Higher Prices Challenge the Wealthy’s Willingness to Pay

inflationDespite expanding into new markets, the luxury retail business has been relying on price increases as a way to drive sales. Even customers in this niche are nearing the limits of what they are willing to spend.

As an example, over the past five years, the retail price of a Chanel quilted handbag has increased by 70 percent to $4,900.00. If you want to pick up a Trinity gold bracelet at Cartier’s you will need to pay $16,300, a full 48 percent more than you would have paid in 2009. A Piaget’s ulatrathin Altiplano watch is $19,000, up from $6,000 in 2011. 

Rising faster than inflation. These increases for some of the world’s most expensive items are rising faster than the inflation rate. They contrast with the middle and lower ends of the retail market, where even small price changes can be enough to drive away buyers.

At the high end of the market, a higher price point can make a product more attractive to buyers, according to one economic theory. However, some attack it as a flimsy platform on which to build sales growth. Critics say that it may have already reached its limit in this case and may even backfire if the economy tanks even further.

Tracking luxury spending. Spending on luxury items, including apparel, watches, jewelry, cosmetics and leather goods, reached $390 billion in 2013, according to Boston Consulting Group. Sales growth is starting to slow from pre-recession levels, however. Sales of these types of items rose by seven percent last year, which was down from the 11 percent annual rate in 2010-2012, according to the figures released by BCG.

The high-end brands say that the price increases are necessary to maintain quality and offset rising production costs. Wages in China have risen by 62 percent since 2007, and the price of steer hides used for leather goods has increased by 17 percent during the same period. The price of gold has more than doubled, which also has also impacted the price of luxury goods.

While charging more may have worked well in the past, luxury brand owners may need to balance their need for increased profits with the realities of the market.

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