In the following dissertation, consumer's behaviour and the subsequent manager implications will be examined in a substantially growing sector, the luxury sector. One the one hand, the following dissertation will outline how consumers are influenced by other's view of them and how this relates to a challenge of the standard demand theory. Concepts such as the quest for uniqueness by snob consumers and the pursuit for exclusivity in the case of Veblen consumers will be explored in detail. On the other hand, the dissertation will evidence consumers' way to search for belonging by jumping onto the bandwagon with the aim of following certain trends and thus be part of a special group.
In addition, it will also be highlighted how other type of consumers will not be conditioned by other's view and will ignore psychological factors. We will explore how they buy according to personal satisfaction since they are Hedonist and Perfectionist consumers. To simplify, Sartre's philosophical concepts such as the “being-for-myself” and “being-for-others” will be implicitly recurrent throughout the dissertation.
Moreover, reasons for purchasing luxury goods will be considered based on the perceived value of each of the mentioned consumers and ergo, the rationale for their purchasing behaviour. Besides, factors affecting Bandwagon, Snob and Veblen effect will be discussed and to what extent luxury consumption is personal or non-personal. The role of “influencers” in shaping impulses will also be highlighted, since they are part of the demand function.
Finally, managerial implications as regards the consumer segmentation in the context of network externalities will be analysed, together with the negative effects of counterfeiting for the luxury brands profitability.
In the last decades, an increase in the rise of disposable income allowed middle-market consumers to be able to trade-up to premium priced products (Twitchell, 2001). “Luxury brands outpace that of other consumer categories and are responsible for the development of a $220 billion global industry” (Keller, 2009). Besides, the consumer base is widening and thus, the phenomenon of "democratization of the luxury market" is becoming more realistic for various reasons, including the birth of outlet malls, discounts and second-hand markets (Lim, Youn-Kyung and Runyan, 2013). In addition, the exclusivity of luxury brands is decreasing since nowadays it is not only for the rich and the elite, and even the masses are purchasing high range products perhaps due to the birth of specialized product lines (e.g. Armani has Emporio Armani, Armani Exchange, Armani Jeans and Giorgio Armani) to cater diverse market segments.
A network effect exists when “the net value of an action (...) is affected by the number of agents taking equivalent actions” (Liebowitz and Margolis, 1994). Network externalities can therefore influence consumers' decisions whether to purchase or not a particular product. Although network effects are omnipresent in the economy, they are highly present in the luxury industry either in the bandwagon phenomenon (as positive effects), in the Veblen phenomenon and in the Snob Effect (as negative effects). What distinguishes network effects from network externalities is that the former is sometimes misinterpreted as creators of inefficiencies, but are now recognized as pecuniary external economies and diseconomies (in fact, they are also identified as demand-side economies of scale.) Yet, the latter do cause market failure, but are far less common than network effects (Liebowitz and Margolis, 1994).
3. Definition of Luxury
There is a huge body of research on luxury brand management. Yet paradoxically, while knowledge improves, confusion over the term ‘luxury' increases (Miller & Mills, 2012). In order to provide clarity to the analysis, it is essential to understand what is meant by ‘premium/ luxury fashion' and therefore which definition to follow given that scholars' denotations diverge on what a luxury brand is. Yet, the fact that increasing studies make the definition more unclear, together with the lack of congruence in research and empirical support, lead to the conclusion that the issue is still not theoretically stable. The following study will be based on two definitions:
“Kapferer and Bastien argue that brand luxury has two facets. These two facets are indulging in one's pleasures (luxury for one's self) and a demonstration of success (luxury for others) and that when it comes to luxury, being unique is what counts.” (Kapferer and Bastien, 2009).
In fact, Dubois and Duquesne (1993) argue that “luxury involves a desire to impress others, with the ability to pay particularly high prices and an ostentatious display of wealth.”
3.1 Reasons for purchasing luxury goods
Kim, J. (2012). Consumer perceptions of the luxuriousness of prestige brands (Order No. 3494662). Available from ProQuest Central; ProQuest Dissertations & Theses Global. (921659107). Retrieved from https://search-proquest-com.ezproxy.unibo.it/docview/921659107?accountid=9652
There might be many reasons for buying luxury goods that are not mutually exclusive and might be interpersonal or personal. The former refers to psychosocial dimensions, since the product provides interpersonal value when purchased and is most common in collectivist societies. The latter, instead, refers to personal dimensions or quality and functionality of the product because of the independent value the product provides to the user itself.
As regards psychosocial dimensions, the first concept exposed is “perceived conspicuousness”, which refers to how individuals are influenced by reference groups and also refers to those who buy luxury to reflect social status. Veblen (1994) coined the term “conspicuous consumption” to refer to product consumption to achieve prestige and status. The motivation of consumers is ostentation and are considered Veblenian consumers. Secondly, “perceived uniqueness‟ emphasizes on the individuality and restricted supply of products, which in turn increases the consumer's inclination towards the brand with limited supply (Lynn, 1991). Consumers tend to have a snob attitude and adopt a quest for uniqueness. Thirdly, perceived social value refers to the term “extended self”, which suggests that identities are reflected through possession of products (Dillman, 2000; Belk, 1988). By displaying luxurious products, consumers seek belonging in prestigious groups and thus behave according to the Bandwagon phenomenon.
Regarding personal dimensions, “perceived emotional value” must be taken into account since luxury products are predominantly “hedonic‟ (Hirschman and Holbrook, 1982) given that luxury consumerism -as well as hedonism- usually pursues pleasure and self-gratification. In addition, “perceived quality” influences consumers who see a higher value in having a product produced by a brand that guarantees quality and reliability. Ergo, reassurance motivates “perfectionist” consumers that prefer not to risk. This specially occurs in the case of “experienced goods” where quality cannot be examined before consumption or in the case where the cost to the customer of buying a defective product is high and hence, the value of the brand is more important.
4. Network Effects:
Weitzel, Wendt and Westarp (2000) studied the (macro) dynamics of network effect markets with the basis that multi-actor systems are not subject only to individual (micro) decisions of actors but also on “personal neighbourhood structures” displaying patterns of networks. Putting into the luxury industry context one of the main determinants of the strength of the network effects is the intensity of communication, which is the source of personal network exposure within the diffusion process and is shown to have a positive effect on equilibrium concentration. Moreover, intra-group pressure positively correlates with closeness of the network's topology: there are high intra-group links and inter-group conformity is inhibited since there is resistance to outside pressure. In addition, opinion leadership simulated in the study through the magnitude of influence on others. The fact that some central agents in networks can influence diffusion can be perceived in everyday life and plays an important role in brand image, word-of-mouth (WOM), public relations and other marketing activities.
One factor that influences the demand is network externalities. Ignoring negative prices, when total consumption of the product is low, there is a poor effect of network and demand has a negative slope (from demand=0 to QL). The same occurs with network externality exhaustion, demand reaches a normal shape due to the risk of commoditization of the product (from QH until the demand reaches its maximum value). Conversely, in the area from QL to QH, the slope of the demand curve is positive and thus quantity increases marginal value for consumers increases as quantity demanded increases. (Akerlof et al, 2008).
If suppositions were to be made, one might expect that a Snob consumer to be positioned at a point where quantity demanded is at is minimum and price is at is maximum. Moreover, Veblenian consumers would be expected to be located at a point where the demand curve is positive since the higher the price is the higher the willingness to buy the product. Bandwagon and Hedonist consumers do not depend only in price; thus, price cannot be the only variable to assess when positioning them in the graph.
4.1 Bandwagon Effect:
In the 1950s the Bandwagon effect was introduced by Liebenstein to explain the purchasing behaviour of consumers in the luxury industry. It refers to the positive network externalities imposed on individuals involved in the purchase of the luxury good. “Whether one buys may be determined in part by how many others have. When the correlation is positive we refer to ‘bandwagon' effects, and when negative, ‘reverse bandwagons'.” (Maxwell, 2014). Every new user of the product derives benefits for itself (private benefits), but also confers external benefits on existing users (Lopatka and Page). Ergo, when the purchase of a product rises its value, as marginal private benefit of purchasing it increases and so does the marginal social benefit. This occurs because the potential consumer wants to belong to, or be associated with, a particular group (Lim, Youn-Kyung and Runyan, 2013).
In behavioural economics, economic behaviour considers individual behaviour based on psychology theories and other branches of sociology. In fact, the key to marketing most clothing is to create a Bandwagon effect, especially in the area of luxury where consumers tend to buy products to fit into a certain group (Wetzstein, 2013). Network externality in market demand has become a vital tool to manipulate demand in the areas of advertising, sales promotion, brand promotion and strategic marketing management through manipulation of the psychological behaviour of groupthink consumers (Maxwell, 2014). The bandwagon effect results in an increase of the demand curve as other individuals increase their demand and vice versa creating thus a feedback loop.
This concept can be associated in the context of sociology with the natural herding behaviour that human beings tend to adopt. Human beings tend to imitate consumption patterns related to their social reference groups consistent with processes of identification and differentiation (Bandura, 2001; Childers and Rao, 1992) and it depends on the construal of self, which again, depends on cross cultural differences. Collectivist societies tend to follow the masses, like herds, and think more on how the self is related to other individuals (Markus, Mullally and Kitayama, 1997).
Since conduct is spread among people, (as fads and trends) there is a tendency to imitate other's actions due to individual's willingness to conform as exposed in herd behaviour. “The bandwagon effect explains why there are fashion trends” (Maxwell, 2014) even though a risk of standardization may arise.
4.2. Veblen Effect:
What distinguishes the Veblen effect from the Bandwagon Effect is that the former is characterized by the will to demonstrate a high economic status. Veblenian approach to consumer behaviour has theoretical implications that challenge the theory of consumer demand.
The Veblen Effect marginal private benefit rises with the purchase of the product. Nurkse (1957) suggests that individual consumers' preference functions are interdependent rather than independent, and ergo, propensity to spend is at some point based on the desire for conspicuous consumption. He also states that “knowledge or contact with new consumption patterns opens one's eyes to previously unrecognized possibilities. It widens the horizon of imagination and desires. It is not just a matter of social snobbishness”. Hirsch (1976) coined the term “positional goods” to refer to those goods whose consumption is based on positional competition, that is to say those things whose value depends relatively strongly on how they compare with things owned by others”. Ergo, the individual utility functions can be considered interdependent due to social influence, since the ownership of a Veblenian good is notorious Veblenian consumers want to be sure others notice their social status.
4.3. Snob Effect
As previously stated, Snob consumers appreciate perceived unique value. They see price as an indicator of exclusivity, and elude popular brands. In a study performed by Deeter-Schmelz et al. (2000), the “Snob effect” can be perceived in the evidence that patron status has a negative influence on consumption. Since consumers would appreciate to have distinctive and idiosyncratic luxury products, “they pointed out that they do not like to shop in the same stores as their friends, or people they admire.” This snobbishness exposes desire for products that are exclusive and that have a high value since their supply is limited. Conversely, those easily available and accessible are less desirable and have less value for snob consumers. In fact, since luxury is more affordable and accessible nowadays, snob consumers tend to ask themselves: Is it still prestigious to own a luxury brand product? The dilemma also addresses the problem of the identification of the driving force for exclusive snobs since they will probably try to find other dimensions of exclusivity.
Ergo, “when one chooses a brand, one communicates the desire to be associated with the group who regularly use that brand” Therefore, consumers can be divided into either snobs or “aristocracy” and bandwagon consumers or “new money” (Husic and Cicic, 2009).
The transfer of positional tastes is related to Maslow's (1954) hierarchy of needs.
In the case of the three phenomena previously discussed, after a consumer covers the basic needs (physiological needs and safety needs), psychological needs are the next step. Since purchasing a luxury product has psychological components, it belongs to the group of “psychological needs”. This includes belongingness and esteem due to the fact that the purchase of a luxury good not only provides implicit membership to a certain reference group, but it also increases prestige and satisfaction.
4. 4. Factors leading to Bandwagon, Veblen and Snob Effects: Prestige seeking consumer behaviour (Vigneron and Johnson, 1999)
One of the main factors leading to Bandwagon effects is fashion fads and trends. Through the appearance of trend setters, gradually people's behaviour is becoming more and more conditioned by them with the aim of being in style. “Marketing approach to bandwagon effect is positive as more and more people would like to try out the product as others are doing it.” (Maxwell, 2014). The second force is rigorous advertising efforts, which leads to higher spread of information among the members of the network and potential members. Thirdly, in a world where impact of television and electronic media stimulates consumption, this effect must not be ignored. “In a highly competitive world where the cross elasticity of demand is positive and gets highly elastic, corporates leverage to build up the brand image which leads to positive bandwagon effect. It represents the desire of people to purchase a commodity in order to get into the swim of things.” (Maxwell, 2014). Furthermore, changes in life style patterns and socio-cultural factors can manipulate market demand by creating positive Bandwagon effect for their brands since -specially teenagers- appreciate to endorse products reference.
Celebrities, fashion bloggers and public figures play an important role in Veblen goods, and in fact, according to Forbes magazine, an Instagram user with 100,000 followers can command $5,000 for a post made in partnership with a company or brand.” The effect of forms of transmission of knowledge is to modify the information available to consumers and not to change his tastes. An “influencer,” who is connected to a part of the consumers has the capacity to shift those consumers' impulses: from “purchase” to “not to purchase” and the other way around.
Even though some scholars consider Veblen effect similar to Snob effect, in the former effect the individual tends to buy more of a product whose price has risen, in order to impress others. Ergo, the price is an important factor and willingness to be recognized must be high in order to satisfy a Veblenian consumer. Yet, Snob effect is more complex since it contains social and personal influences. During prestige consumption, Snob effect is negatively affected by general awareness and availability of the product: price is as important as in Veblen, but motivation for
recognition is towards differentiation from other individuals and being the only user of the good. Therefore, when other individuals also purchase high-priced goods, snob consumers will decrease its demand for the good.
5. Personal and non-personal value
Although some consumers appreciate luxury for themselves and sustain the idea that motives for luxury consumption are personal, others appreciate luxury for others and appreciate non-personal value. The latter can be divided into democratic and elitists.
Elitist-oriented consumers view luxury as appropriate for only a small portion of individuals that are in a privileged position. Democratic-oriented consumers' perspective is that of accessibility of luxury products. In contrast to the democratic, the elitists believe that possessing prestige brands differentiates them from others (Dubois et al., 2005)
Elitists consumers of luxury goods consider marketing mix elements (price, distribution intensity, and price promotions) should be limited since luxury is appropriate for only members of the elite. Conversely, democratic regard luxury as something that should be accessible by many people. The democratic view luxury as not necessarily very expensive; while elitists believe that it is inevitable that luxury is expensive to allow them to differentiate (Dubois et al., 2005).
For example, Goyard (the French trunk and leather goods maker) not only limits production and adopts a strategy that limits price exposure, allowing only the information for consumers that enter into the store, but it also has only nineteen official stores worldwide. Louis Vuitton (French trunks, leather goods and ready-to-wear producer) instead operates in more than fifty countries, produces a higher range and quantity of products, exposes prices and adopts aggressive advertising campaigns. Ergo, it would be expected that elitists would opt for Goyard products rather than Louis Vuitton products and contrarily, democratic would opt for Louis Vuitton products.
6. Country of Origin (COO) influence: Individualism and Collectivism
The main question regarding the country of origin influence is how and why cultural characteristics affect interpersonal influence and whether to expect purchasing differences in countries with different level of individualism. The magnitude of the inclusion of emotional and normative dimensions on consumer behaviour is affected by the country of origin (Batra, Ramaswamy, Alden, Steenkamp, & Ramachander, 2000). Prior scholars found that individualistic people are negatively susceptible to interpersonal influence (Mourali et al., 2005).
The more consumers are concerned with how others view them, the more they will tend to have more interpersonal influence and attitudes toward luxury brands. It has been proven that susceptibility to normative interpersonal influence (SNII) is affected by the individualistic orientation of the culture. Shukla (2011) found that on average consumers in a country with a low-individualistic culture like India (individual index=48) are more susceptible to normative interpersonal influence than those in a country with a high-individualistic culture like the United Kingdom (individual index=89)
On the one hand, in individualist cultures people value more freedom, uniqueness and self-expression. Each individual seeks to maintain the individual as separate and express independence and autonomy. Moreover, individualist cultures avoid strong differences between in-groups and out-groups (Triandis, 1995). Western countries are often individualistic cultures that view the self as autonomous, with the independent self-conceived as separable from the social in-group. The individualists often are characterized by personal achievements and have unique aspects of communication. On the other hand, in collectivist cultures, individuals tend to emphasize belonging, obedience, and cooperation within in-groups. They are motivated by the criteria of “who is to be included and who is not to be included” in the in-group (Triandis, 1995). Eastern countries are primarily collectivist cultures and are more susceptible to herding behaviour. The perception of self is not considered separated from the individual social relationships within which an individual is embedded and seeks belonging.
This can be reflected in the purchase of luxury goods, where the costs are high and benefits display not only utility but also pleasure and social status. Effects of information in purchasing decisions can be observed in the case where consumers hold strong attitudes that ergo-in interdependent societies- create higher trust and reliability in the information received by potential consumers and thus follow the pattern (Agrawal, Nidhi et al., 2005). Beliefs related to the self rather than to the product could have a greater importance for potential buyers in interdependent societies.
7. Managerial implications
As previously stated, historically, luxury consumption used to be limited for the rich and privileged. Yet nowadays the luxury market has shown substantial growth. Moreover, luxury brands are becoming more appealing, not only in Europe and America but most of all in Asia. In this competitive market environment, it is important for a company to manage customer's perceptions of a brand to help customers in the process of differentiating one brand from another and to make their brand stand out among competitors.
As noted, a brand's equity influences customers' decision-making process. This is particularly notable in the luxury industry since in luxury brand consumption, consumers crave for the intangible and psychological benefits acquired from the inherent value that the brand exposes (Vicker & Renand, 2003). One known component of brand equity is perception of the extravagance and lavishness of a brand, a key driver of consumer preference and usage (Dubois & Duquesne, 1993). This perceived 'luxuriousness' of a brand provides psychological benefits- that counteract the high prices reflected in prestige brands- and contribute to satisfying important hidden desires in the purchase of prestige brands. Even though many brands may be regarded as prestige brands, (Vigneron & Johnson, 2004) level of 'luxuriousness' of different prestige brands differs.
Due to democratization of luxury, prestige brand businesses need to respond to a diverse range of consumers in order to continue to grow. Managers may choose to meet at the same time the desires of their traditional clientele and the desires of a mass consumer to achieve business success. Yet, previous researchers (Dubois et al., 2005) found that the attitudes of these two groups were not always similar.
The rarity principle states that the luxuriousness of a brand diminishes if too many people possess the brand and ergo brand equity attenuates. To prevent this, the trade-off is to control brand diffusion to enhance exclusivity, simultaneously maintaining a high level of awareness (Phau & Prendergast, 2000).
Applying this idea to the two identified consumer groups (elitists and democratics), attitudes should vary between these two consumer groups concerning luxuriousness because preserving exclusivity would appeal to elitists but not to the democratics who may desire accessibility. Rarity is also an important concept related to the equity of prestige brands yet it also causes a contradiction: managers seek to maximize profits by selling as much as possible; however, to build equity, a brand needs to avoid the likelihood of commoditization. Rarity suggests that sales must be limited since excessive distribution erodes being scarce, dilutes desirability and exclusivity, and consequently erodes brand equity. Given that elites probably differ from democratics in several attitudes concerning prestige brands and that meeting the demands of these two groups can mean addressing two different marketing goals, it is important for luxury brand managers to understand these two groups' behaviours so that marketing efforts to build brand equity with both groups are effective. Thus, the main dilemma is to explore if groups respond differently to a marketing program.
Besides, another thing that has to be taken in to consideration is the effect the rise of prices might have in goods demand. After studying the theories exposed, one might expect that a rise in the prices of a company that targets Veblenian and Snob consumers might lead to an increase in demand. This occurs because this kind of consumers challenge the demand theory, and thus, the demand curve has a positive slope. Instead, a change in price would not be the main important factor for Bandwagon consumers or consumers that base their consumption-decisions on personal factors.
It is also important to note, that there are other macroeconomic factors that managers must take into consideration, such as the country of origin (COO) influence since consumer behaviour is based on the individual's roots. Moreover, income inequality must also be considered since wealth distribution might be an important factor to aid in the classification of consumers.
7.1. Effect of counterfeiting
The effect of counterfeiting can be related to the exclusion principle, which states that “prices only lead to Pareto-optimal collective action in a multi-agent system if the exclusion principle applies to the goods to be exchanged”. Counterfeiting allows for illegal duplication that reduces incentives to the producer, and is one of the main issues that companies are trying to solve. The International Anti-Counterfeiting Coalition (IACC) states that the top 10 counterfeited brands include Louis Vuitton, Nike, Lacoste, Benson & Hedges and even Viagra. According to the IACC, many product categories beyond luxury goods are counterfeited such as cigarettes, food, pharmaceuticals, auto parts, airplane parts, toys and more and in fact, only 4% of the items counterfeited are luxury goods.
Yet, high range companies dedicate money and effort to mitigate their biggest competitor fake producers. One of the main countries of communism turned into a nightmare since it is one of the main producers of counterfeited goods. The OECD stated that imports of counterfeit and pirated goods are worth nearly half a trillion USD yearly, with US, Italian and French brands the hardest hit and up to 5% of imports into the EU are fake. The thing that worries the most is the fact that there are “Triple-A fakes” or “super fakes” that look almost identical to original products.
So, what type of consumers are more likely to buy counterfeited products? According to rational thinking and based on the evidence produced by scholars above, Veblenian and Bandwagon consumers seem to be more vulnerable to non-official products than Hedonist and perfectionists and Snob consumers. This is because the former are more interested in the others view about them rather than personal pleasure, while the latter are more interested in quality and exclusivity. It is believed that the summit of counterfeiting came with brands making their logos visible and thus, people think that when they carry the logo around, it is a symbol of status reflecting they are trendy. Fake items are a way to stay on top of trends while avoiding high prices, although the burden is suffered by third parties due to the creation of child labor and other crimes. The urge to jump on the bandwagon is impulsive and powerful.
Besides, the birth of new counterfeits diminishes the image of a brand. For example, the image of a luxury brand will be totally diminished if a Snob or elitist consumer starts to see the logo of the brand being consumed by masses. The same would happen to Veblenian consumers. If they see the price of “showing the product” is falling, they would not consume it anymore due to the easy accessibility or conversely, they would opt for counterfeit consumption, that will allow them to “show-off” at a low cost.
With the persistent increase in income, the increase in the consumer base, the “democratization of the luxury market” and the development of some forms of communication, network effects can be perceived in the luxury industry. Although they are present in many sectors of the economy, we can see them also in luxury goods due to the existence of psychological and social value. In fact, due to the many dimensions luxury products have, there are multiple definitions for “luxury” and likewise there are also many reasons for purchasing a luxury product. In the case of the personal reasons, it mostly depends on income and appreciation of quality and emotional value since the consumer identifies only private purposes and ignores others' opinion. It is mostly common in Hedonist and Perfectionist consumers, where interdependent reasons have no effect in purchasing decision. Conversely, there are also non-personal reasons that depend on peer pressure: ostentation (Veblen), non-conformity (Snob) and conformity (Bandwagon). It can be also deducted that elitist behaviour is a characteristic of Snob consumers while democratic behaviour is a condition of Bandwagon consumers (or a condicio sine qua non).
Country of origin (COO) plays an important role, since culture determines consumer behaviour is particularly seen in collectivist countries where purchasing is encouraged by interdependent value, specially in the case of Veblen and Bandwagon effect. Thus, it is expected that there will be increasing value of a network as the number of its users increases leading perhaps to standardization processes. Culture plays also an important role in managerial and marketing decisions since customer behaviour can be deduced depending on the country of origin, Hofstede's scale of individualism, independent or interdependent value and personal or non-personal dimensions.
Moreover, the Marketing Mix exclusivity has to be considered at the time of positioning a brand depending on the target consumers. Besides, special attention has to be paid on counterfeit products because false products' demand and supply is increasing due to the increasing willingness of “displaying welfare”, and thus diminishes the value of official luxury brands.
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