)
- Taxes (VAT for example)
- Profit margin (here it gets interesting)
How much profit margin do you want? How much can you justify through branding, quality, and good design? The two distinct factors were Fashion for example splits into High Street, Premium and Luxury are production costs and profit margins.
High Street: Low production cost, low margin, high volume = Low price.
Premium: Low to medium production cost, high margin, medium volume = High price.
Luxury: medium to high production cost, very high margin, low volume = Luxury price.
As you can see, the price has a strong psychological component apart from a financial one. This is why branding and good marketing can elevate a brand to a new level or devalue it completely. If you choose a certain price, you automatically choose a certain branding strategy and a different segment of customers. Either you go for the mainstream, the wealthy or the rich. There is very little in between, or is there?
Brand Diffusion, or how to squeeze more money out of your brand!
So what do you do if you have an already high-value brand, maybe even a luxury property but you STILL want to make more money and cover more market share? Well, you use brand diffusion. You create “sub-brands” which still have the core brand DNA of the original high priced brand but are A) cheaper produced, B) branded for a slightly younger or less-wealthy customer group and C) sold potentially in different locations than the high priced brand. Maybe you even choose to licence your brand to other producers, but the risk of brand devaluation and thus ruin for your company are very high in this case (see what happened to Pierre Cardin).
Since the 90s and early 2000’s, it has become a trend among big luxury houses to use diffusion brands to increase revenue and spread out into multiple areas (hotels, cafe’s , restaurants, furniture, perfume just to name a few). Some have done well for themselves with this strategy (Armani), others have suffered from it and are now moving back to concentrated offerings (Burberry).
As we all can see now, pricing and brand diffusion in a way are one and the same. Diffusion brands will often have lower prices and thus different branding strategies, but before a business owner takes this dangerous step he should be 100% sure that the new sub-brands or licences will not destroy all the hard work he has put into building a reputation for his established product line.