Normally, the more that sales activities fall into a decline, prices drop, purchasing power is increased and demand stops declining as more people that consume the product become satisfied that the price is reasonable. As a result, most markets begin to reduce their prices on lower demand. However, some luxury markets raise the prices and the higher the prices, the better the sales. It’s an ironic situation. We call this ‘Veblen effect.’ What is the Veblen effect?
In the theory of the leisure class that America’s socialist Veblen wrote, he told of the upper class’s remarkable consumption that is carried out without realizing it. They just want to show off their social status. Veblen effect is irrational consumption; although the prices are higher, the demand does not shrink, but it does increase, because of vanity. This effect is largely based on luxury brands like Chanel, Gucci, Louis Vuitton, Prada.
With Chanel, in spite of the fall in the economy like a drop in the exchange rate in 2010, they raised the price of major handbags and increased the price of the same products every year.
With Gucci, they raised the price of some popular handbags and wallets in 2013 and utilized the policy of raising the price of popular products every year.
In the case of Louis Vuitton, they set up a management strategy that controlled the quantity and non-discount brands to stimulate vanity. Also, they utilized the policy that made waiting line space to control the number of people allowed into their very expensive stores to cater to only the ‘very well heeled.’
As with Prada, they designed the ‘Prada Saffiano line’ that raised the prices by 23%. This was the biggest increase rate among many luxury brands. Consequently, particular luxury brand markets increased sales despite the expensive prices. What is the cause of Veblen effect that is used luxury brand’s main strategy?
Veblen effect is seemingly vanity’s reflection that is conscious of other people’s attention and enables people to flaunt themselves. However, as a modern society, it has come up with a society where people can determine their status by putting in an effort. It means if you make an effort, you succeed and people think low status is the evidence that you don’t make enough effort. People want to get rid of this inferiority and show themselves off with luxury products. At the end of the day, this desire stems from the sense of inferiority and insecurity in the modern world.
To become a wise and desirable consumer, we should consider the price and quality of the goods you want to purchase. Also, you should have a reasonable attitude towards consumption and think not only of the present, but also the future.