(Source: Forbes)

Companies pricing luxury items "are not selling goods, they are selling an emotion," strategy and marketing consultant Jens Baumgarten with Simon Kucher & Partners tells Forbes.

Harvard Business School Marketing Professor John Gourville says that "pricing in the luxury market requires a lot of guess work…  The willingness of consumers to buy luxury goods is often a factor of who they are trying to impress," says Gourville.

In weighing luxury purchase decisions, performance and function are on the list, but it's perceptions of quality that truly drive consumer behavior. Other factors include the pricing of the nearest luxury competitor, the sense of exclusivity, the emotional message wrapped into an item given as a present, and the reputation that comes with ownership of certain luxury goods.

Professor Jagmohan Raju of the Wharton School at the University of Pennsylvania tells Forbes that luxury gifts can serve as a "demonstration of affection."

Professor Raju warns luxury brands of negative externality: the more people who have access to the product, the less value it holds because it reduces exclusivity.  Scarcity allows the consumer to feel like a part of an elite group.

Pricing too low is especially dangerous for premium brands.  "If a product is priced too low, it will have the reverse affect on the emotions," says Baumgarten.

The art of luxury pricing goes beyond costs, competitors or market prices, according to two consultants from Simon Kucher & Partners, Dr. Andreas von der Gathen and Burkhard Gersch., who wrote: "Emotion-based pricing is the key to success."

Even cemeteries have a luxury market, with The Santa Barbara Cemetery (California) offering burial plots for two overlooking the Pacific Ocean for $83,000. 

(Posted 23.7.08)