Published in the San Diego Union-Tribune, May 6, 2019
When you are starting a company, one of the first questions you have to answer is: “How big is the market?” Size matters, but sometimes it is measured in a different way.
Welcome to the very high end. And I mean high end — like $75,000 watches or a Ferrari 250 GTO or the infamous Hermes Birkin Bag. On Fridays, The Wall Street Journal publishes a section called Mansions. It showcases ultra high-end real estate sales and is one of the most read sections of the paper. It turns out that most of us regular folks are deeply fascinated by what we can’t have.
The target market for “luxury” stuff is small, but the margins are high and the brand loyalty creation is indelible. The number of people who go to car shows and look at an expensive car is exponentially greater than the number who can afford one, and that in turn is more than the number who actually buy one.
But if you happen to fall into the last category, then in the case of Ferrari, you have to be interviewed and “approved” before you can even order and pre-pay for a multi-million-dollar car, which will not be delivered for more than a year. Scarcity is the marketing tool.
The luxury business extends across all sectors, from resorts to cruises, from private jets to custom vacations. How many whales (a term for ultra high-net worth individuals) are there in the ocean, and how many Ahabs are searching for them? What defines luxury in such a way that it commands such fierce loyalty and a disproportional economic benefit?
Harvard Business School Professor Stefan Thomke has written a case study on Ferrari in which he concludes that “the overarching goal of a Ferrari is to create an experience — a sensual experience.”
Thomke also studied the famous German watch maker, A. Lange & Sohne, makers of the $2.6 million limited edition platinum Grand Complication. (At that price, you would think it should be really simple).
In each case he found legendary companies with a long tradition and history, and both practice what Thomke calls the four Ps — production, pricing, products and productivity. Those Ps should be considered by every entrepreneur.
So what is luxury in the context of everyday life, and what does the word “sensual experience” mean? Let’s try Amazon. My bride orders the cat litter every two weeks from Amazon. It arrives on time, no fuss, no trip to the pet store. I consider that a luxury experience.
Next, Apple. My iPad and its interface are flawless, and I have easy Internet access to the world. It works beautifully. You can see where I am going. Each of those experiences is the perfect blend of “product-centric” combined with “customer-centric.”
Every startup should consider integrating those four Ps in an attempt to create that sensual experience in which sensual is not code for a rare, buttery leather dashboard, but rather for the sheer delight when something works exactly the way you want it to.
The underlying theme is that if it creates that kind of experience — then you have pricing power and you can charge more for it.
The Ferrari and the Sohne discussion touch on another core issue — what is your product worth and how do you price it? What is the exponential value that the maker can attribute to a luxurious experience?
Why is Gelson’s so successful? You can buy the same chicken breasts at Vons for 25 percent less. But it’s not just the chicken, stupid. There was a guy who once thought he could charge $4 for a cup of coffee. The experience is part of the price.
So the final challenge to all my entrepreneurs-in-waiting is a simple one. Can you create a product or a service that rises about a commodity and gives to your customer a sense of wonder and delight and consistency?
If you can do that, then you can create what is called a brand — and then you have allegiance and then you can begin to storm the gates of unicorn-ville.
Me personally, my car is 13 years old and my watch cannot tell me the phases of the moon in 2050.
Rule No. 608
It’s not what it cost, it’s what it is worth.