The hidden logic behind luxury

Come to understand the primal desires that make €90.000 bags irresistible, and learn about the fascinating dynamics of the luxury industry.

There are few industries where people think and act as primitively as in the luxury industry. Buying a leather bag for €50 feels logical, while a bag for €90,000 sounds irrational, almost fantastical. What on earth could justify a €90,000 price tag for a bag? The secret lies within our own brains. Our most primitive habits and needs are being tapped into. In this article, I will take you on a journey through this fascinating world of luxury in a digestible and easy-to-understand way. This is in preparation for some excellent research reports that will be released in the coming months about companies like Hermès, LVMH, Richemont, and Kering.

Don’t want to miss these and the other 52 fundamental research reports per year? Sign up now and try it for 7 days completely free!

Luxury has undergone a significant transformation over time. To truly appreciate its current significance, we must explore its origins, historical evolution, and the complex nature of modern luxury. This guide provides an insightful journey through the world of luxury, highlighting its key elements and why it remains so coveted.

The origins of luxury

The term “luxury” comes from the Latin word “luxus,” meaning “excess” or “growth in the wrong direction.” Historically, luxury was associated with extravagance and overindulgence—something beyond necessity and often viewed negatively. However, over time, luxury has transformed into a symbol of status, success, and superior quality. This shift illustrates how societal values and economic conditions reshape our understanding of luxury.

Philosopher Theodor W. Adorno observed that beauty, like luxury, is hard to define but essential. The concept of luxury changes with society. For example, soap was a luxury in the Middle Ages but is now common. Chocolate and coffee, once reserved for the elite, are now available to everyone. This shows that luxury is flexible and shaped by cultural and economic changes.

The Paradox of modern luxury

Let’s start with a question. Below are three handbags: one from Louis Vuitton and two from Walmart. Which of the bags below is the Louis Vuitton bag?

Figure 1 | Three bags from different brands | Bron: RAISED

If you guessed the middle one, you’re right. The middle bag is indeed from the luxury brand Louis Vuitton. Now, let’s talk about the concept of ‘quiet luxury’ or ‘subtle luxury’—luxury that only stands out if you’re incredibly wealthy.

Everyone recognizes the middle bag. Carrying a bag like that signals that you have ‘taste’ and ‘money.’ This is where luxury brands tap into our emotions. They want you to feel like you’re part of the luxury world, but in reality, you’re playing in the minor leagues. I have to confess, I lied to you a bit. Sorry about that. The bag on the far right is actually a Hermès Birkin bag worth $30.000. No flashy logos. Almost ‘normal.’ Exclusively available to the truly wealthy.

Modern luxury is paradoxical, balancing exclusivity with mass appeal. Luxury brands must navigate the tension between maintaining an aura of exclusivity while also leveraging mass production and marketing to reach a broader audience. A former CEO of Hermès described the luxury brands' essence:

“Creating beautiful objects, relying on consumers as brand ambassadors, and making independent decisions free from external influences.”

Core characteristics of luxury brands

• Aesthetic appeal and quality: Luxury brands focus on creating visually stunning and high-quality products. This combination attracts high-end and passionate customers seeking beauty and superior craftsmanship.

• Consumer as ambassador: Satisfied customers naturally promote luxury brands, acting as ambassadors who showcase their luxurious possessions within their social circles, thereby enhancing brand prestige.

• Autonomy and authenticity: Luxury brands maintain their unique identity by making independent choices, staying true to their vision and values, which further strengthens their authenticity and appeal.

The allure of luxury products

Luxury products have long been associated with wealth, power, and sophistication. They are more than just items; they are symbols of status, taste, and success. To truly understand the luxury market, it's essential to delve into its nuances, including its segmentation, the psychology behind luxury consumption, and the strategies luxury brands employ to maintain their allure.

So why do people buy luxury products? There are four main reasons:

1. Sense of belonging: Owning luxury items provides a sense of belonging to an exclusive group, fulfilling a desire for elitism and social recognition.

2. Product quality and cost: The high quality and significant cost of luxury products reinforce their desirability and perceived value.

3. Personal emotion and pleasure: Luxury items evoke strong personal emotions and provide pleasure, making the purchase experience deeply satisfying.

4. Brand power and reputation: The strength and reputation of a luxury brand enhance its appeal, as customers trust the brand's promise of quality and exclusivity.

Segmentation of the Luxury Market

The luxury market is broadly divided into two main segments: true luxury and accessible luxury.

• Exclusivity: True luxury products are characterized by their exclusivity. These things don't come in lots, they're usually made by someone who makes them by hand, or they only come in a certain amount.

• Price: They come with an (extremely) high price tag, making them affordable only to a select few who belong to the upper echelons of society.

• Craftsmanship and heritage: True luxury brands emphasize exceptional craftsmanship, using the finest materials, and employing skilled artisans. Brands like Hermès, Rolls-Royce, and Patek Philippe fall into this category.

• Heritage and legacy: These brands have a rich history and heritage, sometimes dating back hundreds of years, adding to their prestige and perceived value.

• Customer experience: The purchase of true luxury items comes with a personalized shopping experience, including private showrooms, champagne, excellent customer services, lifelong guarantees and unmatched quality.

• Affordability: Accessible luxury products are designed to be within reach of a broader audience, though still at a premium compared to mainstream brands. They are focused on reaching the upper middle class, where most of the money is to be found.

• Mass production: These items are produced on a larger scale, but still maintain a level of quality and prestige. Brands like Michael Kors, Coach, and Tiffany & Co. are examples.

• Marketing and brand image: Accessible luxury brands invest heavily in marketing to maintain an image of exclusivity and sophistication, even while being more widely available. Brands like Hermès and Ferrari don’t do this (and don’t need to either).

• Collaborations and limited editions: To keep their offerings appealing and exclusive, accessible luxury brands often release limited edition products or collaborate with high-end designers. They possess less bargaining power compared to true luxury brands, resulting in higher costs and consequently lower profit margins.

Luxury is a complex and multifaceted concept that has evolved from being viewed as excessive and undesirable to a symbol of status, quality, and exclusivity. Understanding the origins, evolution, and paradoxical nature of modern luxury helps us appreciate its enduring appeal. In a world where the desire for luxury goes beyond materialism, it becomes a symbol of personal and social identity, continually captivating those who seek the finest things in life.