December 18, 2021:
How luxury brands work - mechanisms and success strategies
There is no luxury that comes cheap. But is the price really what makes a product valuable? You could argue that “if you can’t afford this, then it is a luxury.” But that’s not so much a statement about the object or its value as it is about the person who is buying it. Will it work to simply put a million-dollar price tag on a product to master the art of creating a luxury brand? Unlikely. What you need to master first is creating desire for something extraordinary.
As strategy consultants, we work with clients from different luxury sectors like automotive, fashion and jewelry. What we found was that the creation of desire, the process of longing and passionate imagining, is crucial to building successful luxury brands. Yet creating it is far from easy. The main challenge in managing luxury brands is the constant trade-off between growing the brand while remaining exclusive and guaranteeing high quality. This managerial challenge is unique to luxury brands. If you grow too fast, you risk losing your desirability.
Luxury is about the extraordinary – this creates desire. In research we look at the processes of creating the extraordinary from different perspectives. Economically, it’s all about price and value; culturally it’s about the magical aura the brands radiate; socially, it’s about status and exclusivity; psychologically, it’s about how the brand makes you feel special; and managerially it’s about creating a culture of excellence. Understanding these mechanisms is crucial to creating desire and seducing consumers into your brand story.
Luxury brands have long known this. In their advertisements, they generate desire by relying on three principles: enrichment, distancing, and abstraction. The differences from mass-market and premium brands are striking. Through enrichment, such as storytelling, luxury brands take us on a journey towards the destination of desire. We rarely desire what we can have immediately. That’s why we seldom desire the ordinary world. Desire is created when something is just out of reach. Customers desire what they have to work for, what is almost out of their reach but still reachable. This becomes obvious when you look at luxury brand advertising. The difference between premium and luxury brands is that luxury brands position themselves in an extraordinary world. A mass-market fashion brand might stage its ad campaign in the middle of Berlin or in a city that might look like the one you live in; its models walk through the city wearing clothes you can buy in any shop. So this is just an ordinary, casual purchase. Luxury brands, by contrast, aim to transform an ordinary purchase into an extraordinary one. They do this by building distance between client and product.
First, luxury brands play with social distancing. The advertisement depicts an aspirational group, a target group that people would like to be part of. For premium brands, this means referring to status symbols like fast cars, helicopters, a lifestyle that ordinary people associate with the lifestyle of the brands’ target group. For luxury brands, this can even mean going into the grotesque, violating social conventions, or replacing real personas with fictive ones, such as characters from a fairytale. This is what we term social distancing.
Second, they use temporal and spatial distancing by positioning their products in a different time and place. They could, for instance, give their advertisement the look of a work of art or stage them in a remote and fictional place. They can refer to the product’s heritage but also serve to “de-place” it somewhat from the world we live in today.
Third, and perhaps most interestingly, luxury brands use hypothetical distancing. They create situations that are hardly or just not conceivable. One example is an advertisement by the brand Hermès. It features a woman who lives in Paris with a horse, a key symbol for Hermès that alludes to its heritage in saddlery. In one campaign, a woman is shown living together with a horse in Paris. The horse is depicted as the faithful companion – they walk down the streets of Paris or look out of their apartment window together. You immediately know that this is the creation of a big dream. They create a desire in the customer to be part of that dream by engaging with the product. Part of what makes a strong brand is that they have their own vision and a unique story that draws people in.
Lastly, there is the principle of abstraction, the many layers of interpretation there are in an ad. With most ads, what you see is what you get – the dress, the bag, the look, the lifestyle. The trick is to create an ad that leaves room to construct your own view and that references more substantial questions. One example is the image of a tree and a butterfly, which is a recurring motif for Hermès. A butterfly is a very fragile, ephemeral animal; the tree is a long-standing, substantial part of nature. A discourse between permanence and ephemerality evolves. To create desire, you need to make consumers dream and invite them to a fantastic journey that only imagination can spark. Enrichment and distancing, especially hypothetical distancing and abstraction, are the ingredients of this successful recipe.
Luxury brands give consumers the space to project their own fantasies onto the product. This is how they create a lasting story in the minds of their consumers. Hence, the product becomes something that lives longer than the commercial counterparts that are designed to be quickly replaced. That’s when customers are willing to pay a higher price. They will gladly invest in an extraordinary experience that potentially lasts their whole lives. Only if you get all dimensions right, you will be able to translate the desire and high price into a successful business model. Talk to us.
Author H. Gurski
March 23, 2021:
How Gen Z Influencers Are Shaping Luxury Brand Futures
What possible impact could a teenaged boy have on the fortunes of luxury brands like Gucci (NYSE: GUC), Rolex, and Burberry (NYSE: BRBY)? As I recently learned firsthand, more than you might imagine.
I was packing for a recent business trip when my 15-year-old son appeared in the bedroom doorway, leaned against the jamb, and asked, “Dad, what are you going to be flexin’ in New York?”
“Flexing? You mean going to the gym?”
“No! You know, like how about wearing your GMT Master Batman Rolex? Or get a Gucci belt. Get your flex on, Dad!”
The term was new to me but not to my Gen Z progeny. It appears in rap lyrics and YouTube videos of performers boasting, fanning wads of cash, and other demonstrations of prosperity or bravado. Interesting to know, but not nearly as interesting as the fact that my teenager is embracing the luxury brand ethos and wants to share it, to influence me.
As a provider to retailers of predictive analytics and other tools, this was a fascinating bit of accidental research, the kind that is invisible to data crunching, focus groups, and trend lines. I had the bit of curiosity in my teeth. Not long after, I was at an industry event in Las Vegas and ran into a Wall Street analyst I know. The first things I noticed were his Gucci slip-on loafers, his Gucci blazer, and his designer belt.
Soon after that display of flexing, I had dinner with a twenty-something business news reporter. At one point I asked her, “If I gave you a million dollars to spend on clothes and such, would your first instinct be to spend it on well-known brands?”
Without hesitation, she said, “Absolutely.”
The final bit of evidence that we’re in an uptick in the luxury brand cycle is that after years of “de-branding” that accelerated during the Great Recession, companies like Burberry are re-flexing their brands. For $790, Burberry will sell you a loose-fitting cotton shirt with leather trim and the name “BURBERRY” printed in huge red letters across the chest.
What’s happening here may be as significant as what happened during the late 1970s and into the 1980s, when young urban professionals became Yuppies, drove BMWs, and—in urban centers like New York—shopped at Ralph Lauren (NYSE: RL). Now, as then, young people are putting a high value on status. As a result, Generation Z has become a target for marketers who are aiming via social media at what would seem to be unlikely influencers.
In a feature article last fall the Wall Street Journal profiled such a child, a fourth-grade fashionista named simply Giana (her last name is never used). Gina has an artistic streak, models a line of “streetwear looks,” and posts her photos and likes for more than 20,000 followers on Instagram. She has been recruited by brands like Nike (NYSE: NKE), which is collaborating with her on a line of shoes.
This is a very different world from the one in which most of us came of age. Youngsters like my son are in the first generation that grew up with the Internet, cell phones, etc., and are much savvier than their parents about social media. A chosen few are being recruited by marketers to reach the roughly 67 million Americans who were born between the late 1990s and a few years ago, a group which directly or through parents is estimated to have nearly $45 billion in purchasing power.
More profoundly, it is established social science that affinities developed during childhood are enduring. Baby Boomer boys will recall that Dad’s favorite gas station gave away or sold branded toys, such as miniature gas stations or tanker trucks. When those kids grew up they bought the brand of gas that Dad bought. Gen Z and the brands they are flexing today are shaping the future in a way that’s never before been possible.
There’s another element to this phenomenon that social scientists say we haven’t experienced since the Great Depression. Writing in the Wall Street Journal last September, Janet Adamy, who writes about demographics, observed that the 17 million members of Generation Z who are now adults and starting to enter the workforce, “came of age during recessions, financial crises, war, terror threats, school shootings and under the constant glare of technology and social media.” Adamy suggests that, compared with older population cohorts, they are “more industrious and driven by money,” and thus more attracted to traditional high status, high-perceived-value brands.
In a recent conversation with Milton Pedraza, CEO of the Luxury Institute, a research and business solutions firm, he agreed that, “Luxury and prestige logos are back with a vengeance. In today’s luxury world, brand influencer power is often reversed, with connoisseur teens guiding their parents as to which brands are hot, and which ones are not. Whether or not luxury brand stewards realize it, the influential power of Gen Z spans categories and generations”.
Brand managers should be paying close attention to the youngest generation now so that when these influencers become customers and decide to “flex,” the products they fancy are on store shelves or ready to ship. For Gen Z, it will be more important to have the items they want to buy in stock than it is for Millennials and older generations to be offered items that surprise and delight. Where other generations want to stand out, Gen Z consumers tend to want to fit in.
For marketers, trial and error is a risky, inefficient strategy for determining how best to serve this unique market the way it is used to—better and faster. Instead, brand managers need to become more savvy and nimble about leveraging technology and predictive data. There are a number of companies that can help solve this “voice of the customer” challenge. To be competitive in the future, luxury brand executives should be tapping into these predictive resources today. Talk to us.
Author Greg Petro
August 20, 2021:
LICENCE TO OPERATE AND VALUE CREATION
The license to operate is the lowest level of reputation and image of the company and/or its business model and refers to social acceptance. A missing license to operate is expressed in a loss of willingness of stakeholders such as customers to cooperate with the company. This makes it more difficult, if not impossible, for the company to create value. It could therefore also be described as the basis of corporate value creation.
One component of shared value is the management of value creation. Shared value goes far beyond corporate social responsibility ("doing good"). Companies that follow the idea of shared value strive for economic and social benefits as well as shared value creation for companies and stakeholder groups. Cooperation is needed to create this shared value. An important task is to make stakeholder groups (analysis) aware of the advantages of cooperation.
According to the definition, value creation means converting the quality of a product or service into a payment (money) that is higher than the payment for the external materials and services (supplies) that the company consumes in this process. The enterprise must produce something that is more important to a third party (customer) and is therefore worth more money.
The added value that the company itself has to generate can only be achieved if various success factors are taken into account: a) It has to create quality for its customers (e.g. agreement on specifications and performance specifications, ISO certifications). However, the expectations of the target customer must be met. b) The customer must attribute the created quality to the company as a supplier. Only the own performance can create value. For this purpose, the own contribution must be separately perceptible from the purchased preliminary services. At the same time, the customer should not be able to obtain the required quality without this contribution, or only with additional effort. c) The company must always reliably keep its promise to the customers - otherwise there is a risk of loss of trust and value of the brand. d) The product or service must arouse desires-the customer must expect added value from the offered good, which he does not want to do without. Into which invest the customer spends his money depends on his life situation and the things that are valuable to him. Therefore, marketing has an influence on the ranking of the target customer's desires and is thus part of the value creation. e) The company with its product/service must strive for uniqueness. A low degree of interchangeability with comparable offers increases the desire of the customer to buy this product/service. This increases the value of the own offer in the perception of the customers. f) The strategic pricing taking into account the customer's willingness and ability to pay. The realizable price volume depends on the one hand on the effort with which the user problem has been solved up to now and on the other hand on the additional value that the new offer develops. g) The company must make the value creation reproducible. For this purpose, it must formulate an adequate profitability claim and implement it in the practical processes. This is because reproducibility requires that sufficient financial surpluses are generated.
Important questions arise: Which expenditures for research and development services are necessary to maintain or expand the quality level? What qualitative changes in market positioning are aimed for? What capital costs are associated with quality development? Which risk prevention measures (risk controlling and risk management system) must the company take? So how are the company's profitability requirements and quality management aligned with each other? Talk to us.
April 29, 2021:
Digitization, Digitalization, And Digital Transformation: Confuse Them At Your Peril
As the hype around digital transformation continues to persist, the terms ‘digitization’ and ‘digitalization’ join the fray, increasing the level of hype while adding confusion.
In reality, these three terms have distinct meanings – or at least, we can make them distinct depending on which authority we’re listening to.
This question is more than a semantic exercise, however. In reality, people are confusing them in ways that shortchange the power and importance of digital transformation, thus putting the very survival of their organizations in peril.
Digitization: The Straightforward Term
Digitization essentially refers to taking analog information and encoding it into zeroes and ones so that computers can store, process, and transmit such information.
According to Gartner’s IT Glossary, “Digitization is the process of changing from analog to digital form” – a definition few would disagree with.
There are many examples of digitization in enterprises today, as there have been for many decades. Converting handwritten or typewritten text into digital form is an example of digitization, as is converting the music from an LP or video off of a VHS tape.
In the enterprise context, digitization is important both for dealing with analog information as well as ‘paper-based’ processes – where ‘paper-based’ is nothing more than a metaphor for analog.
It’s important to remember, however, that it’s the information you’re digitizing, not the processes – that’s where digitalization comes in.
Digitalization: Fraught with Ambiguity and Confusion
Unlike digitization, digitalization doesn’t have a single, clear definition. “‘Digitization’ and ‘digitalization’ are two conceptual terms that are closely associated and often used interchangeably in a broad range of literature,” explain J. Scott Brennen, Doctoral Candidate in Communication, and Daniel Kreiss, Associate Professor, both at the University of North Carolina School of Media and Journalism. “We refer to digitalization as the way in which many domains of social life are restructured around digital communication and media infrastructures.”
Brennen and Kreiss thus base their definition of digitalization on social life – in other words, how people interact. As such interactions move away from analog technologies (snail mail, telephone calls) to digital ones (email, chat, social media), both work and leisure domains become digitalized.
Gartner also weighs in on this term. “Digitalization is the use of digital technologies to change a business model and provide new revenue and value-producing opportunities,” according to Gartner’s glossary. “It is the process of moving to a digital business.”
Gartner’s definition is thus quite different from the academics’, focusing on changing business models rather than social interactions.
The Gartner definition, however, does bring up another question – just what is a ‘digital business.’ “Digital business is the creation of new business designs by blurring the digital and physical worlds,” Gartner’s glossary espouses.
Unfortunately, this latter definition is hopelessly vague. What is the digital world? What does it mean to ‘blur’ worlds? And for that matter, what is a ‘business design’?
In fact, it appears that Gartner is not of one mind on its definition of digitalization, as a recent Brookings Institute report quotes an entirely different one. “Digitalization, according to Gartner, Inc., is the process of employing digital technologies and information to transform business operations,” according to the report Digitalization and the American Workforce by Mark Muro, senior fellow; Sifan Liu, data analyst; Jacob Whiton, research assistant; and Siddharth Kulkarni, former research analyst; all from the Brookings Institution. Kulkarni is now data science manager at Adobe.
According to this definition, digitalization is more about business operations than either social interactions or business models – although clearly all of these notions are interrelated.
The Brookings report, in fact, focuses on how digitalization impacts people. “Digitalization is transforming the world of work,” according to the report. “The acquisition of digital skills has now become a prerequisite for individual, industry, and regional success.”
As organizations implement ‘digital technologies’ – which in this context really means computers and other information technology – people’s jobs change. Imagine factory workers putting down their hammers and lathes and instead using computer-controlled equipment, for example. According to the Brookings report, such change is at the heart of digitalization.
Automation is a major part of the digitalization story, whether it be shifting work roles or transforming business processes generally. In fact, for many people, digitalization applies primarily to such processes. “Digitalization … increases process efficiency and improves data transparency, and of course, it should help boost your top line,” explain Georg Tacke, CEO, and Annette Ehrhardt, Global Head of Communications & Marketing Senior Director, Simon-Kucher & Partners . “If you operate an online platform, then your company may already be 80 percent digitalized, and you can gain more efficiency or create more customer value by going the remaining 20 percent of the way.”
In this example, implementing the technology behind such an online platform isn’t the digitalization step per se – it’s shifting the business process to such a platform. It seems, therefore, that Gartner’s definition that ties digitalization to business operations is on point, as such operations consist of business processes that digital technologies can transform.
Digital Transformation: Beyond Digitalization
Digitalization, however, is quite distinct from digital transformation.
An organization might undertake a series of digitalization projects, ranging from automating processes to retraining workers to use computers. Digital transformation, in contrast, is not something that enterprises can implement as projects.
Instead, this broader term refers to the customer-driven strategic business transformation that requires cross-cutting organizational change as well as the implementation of digital technologies.
Digital transformation initiatives will typically include several digitalization projects, but executives that believe that there is nothing more to digital transformation than digitalization are making a profound strategic mistake.
In reality, digital transformation requires the organization to deal better with change overall, essentially making change a core competency as the enterprise becomes customer-driven end-to-end. Such agility will facilitate ongoing digitalization initiatives but should not be confused with them.
In the final analysis, therefore, we digitize information, we digitalize processes and roles that make up the operations of a business, and we digitally transform the business and its strategy. Each one is necessary but not sufficient for the next, and most importantly, digitization and digitalization are essentially about technology, but digital transformation is not. Digital transformation is about the customer. Talk to us.
Author Jason Bloomberg
December 26, 2019:
One of our favourite meeting points: The Interalpen Hotel Tyrol, Telfs Austria
To chill (English: cool, cool down; in American slang also: calm down, relax, hang around, hang out) is a term taken from English usage.
It is mainly used in today's youth language for "relax" ("chill out!" instead of "calm down!") or "hang out" ("let's chill out!").
Over time, various variations of the term "chill" have been developed, such as German: "chillig", "Chiller", "gechillt" or "Chillaui". "Chilling" has meanwhile also become more generally established for activities that are mostly relaxing, passive and associated with pleasure ("chilling on the sofa“, "chilling and snacking", "relaxing", recently also to be found as a suitcase word in the German: "chillaxen")
Author Volker Kumpf