How Luxury Goods Providers
Compete in an Economic Downturn
Ira Friedman is the CEO of Bay Audio, a
manufacturer of custom speaker solutions.
He holds an MBA from the Harvard Business
Have you noticed that wealthy clients are
asking you to do more for less? This is a
natural result of the power shift in our
industry from the professional (you) to
Clients with money are hyper-aware
of their power. The wealthy are enjoying
the best of times right now. Buying power
has consolidated to this small group of
people–and they’re flexing their spending
muscle like never before.
Well actually, that’s not true. You
see, in the years during and immediately
following the Great Depression, the
wealthy were gobbling up luxury items
and services just like they are today.
Because a depressed economy pushes
prices lower–merchants reduce their
margins by cutting deals, and service
providers cut their rates to secure work–
discretionary purchases become less expensive.
Here is a list of discretionary items that I’ve noticed “on sale”:
• Four-star hotels in L.A. apply a hefty discount if you stay a third day.
• High-end landscapers have slashed proposal prices by pitting their own
subcontractors against each other.
• Top restaurants have introduced lower cost prix fixe meals.
Here are a list of items that seem to be priced the same, or higher than 2008:
What’s going on here is simple. The retail prices of milk, gas, and Levi’s
are awfully close to their true delivered costs, so there’s not much wiggle
room in pricing. An aggressive discounter may shave 10 percent off a
gallon of milk, and that’s where the discounting ends.
But the “cost” of a room at the Fairmont or three courses at Mille
Fleurs (my local favorite) is a bit hazier. So high-end hotels and restaurants
create deals to capture the sale. These aren’t discounts in the traditional
sense. More like enhancements.
AV is Discretionary
Like high-end landscaping, the AV business is discretionary. Not that an
architect would leave AV out of his plans, but he can squish the budget,
send the project out to bid, and be assured of plenty of takers.
Chances are, you have been one of those takers. Now, let’s be clear.
I’m not suggesting that you are a discounter. I’m suggesting that you have
adapted to the market by engineering sophisticated systems with fewer
expensive parts, meaning that yesterday’s $200k project is now $150k.
And, even if your margins have stayed the same, you have earned less
money. As they say, you don’t take margin to the bank.
And just to make it more interesting, there are fewer $150k projects to
go around, so you can’t make it up in volume.
So How Should You Compete?
The AV world should take a cue from other high-end businesses,
like fine dining restaurants and four-star hotels, by using creative
promotions to give customers more for the original budget without
having to skimp on quality.
Note how the Fairmont competes: by offering a third night at a reduced
rate. And Mille Fleurs? By creating a limited prix fixe menu with smaller
Smart luxury marketers don’t cheapen their brand by discounting
outright. They reward their patrons by giving more with each purchase.
The trick in our business is to establish a value for the add-ons.
bid you took
been $200k, but
the products and
labor to fit the
you’ve done is
of the bid. The
from your room,
and Mille Fleur won’t serve cheap food just to hit a price point. Instead,
they stick with their high-end offering and give you more for the original
In the AV world, that means submitting a $200k proposal back
to the architect, but enumerating at least $50k in optional add-ons,
enhancements, and upgrades to the $150k system. In this way, the
architect gets what he wants (a $150k bid), the client gets what they want
(a perceived discount), and you get what you want (the margin dollars of
a $200k project should they purchase the options).
Remember that we’re in the luxury goods business, which means we
should look to our luxury goods brethren for marketing advice.