A new global marketplace and a changing customer mindset has forced luxury brands to do many things they never would have before. That includes changing the entire way they market and set prices for their products. One movement gaining acceptance among certain brands is that of “global” or “harmonized pricing.” Created specifically to boost e-commerce, and in some cases protect the brand from trust issues, global pricing is a fraught concept that is much more complicated than it seems on the surface.
So what’s global pricing, anyway?
For years, luxury companies have been pricing items sold in Asia, and particularly in China, between 25 percent and 40 percent higher than they do in Europe. That was because demand was higher in China.
Under global pricing, luxury products will cost the same all over the world, whether they’re bought in Asia or Europe. For example, Chanel’s iconic 11.12 handbag cost about 3,550 euros before the brand harmonized pricing last year. It now costs 4,260. (Comparatively, the same bag used to cost 38,200 yuan in China but now costs about 30,000 yuan.)
Why now? What’s changed?
A few things. One, China’s growth has slowed in the last year, particularly in the last few months. This has hurt companies including Burberry, Prada and LVMH. Two years ago, luxury demand in China was robust even though global growth was slowing.
Two, customers are smarter. Petah Marian, a senior editor for retail intelligence at WGSN, said customers are traveling more, which means that they’re also better educated on pricing: “If a consumer from the U.K. sees the same product at half the price in the U.S., they’re going to feel cheated and that damages brand equity,” she said.
So that means not only are Chinese customers less willing to pay higher prices because they just don’t want to spend the money, all customers are better educated and less likely to agree to paying more money just because they’re in a different region.
Isn’t this about knockoffs, too?
In a way, yes. Chanel was the first mover in the space — the brand decided last year that it would harmonize its prices for three handbag models, which at the time meant raising product prices in Europe and dropping them in China. The company said it decided to harmonize prices to prepare for a potential e-commerce effort globally. At the time, Chanel’s president of fashion, Bruno Pavlovsky said: “We made a very important decision, to treat our customers the same way everywhere in the world. It was a big decision.”
That’s all very kumbaya, but the move was also a way to fight resellers, especially in China, from buying things in Europe at a lower price and selling them at a higher price in Asia — a particular bugbear for Chanel. This practice, done by agents called “daigou” has hurt brands that need to make retail in China more attractive for customers — not make Chinese shopping just a “showroom” so people can look there, but buy elsewhere.
Some others have followed suit, including Burberry, Cartier and Patek Philippe.
What happens now?
It will likely affect travel plans: Fans of brands like Chanel will travel to certain regions almost purely to shop. Harmonized pricing removes the incentive to do so.
Another effect is to allow brands to “prepare” for e-commerce. Chanel has essentially said as much; harmonized pricing will create parity between markets so online prices can also be even.
For brands, one upshot is a boost of trust, according to Marian. “Consumers trust brands that operate on a consistent basis,” she said. That comes back to the issue of fakes: Brands have for long worried about authenticity issues — it’s a constant headache for bigger companies to prevent “first copy” issues, especially. (First copy refers to products that may be made at the same factory as original products, but without official serial numbers.) People often think lower prices may signal fakes; global pricing prevents those authenticity questions entirely.
Not all brands have signed on to the global pricing scheme. (Check out the J. Crew screenshot below of different prices in the U.K. and in the U.S.) It’s tough to implement: Brands have to work out the cost of doing business in different places and create that “global price.” And it leaves them more vulnerable to any big swings in FX rates. So with Brexit, that’s been a huge concern, especially for U.K. brands.