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The 101 of Veblen Effect in Luxury Marketing

This is a Special Piece. The piece is collectively written by Saurabh Bajaj (Marketing Head, Dairy at Britannia) and Sundar Kondur (SVP – Times Group) two of the most appreciated Industry stalwarts out there. We’re extremely thankful to both of them for putting this together. With the kind of experience they have, we fail to think of a better duo who could do justice to this topic. Today, we’ll be discussing the Veblen Effect in Luxury Marketing.

Let’s jump right in the piece!

Origins: of Veblen Effect

At 23, Julius Caesar was a junior politician on the way up. But unlike others, he was confident and had a vision. When sailing across the Aegean Sea, he was captured by Sicilian pirates. They demanded a ransom: 20 talents of silver (about 620kg).

Caesar told them they were being ridiculous.

He couldn’t possibly allow himself to be ransomed so cheaply. The pirates hesitated; they were confused. Caesar insisted the ransom must be raised to 50 talents of silver – Around 1,550kg. They didn’t understand what was going on. But if he said he would double the ransom, why argue? They let Caesar’s men go back to Rome to raise the money. And in Rome, in his absence, Caesar suddenly became very famous and well known.

No-one had ever been ransomed for such an enormous sum ever before.

He must be very special. That ransom demand put Caesar on the political map and made him famous. But, as far as anyone in Rome knew, it wasn’t him who had put this price on himself.  It was an independent valuation. So it must be true. And because Caesar was now so highly valued, his men had little trouble raising the ransom money.

They returned to the island and freed him. But Caesar wasn’t going to allow the pirates to keep that sort of money at all. As an important and famous man, it was easy to raise a huge force.

He hunted down the pirates and took back all the money, plus everything else they had pillaged, then executed them all.

So Caesar was now both very rich and very famous. And in time, with the same combination of confidence and brains, he became ruler of all Rome. And he presided over the golden age of the Roman Empire.

He had just invented the Veblen effect. Of course, the nomenclature and the Economic and marketing theory would come thousands of years later, but this is the foundation of “Luxury Marketing” or Veblen Marketing as we know it today.

Why Veblen?

Well, we have to rewind to 100+ years to a man named Thorstein Veblen, who was the first to write about this in his book – The Theory of the Leisure Class, published in 1899. This is when the industrial economy gave rise to people with high disposable incomes and the US was opening up its economy creating millionaires. The Veblen effect is when consumers perceive higher-priced goods to be worth much more, simply because they cost more, just like Julius Ceaser making himself more important!

Examples of brands today include Rolex, Cartier, Bentley, Rolls-Royce, Aston Martin, Louis Vuitton, Christian Louboutin, Harrods, Cristal Champagne. True they are high-quality products but are they truly worth the price?

Related: Take a look at The Psychology of Pricing

None of them are significantly better than the cheaper alternatives, but the price alone makes them seem desirable and exclusive.

“How you stake a claim in the mind is by creating a perception. And how you create that perception is by controlling the context”

Related: Take a look at the Burberry Rebranding

So, to summarize, a Veblen good is a good for which demand increases as the price increases, because of its exclusive nature and appeal as a status symbol. Luxury goods in general and many scarce goods have instilled into social beings that the brand is the consumer. What this means is you are what car you own, you are what yacht you own, you are what you own and display, generally.  This is social competition and many brands have fuelled this thought and taken the positioning of “own this and you rise above others”. Own this and you are better than others

It is believed that a more expensive product implies better quality, exclusivity, customization or some additional bonuses. But is it always that expensive things really turn out better, and what causes people to part with their money?

The psychology behind this theory leads to several interesting real life stories and each of them is more exciting than the last. A 2000 year old strategy help many marketers (or should we call them Ceasars? 🙂 ) exploit Veblen theory.

Let’s look at a few examples of the feelings and emotions these goods evoke.

Want to live next to Celebrities?

Ever wondered how an inhospitable desert surrounded by a salty ocean became one of the world’s most lucrative property market? Yes, we are talking about Dubai a city so grand it almost feels like a mirage that will one day disappear. A city that appears to have been imaged into existence by the vision and will of its founders. Dubai’s Prime Minister, Sheikh Mohammed knew that the petroleum in the country is not going to last forever and has spent the last two decades working to turn the city into a world-class tourist destination.

In one of its signature pieces, the real estate group Nakheel, in 2001, dredged 3 billion cubic feet of sand from the seafloor and created an artificial archipelago in the shape of a 17- fronded palm tree. The entire island was covered with breathtaking luxury villas. But then how do you create genuine desire amongst the rich & famous? That’s where the Veblen effect comes into play!

You control the context by gifting apartments to the rich & famous! One of the recipients of such a luxurious gift is none other than our own Shah Rukh Khan, who was gifted the uber-luxurious abode by Nakheel in 2007 after obtaining the RBI’s approval! But why would a property developer go through all the trouble of securing approvals to gift a house? Well, to ensure that the prices of all other houses in the area skyrocket. After all, wouldn’t you want to buy a house right next to global celebrities! Today, David Beckham, Shilpa Shetty, Giorgio Armani, Michael Schumacher, Boris Becker, Brad Pitt, Abhishek Bachchan, etc. own luxurious villas in Dubai!

Truly only the Veblen effect can explain how a hot & inhospitable desert can become the hottest property destination in the entire world!

What’s the real price of a Jewellery Piece?

Nirav Modi has been held responsible for 11,400 crore transaction fraud case. However, it was not always so. He was a darling of Bollywood and perhaps one of the most famous Indians overseas. Nirav founded Firestar in 1999, a diamond sourcing and trading company. In 2002 he started manufacturing jewellery on a contract basis. In 2008 a close friend asked Nirav Modi to make a pair of earrings after which he created his Brand. In 2010 he launched a diamond store bearing his name in New Delhi’s Defence Colony, followed by one in Mumbai’s Kala Goda. At the height of his fame, he opened boutiques in New York City & Hong Kong in 2015 & 2016.

He became well known after he designed his “Golconda Lotus Necklace” with an old 12-carat, pear-shaped diamond as a centrepiece in 2010. The diamond was earlier sold in the 1960s; it was repolished. It featured a lattice of white and pink diamonds. It was included on the cover of Christie’s catalogue in Hong Kong and was auctioned for US$3.6 million in 2010.

But what does the story of Nirav Modi have to do with the Veblen effect and how did it result in one of India’s largest scams?

The price of jewellery depends on how desirable it is and the prices sold in auctions. To cut long story short, Nirav Modi created a circle of shell companies that would outbid each other across auctions, thereby inflating the prices of his jewellery pieces, expanding his fame and the value of his company. Woah! Right? Undoubtly the Veblen effect creates desire, often fabulous wealth but can also be dangerous in the wrong hands.

Alcohol the rich man’s chocolate

Alcohol is a fascinating category dominated by myths & legends. However, at its heart is a rather ordinary chemical – Ethanol. The simple compound most often used as a hand sanitiser and with an intoxicating effect on the human body is at the heart of the multi-billion dollar industry. Some of the World’s most inspiring & fascinating brands inhibit this category and each is special owing to its own unique story that inspires desire.

When you sip a glass of Jack Daniel, you can virtually see that spunky American with all his quirks and passions brought alive in every sip. While the makers of Laphroaig promise you a lifetime lease of 1 square foot on the island of Islay for the purchase of every bottle. Even most puzzling are the valuations for fine vodka. By definition, vodka is an odourless, tasteless, colourless liquid! How then does one explain the varying Prices of Magic Moments, Smirnoff, Absolut, Kettle One & Golden Goose?

In Summary

At the heart of Luxury Marketing is the art of creating desire and hence value, well explained by the Veblen effect. Luxury goods promise an individual “own this and rise above others”. Hence, luxury goods play an important role in our life in marking special occasions, reminding us of our own achievements and enhancing self-esteem. The Veblen effect can be seen playing out across categories from alcohol, automobiles, designer bags, jewellery, real estate etc.

The alcohol category consists of hundreds of brands with the same functional core but varying stories that inspire desire & pride. While the Veblen effect has often been used to enhance value through shell companies & scams. As at the heart of the effect is a way of creating desire & hence value. The Veblen effect can also promise you the life of your dreams by giving you a chance to live in the same neighbourhood as world-famous celebrities! So is the Veblen effect a tool in the armoury of a marketer or the guile of a wily businessman. What do you think?

The Author

The piece was co-authored by Saurabh Bajaj and Sundar Kondur, if the piece adds value, head on to LinkedIn, and drop a thank you. You can also share the piece with your best friend on LinkedIn WhatsApp.

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