<p><em>Scarcity and exclusivity lead to an increase in willingness to pay and perceived prestige value, writes <strong>Ranjan Banerjee</strong></em><br><br>Guess the largest channel through which Rolls-Royce cars are sold in the United Kingdom. The answer: yacht shows. It’s not that surprising, when you think about it. Yacht shows attract the right audience: wealthy people with high disposable incomes, who value the good things in life.<br><br>The strategy hinges on a well-researched phenomenon in behavioural economics called anchoring. It refers to the observation that consumers do not judge value and make decisions in a vacuum — they do so relative to a reference point. The process of forming reference points is subjective. It is possible to anchor reference points and impact decisions. A consumer who has come mentally prepared to buy a yacht is less likely to balk at the price of a Rolls-Royce.<br><br>The 2009 US film The Joneses takes the role of luxury reference points to a whole new level. The Jones family moves into a swanky neighbourhood and quickly becomes the cynosure of the neighbours. The Joneses are good-looking, and they flaunt the latest gadgets with panache. Soon, many neighbours begin using the same products. Spoiler alert: as the plot progresses, we learn that the Joneses are really actors who get paid based on the sales of the products they flaunt. The film has satirical elements and takes an interesting turn, but the role of reference points in luxury consumption comes through clearly.<br><br>When consumers buy luxury goods, they are often guided by an image or experience, which is hinted at or perhaps sampled. Marketing luxury goods is about look and feel, so it’s important to focus on the minutest aspects of the buying and ownership experience. Design, styling and sensory elements all play a significant role in creating this experience.<br><br>A study of sensory branding by researcher Martin Lindstrom reveals that the more senses you involve at the point of sale, the higher the likelihood of conversion. This is important, because most luxury goods are high-margin, infrequently purchased items.<br><br>For example, German luxury car maker Mercedes-Benz employs a team of 10 engineers whose sole task is to create the ideal sound for the opening and closing of a car door. Rolls-Royce combined some 800 ingredients to re-create the scent of its classic 1965 Silver Cloud, to spray under the seats of its new cars. Thus sensory elements are used to cue an image, enhance the anticipation of possession, and subtly shift consumer reference points.<br><br>Research also suggests that many prominent brands deliberately produce less than they know they can sell. Part of the value of luxury goods comes from possession, and part from the fact that people who do not belong to a particular group do not possess it. Scarcity and exclusivity lead to an increase in willingness to pay and perceived prestige value. When a brand produces a limited edition, the implied exclusivity moves the consumer reference points on price upwards.<br><br>So reference points matter when buying luxury goods. What luxury brand do you aspire to buy? How did your reference points for it get created? These questions can help both consumers and marketers make better decisions.<br><br>(This story was published in BW | Businessworld Issue Dated 16-11-2015)</p>
