Prices That Will Make You Cry

Applying the adage "what the market will bear" is not always simple when customers have no limits. When thirsty celebrities at the MTV Video Music Awards and the Emmys pop open a $40 bottle of the event's featured beverage, Bling H2O, they are sipping more than just purified water from Tennessee. Bling H2O is the creation of Hollywood writer and producer Kevin G. Boyd, best known for his work on the Jamie Foxx Show in the late 1990s and Girlfriends in 2001. Rather than a similar-sized Poland Spring bottle that retails for about $2, luxury consumers are turning to Bling H2O for what Professor Raju of Wharton believes is a desire to reach a certain status level.

Professor Raju, who says he owns both a Mercedes and a Lexus, notes that many luxury items fall into a category of negative externality; thus the more people who have access to the product, the less value it holds. An element of exclusivity allows the consumer to feel like a part of an elite group. What does he want when he goes car shopping? Raju says he looks for both function and comfort in the vehicle, but also values the quality of service at the dealership.

Even cemeteries have a luxury market. The Santa Barbara Cemetery in Santa Barbara, Calif., offers couples burial plots overlooking the Pacific Ocean. The price for two to rest for all eternity in this prime piece of ground: $83,000.

Like Baumgarten, Professor Raju emphasizes the emotional value in something intended as a gift. "If an item is given as a present, then the price is a demonstration of affection and consumers will often justify a higher price," says Raju.

For consumers who think a $3 bar of Dove soap isn't enough, San Francisco's Spa Radiance offers the Grand Luxe Facial at $750. With a caviar eye treatment and Diamond Peel Microdermabrasion, Spa Radiance swears its top-priced facial heals years of sun damage and irritation.

Professor Raju talks about "credence products"--goods with utility that is difficult or impossible to ascertain. Outside of business schools, people talk about reputation. For instance, it would be nearly impossible to determine whether the Grand Luxe Facial actually improved skin quality, and even more difficult to measure that improvement. However, if luxury consumers spread the word that a given product is worth the splurge, demand for that product will rise regardless of the value of its function. "Price is often a signal of perceived quality," said Raju.

The art of luxury pricing goes beyond costs, competitors or market prices, according to two consultants from Simon Kucher & Partners, Dr. Andreas von der Gathen and Burkhard Gersch., who wrote: "Emotion-based pricing is the key to success."

Even if you never get the chance to do 0 to 60 in 2.48 seconds, just owning the Bugatti Veyron should make you feel like $1.8 million bucks.

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