The Premium Price in the Luxury Clothing Industry
This article focuses on the calculation and definition of premium price within the luxury fashion sector. The premium price is an economic concept that refers to the price at which a product or service is sold, a price that by definition is higher than the market average. The calculation of the premium price considers several factors, such as product quality, company's market position, consumer perception, and competition.
According to the literature, especially the studies conducted by Shapiro (1983), Allsop (2004), and Roe & Bergen (1992), what defines the premium price is primarily the higher quality of the product, followed by factors such as brand heritage, brand association, brand image, brand identity, and exclusivity.
The analysis revolves around the following research questions:
• What is the premium price currently defined by companies in the sector?
• What is the premium price perceived by the consumer?
• Are the determinants of the premium price in the luxury fashion sector, according to modern literature, sufficient to justify the price premium?
The research aims to verify whether the price premium depends solely on the factors highlighted in the analysis of the literature or whether there are other variables to consider when choosing the pricing.
The methodological approach was divided into two phases: a qualitative analysis and a quantitative analysis. During the qualitative phase, in-depth interviews were conducted with four industry experts and four luxury fashion enthusiasts to identify consumer purchase drivers. In the quantitative phase, linear regression techniques and conjoint analysis were used to identify the main drivers of satisfaction for the analyzed brands. Also, the Price Sensitivity Meter was used to calculate the price perceived as optimal by the consumer.
In the analysis, two products identifying two companies with a premium position in their respective categories were considered. The selected products ar: the "Peekaboo" bag by Fendi and the "Gommino" moccasin by Tod’s.
The following are the reasons for this choice:
• Iconic and representative products of the two companies.
• Continuous products, that is, which are re-proposed every season with the same characteristics.
• They do not present differences in terms of processing or materials used.
• It is assumed they have almost constant production costs (scale and learning economies).
• Their retail selling price has grown progressively over the years.
• They have different mark-up multipliers belonging to two different merchandise categories, which allows for studying different purchasing habits.
The qualitative research aimed to identify the perception of different brands pertaining to luxury fashion, the definition of the characteristics that outline the typical consumer, and the drivers of importance during the purchase phase. The main factors identified by the respondents are: Product Quality, Material, Price, Origin of production, Brand Prestige, Brand Heritage, Shopping Experience, Importance/visibility of the logo.
The number of respondents is small and therefore statistically not representative of the population, furthermore, the sampling method used is non-probabilistic. The insights obtained cannot therefore be generalized globally, but despite these limits, they were extremely useful for the preparation of the online quantitative questionnaire administered in the second step of the research.
The online questionnaire, from a total of 1026 responses, following screening questions, provided 955 valid responses for the purposes of the research. The initial part of the questionnaire focused on questions aimed at profiling the typical consumer, the respondents' knowledge of the market players, and their purchasing habits. Subsequently, consumer preferences were analyzed in relation to the insights that emerged during the qualitative research. The graph in question presents the main drivers of importance. Product quality shows the highest evaluation, followed by material, price, and origin of production "Made in Italy".
Cross-referencing the analysis with profiling variables - "Have you ever purchased a luxury product?" and "What was your average expenditure in the last two years?" - it is clear that for those who have purchased at least one luxury product, the quality of the product, the origin of production, Made in Italy, and Brand Heritage, are significantly more important compared to those who have never made a purchase; whereas Product Quality, prestige, and origin of production are significantly more important for those who have had higher expenditure.
In the central part of the questionnaire, the focus was on the two companies and the selected products: Peekaboo bag and Gommino moccasin.
Starting with the analysis of the Della Valle company, 733 individuals claimed to know the brand and 584 stated they had made at least one purchase. The overall rating of the brand was 7.9 out of 9, while referring to the quality of the product the rating was 8 out of 9. It is particularly interesting to note that both ratings increase if only respondents over 30 are considered. Subsequently, the focus of the questionnaire shifted to the "Gommino" item, known by about 95% of the sample and purchased by half of it. The overall product rating presents a score of 8.84 out of 9, considering only those who purchased the product.
Regarding the Fendi brand, 887 respondents stated they knew the brand, of which 65% made at least one purchase. The overall evaluation of the Roman fashion house is 7.98 out of 9, increasing to 8 out of 9 when considering only the quality attribute. The overall satisfaction of the brand grows when considering consumers who have purchased at least one luxury product and those over 30. From the brand, the focus of the questionnaire shifted to the Peekaboo item, which was known to 78.5% of the sample. The overall product evaluation, referring to this sub-sample, is 8.3 out of 9.
Through linear regression, using the stepwise method, the satisfaction drivers of the two brands were obtained, both characterized by the presence of Brand Heritage as the main satisfaction driver.
In the case of Tod's, 59.7% of the model is explained, while in the case of Fendi, 36% is explained.
The final part of the quantitative analysis focused on defining the optimal price of the two items according to the panel of respondents, through direct and indirect price calculation methodologies, specifically using Conjoint Analysis (traditional full profile model) and PSM.
The Conjoint Analysis, in both cases, did not show reversals in relation to the price attribute, and through the decomposition of utilities, it defined the attribute "presence of premium brand" as the attribute with the highest utility value.
To define the price perceived as optimal by the consumer, the Price Sensitivity Meter (PSM) was used as a direct calculation method. This methodology involves asking the interviewee four questions:
· What is the price you consider too low for the product in question?
o This question aims to identify the price limit below which the quality of the product should be doubted.
· What is the price you consider fair for the product in question?
o This question aims to identify the price that should make the purchase seem like a "good deal".
· What is the price you consider high but acceptable for the product in question?
o This question aims to identify the price at which the consumer should still be willing to purchase the product.
· What is the price you consider too high for the product in question?
o This question aims to identify the price limit beyond which the purchase is considered too expensive.
In this way, it was possible to determine the price perceived as optimal within the panel of respondents. For the Fendi product, the price perceived by the consumer as optimal is €2800, while for the Tod's product, it's €380.
Unlike the previous analyses, cross-referencing the results with profiling and purchasing behavior variables did not reveal significant differences. Through a quick market research, it was found that the market price of the Peekaboo bag is currently €4100, while the price of Tod's moccasin is €490.
The methodology used allowed:
· To obtain the market prices chosen by the two fashion houses for the two products under analysis.
· To define that the determinants of the premium price, identified during the literature analysis, are correctly perceived by the panel of respondents.
· To determine the price perceived as optimal by the interviewed consumer.
As can be seen in the table, there is a discrepancy between the "optimal" price for the consumer and that defined by the company. This result could lead to the conclusion that the companies are making mistakes in setting the final prices of the items. However, if the sales flows of the two products are analyzed, both items reach a "sold out" situation every season.
Therefore, in contrast to what was seen during the literature analysis, it is not sufficient to focus solely on the characteristics of the brand, but macroeconomic variables must also be considered. Certainly, one of the factors that has allowed fashion houses to progressively raise prices has been the o pening of sales and distribution channels to emerging markets in the Asian continent, which in 2022 alone saw a growth of about 100% compared to the previous year.