If you can buy a pair of Levi's for $68, why pay $11,300 for a pair of Earnest Sewn and Van Cleef & Arpels Alhambra jeans?
It's not fit, it's feelings.
Companies pricing luxury items "are not selling goods, they are selling an emotion," says Jens Baumgarten, head of financial services at Simon Kucher & Partners, a strategy and marketing consulting firm.
A high-priced item can convey prestige and a sense of belonging to an elite group. Particularly when given as a gift, Professor Jagmohan Raju of the Wharton School at the University of Pennsylvania, says, the luxury item can serve as a "demonstration of affection."
Whether executives are deciding on an eye-popping price for jeans or putting a $1.8 million sticker on a car, as Volkswagen does with the Bugatti Veyron, they weigh the same factors. Sure, performance and function are on the list, but perceptions of quality are more important. Other factors: the pricing of the nearest luxury competitor, the sense of exclusivity, the emotional message wrapped into an item given as a present, and the reputation that comes with ownership of certain luxury goods.
Selling a $40 bottle of water or an $83,000 burial plot? Anything priced for the top of the market has to weigh the same set of considerations.
One of the worst mistakes a seller can make: marking down. "If a product is priced too low, it will have the reverse affect on the emotions," says Baumgarten.
Volkswagen certainly looked beyond the value of function when it priced the Bugatti Veyron. While the car certainly has outstanding features--it's the only production car with more than 1,000 horsepower--the $1.8 million price reflects the kudos that comes with owning a unique vehicle.
According to John Gourville, a professor of marketing at the Harvard Business School, companies putting a price tag on an item like the Bugatti Veyron find benchmarks in the prices of items they consider to be the next best alternatives. But, he says, "pricing in the luxury market requires a lot of guess work" to gauge the dollar value of the desire to own the product.
"If a consumer is deciding between a Volkswagen Jetta, a Toyota Camry and a Nissan Altima, they are comparing function," he adds. "But anyone willing to pay $1.8 million for a car is taking into account the scarcity of that vehicle as well as the status or image they hope to attain by owning it."
Professor Gourville, who says he drives a Subaru Forester, also notes that what passes as sophisticated in one area might be considered average in another. For instance, he says that a Mercedes in his middle-class suburb of Boston might turn heads, but the same car in Beverly Hills would not.
"The willingness of consumers to buy luxury goods is often a factor of who they are trying to impress," says Gourville.