Life Style Marketing of Luxury

Do the Math

The New York Times reported today that the vast majority (42%) of the increase in personal income in recent years (up to 2006) has accrued to the 1-in-400 taxpayers (or, at least, tax filers) who report $1 Million or more in personal income.

This is one more fact that highlights the wisdom for luxury merchants in paying particular attention to their best customers. While we should expect that the results for 2007 and especially 2008 may not be quite so rosy, especially among those households attached to Wall Street, we also should expect that those with assets accumulated over the years will continue to spend.

At the high end of the market, spending is inspired by assets more than by income. Pay attention to the asset classes that are increasing in value (e.g., commodities, energy, etc.) and prospect among those who hold these assets.

Strike while the iron (and the steel and the cooper, etc.) is hot.

Luxury as Information

The decision to purchase or not to purchase a luxury item constitutes a bit of information about the affluent consumer making the decision.

Which item is purchased (Armani or Ralph Lauren) and where it is purchased (Neiman Marcus or Barney's) constitute additional bits of information.

How frequently such purchases are made, the channels they are made in and the conditions (e.g., sale, early in the season, with the assistance of a personal shopper, etc.) under which they are made constitute additional bit of information.

Add up the bits and you have quite a bit of information about the consumer.

The next question becomes, are these various acts random or is there a pattern? If there is a pattern, what does the pattern mean. What exactly is the information that emerges from these shopping pixels? Is it possible to impute intention or motivation from behavior?

At one level the answer to all these questions is yes. However, it is very interesting to look at this question through the lens of information theory. In determining "meaning," Information theory considers the expectations of the recipient as well as the messages generated by the sender. The pixels will look different if your set is black-and-white than if it is color.

That is, the bits of data become information only in the context of the receiver. The purchase of a Maserati by person A probably means something different to person B (say,  a teenage boy)  and person C (say, a middle aged man). And Person A may attach a third and different meaning to his purchase.

It is this phenomenon, the subjectivity of the receiver or observer, that makes marketing luxury such a delicate business, Luxury, by definition, arouses feelings. These feelings can taint the objectivity of the marketer as well as stimulate the behavior of the customer.

From what perspective does the marketer look at the purchase and ownership of luxury?  From the perspective of a person who can routinely afford the very best? Or from the perspective of his/her own life situation? This is marketing's version of the Uncertainty Principle: An object changes when measured.

Luxury is useful information only if there is an objective frame of reference. This objectivity is one of the attributes of LifeStyle.

   

Luxury and fashion: From Le Roi to ROI.

I would like to apologize for not posting anything to this blog about Luxury for the last week. I assumed everyone who might be reading was absorbed by Fashion Week.

Being the contrarian, while others were looking at the latest possible trends, I was trying see if I could put the week in context. I created my own survey of the history of modern luxury, say from 1400 A.D. to 2007. I was looking for the connection between luxury and fashion.

As best I can tell those 800-plus years can be roughly sub-divided into major three periods.The dates are approximate.

1400-1800 is the period from the Renaissance to the Enlightenment. During this period Western Civilization emerged from the Dark Ages. Two countervailing focal points for luxury emerged. One was the landed aristocracy the other was the trade-based city. Think of aristocracy (the royal court and the landed nobility) as the top-down definition of luxury. This view prevailed in those regions which had strong central monarchies and whose economy was based on inherited agricultural wealth. Spain and France are the best examples and luxury was a sign of power. The city, on the other hand, was run by merchants and bankers. The Italian city-states in the south and  Amsterdam in the north are examples. London came late to the game. In the city luxury was a sign of commercial success and skills at value-creating relationships. Money itself was the tool for creating wealth and was cautiously diverted to personal use. And since success in these commerical ventures depended on the trust placed in them by their counterparts, the merchants and bankers were less ostentatious with their wealth so as not to appear profligate. In this period we see that economics, social dynamics and politics all are involved in defining what constituted luxury and what was fashionable (i.e., acceptable to display). There were two different definitions based on the two different sources of wealth.    

1800-1940: The Enlightenment until World War II. This broad timespan covers the demise of aristocracy as a political and social force, the rise of industry, technology and capitalism (as distinguised from commercial trading). We see the creation of mass, urban markets and the supporting mass communications such as newspapers, magazines and radio. Consumption, in the words of Veblen, becomes more conspicuous. Both the capitalists and the mass market are much more ostentatious about their affluence than any prior non-aristocratic class. Luxury is in this period is bi-modal. On the one hand it is associated with hand-made (couture) as distinguised from machine-made goods. And on the other with technology (Rolls Royce, electricity and private Pullman railroad cars) versus tradition. Europe, especially Paris, remains the arbiter of luxury and the incubator for modernism . Here the historic concept of luxury becomes more distinguished from the time-based concept of "fashion."  The dividing line between the two becomes more generational.

1940-2000: Post European Luxury. The center of the economic, political and social universe shifts to the U.S. This is short American Century. In the 1950's 60% of the world's GDP comes from the U.S.. Time and technology fully replace tradition and craft. ROI replaces le roi. In European-based cultures aspiring financiers create companies (Richement, LVMH, Gucci, etc.) that amass luxury brands. As the independent maisons get gobbled up, the concept of luxury becomes further intermingled (confused?) with that of fashion. On top of this, wealth, the source of luxury patronage, is heavily concentrated not only at the top of the social structure but at the top of the age structure. Over 60% of assets are controlled by people over 55. This is a new historical phenomenon. In the 1400's the average life expectancy was 25 years. Today it is in excess of 75 years (in the U.S.).

Which leads to back to last week. There is clearly an increasing wedge between fashion and luxury. I doubt there were many representatives of the generation with the most money in the front rows before the runways. I doubt there was much attention paid to their passions. The concept of the "latest" is increasingly adrift from the concept of the "best."

 

Self-made Wealth

Our research shows the vast majority (over 80%) of today's wealthy are self-made. Most of the analysis of this group focuses (perhaps,  fixates) on the "wealth" aspect of their accomplishment:  How they made and how they spend their money.

I am also intrigued by the aspect of being "self-made." I believe this perspective has significant marketing implications.

Any discussion of  "self-made" benefits from an historical perspective. At a minimum, it requires appreciation of the history ("life story") of the individual and his/her accomplishment. One can look at individual's progress from the outside, at the sequence of events leading to the financial success. This is the MBA version. It provides a case history of what to do to become wealthy. It doesn't provide insight into being comfortable with the success ("Be careful what you wish for.").

Most of the newly wealthy, coming from middle class backgrounds, are self-conscious about how to think and behave in their new circumstances. Why?

Being "self-made" is a relatively new (historically speaking) human phenomenon. A reading of  Fernand Braudel reveals the recency of significant upward mobility in Western society. (One never rose from serfdom to royalty.) Fernand's work documents the tenuousness of the hold on the high perches. (We see this today in the turnover of names in the Forbes's lists.)

The majority great ideas and plans never reach the light of day, at least not in the lifetime of the developer. The aspiring person who actually "makes it" is a survivor of an socio-econoimic  process whose odds of success are akin to the chances of a individual sperm fertilizing an egg: A million failures accompany one success. Awareness of these odds results in the survivor having an attitude that can range from hubris to humility. You either brag about being a good swimmer or, like Ulysses,  you thank the gods that washed you ashore

The ability of a human to think of changing his lot in life, to conceive that such a transformation is possible, is "new."  Harold Bloom dates this psychological development to Elizabethan times and suggests that Shakespeare was the first (and best) to articulate the internal dialog that accompanies it. For the preceeding tens of thousands of years humans' future was fated. For the last 500 years success is a play rehearsed  in the mind then acted out on life's stage.

So what's the connection to marketing luxury products and services? 

The newly wealthy approach the consideration of luxury goods and services with an eye to more than aesthetics, pleasure, value or status.  Among all the other questions is the one: "Who am I that I own/drive/fly/drink/eat/wear/etc. and have this rare experience?"

After making their fortune they must make sense of themselves and their new situation. Shakespearean characters engage in a soliloquy about who they are and the meaning of life  while holding a dagger, a skull, a chalice or some other prop. Today's self-made person has the soliloquy while holding the wheel of the new Bentley.

The luxury brand must be capable of a dialog. It must convey individuality and meaning. Its very presence must articulate why it, too, is the survivor of an equally Darwinian process and worthy of being in the front seat with the driver.   

What Luxury Market Down Turn?

The Institute for Luxury Home Marketing maintains a blog with frequent updates on the luxury real estate market. A review of their postings (especcially December 21, 2007) says that the wealthy are still buying. In Dallas, accoring to the President of one local luxury real estate firm, the most active part of the market is homes over $3M.

The same blog carrries a link to lore magazine. It contains an article about how our research is being used by the Institute to train luxury real estate agents in LifeStyle marketing and selling. We can't claim responsibility for the strength of the market. We just claim helping agents capitalize on it.

We are doing the same thing in financial services. A version of LifeStyle Marketing training is being applied by the Wealth Management divison of a leading firm.  This firm knows that the fastest growing segment of their market is households with over $10M in assets.

The next application will probably be in private jet travel. Firms in this industry are serving the same clients. And its forecast that there will be 1,000,000 households at this level of wealth within 2 years.

While aspirational luxury pauses, real luxury moves ahead. And we are pleased to move ahead supporting providers of true luxury.

Fashion Forward

Changes in fashion seem so prevalent and continuous it is hard to imagine a world or a time without change.

Fashion-as-change came into reality in the seventeenth century. Prior to that "styles" (or the lack of them) stayed in place for centuries. European men wore toga-like garments (although of dubious quality materials) from the fall of the Roman empire until the 1400's and somewhat longer. Think of the costumes Medieval knights wore: Togas with armor over.

From the 1500's to the 1700's "fashion" in clothes and hair (including facial and eventually wigs) changed slowly. There were traditional differences among countries (the French court wore lace; the Spanish court wore black)  and time-lag delays in one country's awareness of changes in another's fashion. Italy, Spain and France each set the mark for others in Europe as their respective kingdoms grew or faded. Eventually Britain joined the club of powerful states and "victorian" become a global style. Changes in fashion were litteraly "statements" of ascendancy of power among countries. As naval and air travel (and power) improved, fashion leadership changed with the fortunes of nations.

Within countries, fashion reflected power. Laws restricted the ability of lower classes (peasants, servants, etc.) to wear the attire of nobility or even use the materials in those garmets (e.g, the sale of silk was controlled). By the late 1700's enough wealth had been accumulated by the upper middle classes in many countries that they began to generate their own fashion as a demonstration of their increasing power. Think Beau Brummel.

By the 20th century, especially after WWII,  the consumer was king and American-inspired fashion and the corresponding culture was ascendent: Tee shirts, jeans, burgers, fries and rock'n roll pierced and toppled the iron curtain.

At this point it is not clear what 21st century fashion will look like, either globally or within the U.S. What may be certain is that it will be made from recycled material and be taken home in an environmentally correct container.

Luxury Forecast 2008, Part 2

The prior entry about the Luxury Market forecast for 2008 seems to have generated some interest. Here are some follow up factoids:

• Netjets is increasing its order of Gulfstreams by >35%. Says Corporate execs, especially in Europe, are flying private more.
• Toyota is introducing an $85K version of its big SUV. it is forecasting 100% increase in sales over the previous, lower priced model.
• Ford is launching a Platinum version of its F-150 with prices starting about $60K. Sales of the standard F-150 are flat.

At the same time,  the domestic auto industry is forecasting an overall decrease in sales (units and dollars) compared to 2007. Not a single commerical air carrier is forecasting growth in the 30% range.

These points illustrate the bifurcation most likely to occur in spending at least in the first half of the year. The very affluent/wealthy will continue as if nothing (except sales) is occuring. The aspirational affluent will hold off until the coast is clear.

Forecast for the Luxury Market 2008

The Luxury Marketing Council Dallas, of which I am the Founder and CEO, holds an annual breakfast for the CEO’s of its member companies. The purpose is to provide a shared perspective on the forecast for the luxury market for the new year. We were joined by Ash Rajan, Director, Global Markets, Merrill Lynch, who provided opening comments.

Notes on Comments by Ash Rajan:

The news for the U.S. economy and the luxury market is bad and good.

The bad: Oil prices are rising; inflation is a concern; the Fed will cut rates and this will drive the dollar down further. The trade imbalance will worsen. Corporate profits are falling and will continue to fall for a while. For all intents we are in a recession. In this environment mass and “Aspirational” consumers will defer purchases.  This condition will reach a crescendo in 6 months when the results of rate decreases and government stimuli such as tax incentives make an impact. Growth in the economy and spending will then resume.

The good: Markets move based on expectation and so will advance ahead of the improvements and end the year ahead by ~10%. The truly wealthy will not be impacted by the current downturn. For them this is a blip. Their spending is a-cyclical as demonstrated by the current boom in antiques, fine art auctions and sales of very high end homes.

Four types of rich are taking the lead in spending: (1) Nouveau Riche who suddenly come into wealth through an event like the sale of a business ;(2) Global rich from the BRIC countries (Brazil, Russia, India, China) whose economies are rapidly expanding and creating new concentrations of wealth; (3)Commodity rich who are involved in materials (copper, oil, steel, etc.) in short supply as a result of demand by BRIC and other growing economies; (4) Eco-rich (“eco”  is Greek for  “household”) who inherit money or , still living at home, are able to spend their parents wealth.

In addition to these factors, luxury merchants should recognize there is a secular trend towards experience as the basis for luxury. Comfort, convenience, and the sensation of luxury (“decadence”) are the new drivers of luxury consumption rather than mere ownership of things. Luxury is not just the fine hotel but the services and experiences in the hotel. It is not just the materials from the fine tailor but the way the staff handles your appointment. It is not just the fine pastry but the view one is provided while enjoying the pastry.

In light of these conditions, Luxury merchants should review their business models and avoid over-reliance on traditional sources of business and traditional ways of attracting and satisfying clientele.

The notes, above, are based on my notes of Ash's comments. Any error is my responsibility.

Affordable Luxury is Relative

I like The New York Times. I consider the Times an "affordable luxury." In my part of the world the Times costs $1.50 a copy. That's about three times (3x) the cost of the local paper. I consider the Times worth the premium because the articles are well-written and well-researched. And the content is well-edited. If you were so inclined you could say it is a well-designed and well-engineered newspaper.

So I was surprised when a review of the new Porsche in the New York Times hinted that paying $138,000 for a new cabriolet was a bit excessive.  This price is only about 3 x the price of an entry level luxury vehicle, about the same relative premium the Times charges.

This led me to wonder how an observer decides when the price of something is excessive. I think we base our judgments on our own experience rather than the perspective of the intended purchaser.

A recent Elite Traveler survey reported that private jets owners had spent over $400,000 on hotels, resorts and spas in the ensuing year. There are at least two ways to view that number.

One is that the Elite Traveler reader  spends approximately 8-10 times on vacations what the average household spends in a year on everything. That could seem a bit excessive.

Another view is that surveyed households total living expenses are about the same percentage of household income as the average household's. (In fact they may be a bit less.) That could seem in line. And buying a Porsche instead of a Bentley Continental could be seen as a modest purchase.

In fact, so would buying the Times.

Brand as Story

Marketers of luxury products know their brand should have a "story."  But how do they achieve it?  What are the elements of "story" and what separates a good story from an average story?

We were fortunate to stumble across Story by Robert McKee, an authority on the art of story-telling. McKee defines and describes the elements that result in a good story well told.

It is not difficult to translate his terms and recommendations about story-telling into telling the story of a luxury brand.

I concluded "brand" is like the protagonist striving for an "object of desire." (The "object" is a condition, like happiness, truth or beauty.)  The protagonist is driven by needs (values) that only the object will satisfy.

The protagonist reveals his character (brand character) by making choices in his quest. The choices (say, regarding standards of material, elements of design, levels of service, etc.) reveal his character. The audience (i.e., the consumer) identifies with the protagonist and participates emotionally and intellectually in his effort.

The "story" analog raises many useful questions. For example, where does the consumer see and hear the "brand story?" What are the words, pictures, movements that convey the brand story?

You get the drift.

Throughout the 400-plus pages McKee uses very concrete examples from movies to illustrate his points. This allowed me to see how great stories (brands) are relevant across time and culture and why mediocre stories (and brands) fail.

Is your brand story a Casablanca (or, at this time of the season, A Wonderful Life)? If not, you might return that tie you didn't want and give yourself Story.

On that note: Happy New Year!