Contemporary Marketing, 2013 Update 15th Edition by Louis Boone ,David Kurtz

Exercise 7

Holding the (Price) Line on Luxury Goods
In a tough economy, the market for luxury goods and services faces unique challenges. Many people who at one time might have splurged on a Rolex watch or a Lexus sedan are now unemployed and, possibly, facing foreclosure on their home. Even those with high net worth felt the pinch when their investments-affected by a stock market in free-fall-took a hit, some losing as much as 50 percent of value. Thus, even the wealthy had less disposable income for high-priced vacations and weekly spa treatments.
The luxury goods market experienced a several-quarter drought during which sales fell 8 percent-about $227 billion. As the stock market began to stabilize, however, sales in the sector have begun to pick up: high-fashion house Hermes posted a 19 percent spike in sales for a recent quarter, and LVMH Moet Hennessy Louis Vuitton reported an 11 percent increase.
Still, luxury retailers aren't out of the woods yet, and they resist applying the same promotional strategies to bring in business that more mainstream retailers might try. Tiffany's-widely regarded as a premier jeweler-would risk damaging its carefully tended image if it were to advertise, for instance, a "buy one, get one free" sale or discounts on its crystal or sterling patterns. Interestingly, such promotions by retailers like JCPenney or Lord Taylor seemingly have no adverse effect on shoppers' perception of value.
Recently, Tiffany's quietly discounted its prime line, diamond engagement rings, by about 10 percent, but did it without hoopla. Only those shopping for an engagement ring would have known about the reduced prices, having been informed by the salesperson. Discounting merchandise without making it widely known allows retailers like Tiffany's to maintain their traditional pricing policy-outwardly, at least.
But what can a luxury retailer do to increase traffic during a recession if it doesn't advertise a sale? Many retailers choose to be discreet and communicate sales only through emails to regular customers. Others communicate more publicly, positioning the sale as "clearing inventory" while bolstering revenues. During a recent holiday season, Saks Fifth Avenue announced savings of as much as 70 percent, through print and Web ads, store signage, and e-mails. Saks management said the sales didn't hurt the store's image at all.
When spas and beauty salons discount the cost of services to encourage business, they run the risk that customers will think the service was initially overpriced. Instead, spas and salons have found success in bundling services: for example, a customer who gets a manicure can, for a reduced price, get a facial at the same time. For some reason, the notion of bundled services does not diminish their value in the customer's mind. Another tactic that works is the incentive plus special offer: for example, by referring a customer to your spa or salon, you'll receive a coupon good for 10 percent offon your next appointment. Such a promotion can also encourage the purchase of multiple services.
How do you think the price-quality relationship affects the marketing of luxury goods?