The Blame Game: Brands or Consumers? Who’s Really Responsible for the Surge in Luxury Prices?

The luxury industry, long considered a fortress of exclusivity and refinement, faced unprecedented challenges during the COVID-19 pandemic. During global lockdowns, luxury sales experienced a modest decline, especially in traditional markets such as Europe and the United States, which witnessed substantial downturns. However, this period was followed by a surprising surge in demand. Two pivotal shifts catalyzed this rebound: luxury brands’ accelerated transition to online e-commerce models and consumers’ newfound inclination to purchase luxury goods locally due to international travel restrictions.

This rollercoaster trajectory raises a critical question: Who is truly responsible for the increasing price tags in the luxury industry—the brands or the consumers?

The Catalysts Behind the Surge in Demand

1. Access to Increased Disposable Income

With travel plans shelved and social events canceled, consumers found themselves with un-allocated funds that were previously earmarked for experiences like vacations, dining, and entertainment. This shift led to a re-channeling of disposable income towards tangible goods, particularly luxury items. A report by McKinsey & Company highlighted that 29% of affluent consumers diverted their travel and entertainment budgets to purchasing luxury products.

From a psychological standpoint, this behavior aligns with Maslow’s Hierarchy of Needs. As basic needs are met, individuals seek esteem and self-actualization, often expressed through the acquisition of status symbols. Luxury goods serve as a tangible representation of success and personal achievement, fulfilling deeper emotional and psychological needs.

2. The Phenomenon of Revenge Buying

“Revenge buying,” a term coined during the pandemic, describes the pent-up demand and subsequent surge in consumer spending following prolonged periods of restraint. This trend was first observed in China, where luxury stores like Hermès in Guangzhou reportedly achieved $2.7 million in sales on a single day post-lockdown.

This behavior can be explained through the lens of the “Scarcity Principle” in marketing psychology, which posits that limited availability increases an item’s desirability. After months of restricted access, consumers were eager to indulge, leading to a spike in luxury purchases as a form of self-reward and a return to normalcy.

Luxury Brands’ Response: Price Increases to Maintain Exclusivity

Faced with soaring demand, luxury brands were compelled to protect their core value proposition: exclusivity. One strategic response was to increase prices. By doing so, brands aimed to balance supply and demand, ensuring that their products remained exclusive and their retail environments were not drained of inventory—a scenario that could dilute brand prestige.

For instance, Chanel increased the prices of its iconic handbags by up to 15% in 2020 and 2021. This strategy not only preserved the brand’s exclusivity but also capitalized on the inelastic demand characteristic of luxury consumers, who are less sensitive to price changes.

Moreover, the “Veblen Effect” comes into play here. This economic theory suggests that higher prices can enhance a product’s appeal to status-conscious consumers. By raising prices, luxury brands reinforce their image as purveyors of premium, sought-after goods.

Impact on Millennials and Gen Z

The attitudes of Millennials and Generation Z towards luxury brands are reshaping the industry’s landscape. These younger consumers are digitally savvy, socially conscious, and value-driven. They are more sensitive to price increases compared to older generations and are influencing market dynamics significantly.

According to a report by Bain & Company, Millennials and Gen Z are expected to make up over 70% of the global luxury market by 2025. However, their purchasing behavior is influenced by perceptions of value, sustainability, and brand authenticity.

The steep price increases implemented by luxury brands have not resonated well with these demographics. A market survey found that 57% of Millennials and 63% of Gen Z consumers believe that luxury goods have become overpriced without offering additional value. This sentiment contributes to a decline in demand among these groups.

Furthermore, these generations prioritize experiences over possessions. The “Experience Economy” suggests that Millennials and Gen Z prefer to spend on travel, dining, and entertainment rather than on high-priced luxury goods. With the easing of pandemic restrictions, their disposable income is shifting back to experiential spending.

The rise of resale and rental platforms also reflects changing attitudes. Younger consumers are turning to alternative avenues to access luxury items at more affordable prices. McKinsey & Company’s report indicated that the luxury resale market is growing at a rate of 12% annually, outpacing the primary luxury market, driven largely by Millennials and Gen Z.

This shift challenges luxury brands to rethink their strategies. The traditional model of exclusivity through high pricing may no longer be as effective. Brands need to engage these consumers through value propositions that align with their values—such as sustainability initiatives, personalized experiences, and digital innovation.

The Recent Decline in Demand: A Consequence of Price Inflation

Drained Disposable Income and Price Sensitivity

As the world adjusted to a new normal, the temporary boost in disposable income began to wane. The resumption of travel and entertainment options meant that consumers once again had multiple avenues for spending. Consequently, the funds available for luxury purchases diminished.

Moreover, repeated price increases led to a tipping point where consumers started perceiving luxury goods as overpriced. Those who had splurged during the revenge buying phase found their financial reserves depleted, making further luxury spending untenable. A report by Deloitte indicated a growing price sensitivity among luxury consumers, with many reconsidering their purchasing habits in light of economic uncertainties.

Lack of Added Value Justifying Price Increases

A critical factor contributing to the decline in demand is the perceived lack of additional value accompanying the higher prices. Consumers are more informed and discerning than ever, expecting that significant price hikes should correlate with enhancements in product quality, innovation, or customer experience.

However, many luxury brands failed to provide tangible justifications for their increased prices. The products remained largely unchanged, and any improvements were not substantial enough to warrant the additional cost. This disconnect led to consumer dissatisfaction and a sense of being priced out of brands they once loved.

Social media platforms amplified these sentiments, with discussions and critiques about unjustified price hikes becoming commonplace. This negative word-of-mouth further discouraged potential buyers, contributing to the downturn in sales.

Deloitte report indicated a 7% decrease in luxury spending among middle-tier affluent consumers, who cited price increases as a primary deterrent. Furthermore, the absence of added value—such as enhanced product features or superior customer experiences—made it challenging for consumers to justify the heightened costs.

This situation is exacerbated by the “Price-Value Relationship” in consumer behavior theory. When prices rise without a corresponding increase in perceived value, consumers may experience cognitive dissonance, leading to reduced purchase intent.

Contributing Factors: Inflation, Raw Material Costs, and Craftsmanship Decline

The luxury industry’s pricing strategies cannot be viewed in isolation from broader economic factors. Global inflation has raised the cost of raw materials, production, and logistics. For example, the price of gold and precious metals, essential in luxury watchmaking and jewelry, saw significant increases during the pandemic.

Additionally, the decline in skilled artisans poses a challenge. The luxury industry relies heavily on craftsmanship—a dwindling resource due to an aging workforce and a lack of new entrants trained in traditional techniques. This scarcity drives up production costs, which are subsequently passed on to consumers.

Conclusion

In dissecting the layers behind the surge in luxury prices, it becomes evident that both brands and consumers play integral roles. The reallocation of consumer spending and the psychological drivers of revenge buying fueled demand, while brands strategically increased prices to maintain exclusivity and navigate economic pressures.

However, this delicate balance has led to a recent decline in demand. Consumers with exhausted disposable incomes are stepping back, and those willing to spend are questioning the value received for the higher prices. Inflation, increased raw material costs, and a shortage of skilled craftsmen have further compounded price escalations.

The pivotal question for luxury brands now is: How can they address consumers’ needs and perceptions in the face of substantial price increases? It is imperative for brands to add tangible value—be it through enhanced product innovation, personalized services, or enriched brand experiences—to justify the cost to discerning consumers.

Brands must also communicate transparently about the factors influencing price changes, fostering trust and loyalty. In regions where prices have soared by up to 100%, understanding and responding to local market dynamics is crucial.

Ultimately, the luxury industry’s future hinges on its ability to adapt strategies that balance exclusivity with accessibility, ensuring that price increases are matched by equivalent value additions. By doing so, brands can retain their esteemed position in consumers’ hearts and continue to thrive in a post-pandemic world.

About the writer

I have a passion for everything luxurious. Background in marketing, sales and finance. Collector, investor, and marketing and sales advisor in the fields of fashion, properties, fine art, watches and luxury events.