The third article in our Innovation series, the over arching strategy to innovate based on price is one that can be a decision of brilliance or detriment. While price is always a barrier to entry for customers in the luxury marketplace, having reduced prices can drive sales forward and increase revenue.
As a business model, innovations on price are more than simply end of season discounting, and instead are more integral to the company’s identity and perceived brand. For the fashion industry, in particular, deviating in cost can be a tricky thing. In part, fashion has become a living, breathing evolution and what feels fresh and current one season does not maintain relevancy in the seasons after. The dynamic nature of the industry lends itself to a constantly revolving door of what’s “in”, meaning that the shelf life of merchandise is somewhat limited. After all, no one wants to read yesterday’s newspaper. This is not to say that one cannot be fashionable wearing past season clothing, or that there is an expiration date on collections; this is more about one’s style than the business logistics of the fashion industry.
As a business, fashion houses need to reinvent on a seasonal basis in order to be profitable. Excess merchandise is usually sold at a discount, either by the brands themselves, retailers, outlet partners and/or newly established Flash sale sites. For the latter example, these are businesses that define themselves based on improving the pricing model. Take Gilt Groupe, Privalia or Ideeli as examples. They cater to a fashion-forward demographic who is used to spending at the total cost level for the designer or contemporary brands featured. At a minimum, the target demographic is exposed to these brands at full price and so understands the value in Flash sale. These businesses are totally straightforward in regards to pricing, not trying to hide the sale rack in the back of the store, so to speak. Rather, it represents their main value offering. These sites have been extremely successful in driving profit without exuding an outlet-discounting model or an out-of-style merchandise perception. They are raking in millions. Take Gilt Groupe, who reported $25 Million in revenue in 2008, $170 Million in revenue in 2009 and nearly $500 Million in revenue in 2010 (Wall Street Journal).
However, this commitment to price innovation should be executed delicately and with a strong regard for any established brand perception that may exist. Take, for example, Saks, a high-end department store with a reputation for extravagance and luxury. A hotspot destination for wealthy shoppers, Saks’ decision to offer deep discounting during the recession has severely tarnished their brand. By marking all the way down to 70% off, they introduced extreme reduced costing to a customer who was never a basement shopper. In doing so, Saks has inadvertently positioned itself in a strange middle ground; one where their previous customer has rebounded and again desires a luxury shopping experience, and their new customer seeking out price-based value feels more comfortable at Bloomingdale’s or Macy’s. Their decision to build out more Off 5th outlet centers supports this, and can prove to be a beneficial decision, but then what of their flagship and full priced stores? Luxury sales are expected to increase 10% this year (Bain & Company); however, the discerning luxury customer may no longer be a patron of Saks.
Innovations on pricing are often the scariest strategies for fashion and luxury brands, and for good reason. Be that as it may, the rewards can be great. Then again, so too are the risks.
Photo credits: Brain Hagiwara
All articles are reviewed and copy-edited by Gina Conforti
