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Why Luxury Brands Should Embrace Being Cheap

Relevant topics Archive, Strategy

  • Neuromarketing Principle:
    Outlet stores can serve as a brand entry point for people who might initially be hesitant to buy a brands expensive goods.
  • Application:
    Don’t be afraid to open an outlet store even when you are a luxury brand.
  • Consider the following scenario. You are walking through your city on a Saturday afternoon, looking to buy a new shirt. All of a sudden, a retail store of an expensive high-end brand catches your eye, with several beautiful high-class shirts in the storefront. You’ve never bought anything from this brand, but you really like it’s style and designs.

    Enthusiastically you check how much one shirt costs and are shocked to find that the price tag of one of these shirts almost equals your entire weekly paycheck. Would you be ready to pay this enormous amount of money for a shirt from a brand you’ve never owned anything from?

    Unless you are a rich billionaire with more money then you could possibly spend in a lifetime, your answer would probably be a resounding no.

    Instead, you would probably walk to another store with shirts that look slightly less good, but cost only a fraction of the price.  You would probably still like the design and style of the brand, but the prices would stop you from buying any products from it. But what would happen if in this scenario you wouldn’t have come across a premium retail store, but an outlet store of the same brand? This outlet channel would feature shirts with the same design and style, but with a price tag that’s significantly less than those of the high-end retail store. Would you be willing to buy the shirts under these circumstances? The chances that you will now answer yes, will probably go up dramatically.

     Outlet stores and their effects on customers

    It’s this relationship between a brands retail and outlet stores and the influence these channels have on the spending behavior of their consumers that was the focus of recent research. For years, outlet channels have had a bit of a negative reputation with high-end retailers, who feared that the adoption of outlet stores might lead to a dilution of their high-class brand image. In addition to brand dilution, these retailers also feared that adopting outlet channels might entice their current high end customer base to switch to the outlet channel, thereby decreasing the overall amount of money coming in.

    However, research by Soysal and Krishnamurthi(2015), has uncovered that these negative feelings might not always be justified. In an extensive case study of a leading retailer in the USA, they studied how purchase behavior of the customers was affected by the opening of new outlet stores. For over two years, they tracked individual purchases by customers in the retailer’s channels. What they found was that even though it’s true that the customers that choose to shop in the retailers outlet stores initially spend less than those who select the retail outlets, the adoption of these outlet channels caused them to eventually spend more in the retail channels.

    So if you own a high-end brand and are having doubts about setting up a cheaper outlet channel, a good thing to do would be to just try it. The outlet channel could serve as an entry point for customers, for whom the high prices in the regular retail store might initially be too high. They might start buying the cheaper products in the outlet store and by doing so increase their commitment to the brand.

    This commitment will increase further with every brand-related purchase they make and every interaction they have with the brand. Eventually, this commitment will reach a point where they will consider buying the more expensive goods in the retail channel. They might not have reached this point without the easy entry point that the outlet store provides. Opening an outlet store could therefore capture business from customers who might otherwise not have bought from the company.

     An outlet for every company?

    These results are certainly interesting. Does this mean that high-end brands should start opening outlet stores straight away if they haven’t done so yet? Before doing so, brands might consider the way this study was carried out.

    This research was an extensive case study, but it focused specifically on one retailer. Its focus on only one company means that these results don’t necessarily work for other companies. Even though the researchers did some effort to exclude the influence of other variables, one should still be careful to generalize these findings to other contexts.

    The retailer that was the subject of this research was an American company specializing in apparel. So, if your company happens to be specializing in high-end clothing and is operating in American markets, these findings could be applicable for you. In other situations, it’s probably best to exercise with a little more care.

    Take aways

    • Outlet stores don’t always have a negative impact on high end brands and their profits
    • Outlet stores can serve as an entry point into the brand and its products for customers who might initially be reluctant to pay a high price for the brands retail products
    • Customers that get to know a brand and its products through an outlet store might eventually start shopping at the brands more expensive retail stores.
  • Why Luxury Brands Should Embrace Being Cheap
  • Reference:

    Soysal, G., & Krishnamurthi, L. (2015). How Does Adoption of the Outlet Channel Impact Customers’ Spending in the Retail Stores: Conflict or Synergy?. Management Science, 62(9), 2692-2704.

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