Less Is More: Redefining the Luxury Goods Market

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Wharton’s Pinar Yildirim and John Zhang talk about their research on the rise of ‘minimalist luxury.’

The 1980s is often remembered as the decade of excess. Big hair, big shoulder pads, and big jewelry were the height of fashion. Shows like “Dynasty,” “Dallas,” and “Lifestyles of the Rich and Famous” sparked dreams about sipping Champagne, partying on a yacht, wearing a silk Versace dress, Gucci shoes, and carrying a Louis Vuitton handbag. Conspicuous consumption was aspirational, and the rich were glorified. But things have changed. In just a few short decades, there has been a cultural shift away from conspicuous consumption, towards something called “minimalist luxury.” Counterfeit goods have become so sophisticated that the real thing has lost some of its luster for the wealthy. After all, there’s no point in sporting your $100,000 Birkin bag if the woman sitting next to you on the subway is carrying a pretty good knockoff for about $100.

Wharton marketing professors Z. John Zhang and Pinar Yildirim have been studying this phenomenon and have written a paper about it titled “A Theory of Minimalist Luxury,” along with co-author Z. Jessie Liu, a professor at Johns Hopkins University’s Carey Business School. Not only do the researchers explain this shift, but they also analyze what it means for the luxury goods market that relies on these wealthy consumers. Zhang and Yildirim joined Knowledge@Wharton to talk about their study.

Listen to the podcast above or read an edited transcript of the conversation below.

Knowledge@Wharton: In this paper you write, “Less is more is the new conspicuous consumption.'” What does that mean?

John Zhang: Conspicuous consumption was a term used by Thorstein Veblen, the American economist and sociologist, back in the 1890s. He noticed that wealthy people tended to buy many things that they could consume in public, things at very high prices. This was rather odd, given that functionally equivalent products were available at much lower prices. He suggested that these wealthy people engaged in this wasteful, showy consumption or “conspicuous consumption” to signal their wealth status. Essentially, these wealthy people were putting their wealth on display to convince others that they belonged to a different and much more desirable class. Therefore, conspicuous consumption is a way to signal social status.

Pinar Yildirim: In his famous book, The Theory of the Leisure Class, Veblen was studying the Gilded Age, and he argued that consumption was a signifier of wealth, and it became honorific to consume. It was almost like if you were failing to consume, it was a mark of demerit. He dubbed consumption as an end to demonstrate one’s economic position in society, and therefore signaling your wealth was a conspicuous behavior. Veblen had the insight that consumption and display of items that you owned was communicating information about yourself. That could be your economic status, it could be your social status, it could be the qualities that you have, for instance, coming from a famous or a royal family.

Just like in those days, an expensive watch, an expensive car, and an expensive handbag today can tell others that we have wealth. There is a large body of academic research, as well as anecdotal evidence, that suggests that individuals spend a lot of their wealth in order to display these expensive items, to communicate these characteristics of themselves. This is very much the grounds on which the luxury industry operates. People buy luxury brands not because they just care about raw materials, craftsmanship, and high quality, but because they want to communicate something about themselves. They want to communicate their economic status, their social status, and consumption does this rather well.

“Spending on luxury goods is like burning money in public, to convince others that you really have a lot of money.” –John Zhang

This trend of wasteful spending to communicate status is very much still alive and out there, but what we’ve been observing over the past one or two decades is this alternate emerging trend of minimalist consumption. Growing numbers of consumers have started practicing an opposite trend; that is, they decide and practice the idea of buying fewer items and buying better. This is what we refer to as “minimalist luxury” within the paper, but of course as many will recognize, minimalism itself is a much grander, a much bigger concept than just the luxury industry. There is popular TV personality Marie Kondo and her ideas of purging items that do not bring you joy. We see examples of minimalism in various industries. We see it in architecture. The number of items that you buy could be very few, the furniture that you own could be very few, kitchenware items could be very few, or you might be intentionally purchasing fewer clothing items.

Minimalism is a very grand concept that applies to many different areas, but thinking about minimalism in the context of luxury to some was an oxymoron. We have known that people were consuming in a very conspicuous way. They wanted to show wealth. So, why would you want to buy less if the reason why you’re buying items is to display them? That’s essentially the observation that started us on this research.

Knowledge@Wharton: Can you tell me how you went about studying this?

Zhang: I’m an economist by training. I’m also a theorist, so the way I study the phenomenon is to build a model and propose a mechanism for what is happening. The Veblen thesis basically says that the rich buy expensive luxury goods to signal their status. However, if you look at today’s marketplace, you’ll notice that there are lots of high-quality, fake luxury goods around everywhere. And they are available at a fraction of the cost of the real thing. If you think a little bit about this, you realize that the Veblen thesis would not work in today’s environment. There is no good reason for the rich to spend on luxury goods. Spending on luxury goods is like burning money in public, to convince others that you really have a lot of money. Imagine that if you don’t have a lot of money. You obviously would never stage any kind of a public burning of money. However, if there is a lot of fake money around that looks just as real, you do not need to have a lot of real money to stage a public burning. You burn the fake money. Nobody needs to know. Thus, with fakes around, luxury goods can no longer serve as an effective signal for social status. The rich should find something else to signal their status.

Yet, if you look at the reality, even with so many fake goods around, the rich are still buying expensive luxury goods and luxury brands are still prospering. What’s going on? That’s the puzzle that intrigued us. That’s what we wanted to solve. Our answer is that minimalist luxury is the right signal in today’s marketplace because when you buy less and buy better, you stand out. You stand out simply because you are gaining more through sacrificing functional utilities than the people you want to stand out from. To give you an example to illustrate, in ancient China, women from wealthy families practiced foot binding, which was a very, very painful process. When you saw a woman with extraordinarily small feet or minimalist feet, so to speak, you knew she must be from a wealthy family. This is because with such small feet, you cannot do any menial work. You must have servants to take care of your daily needs. A woman from a poor family could never afford to bind her feet. Here, you see that the rich make some sacrifices that the poor are not willing to make to stand out. That’s essentially the theoretical foundation for the minimalist luxury we propose.

“People buy luxury brands not because they just care about raw materials, craftsmanship, and high quality, but because they want to communicate something about themselves.” –Pinar Yildirim

Yildirim: Can this theory hold if you put together the economics behind it? Are there enough incentives for consumers to be able to practice this behavior? And would that be consistent with their desire of signaling their wealth? Those are the questions that we are asking, and this is a theoretical exercise. So, this is relying on economic theory in combination with math.

What we started first looking into was trying to understand what kinds of incentives, what kinds of changes in the environment could result in this shift of behavior? The first question one can ask is, are we in a different market now? Do consumers no longer care about conspicuous consumption? That’s certainly not the case.

The second thing we observed is that for consumers to be able to signal their wealth through consumption, the mechanism of doing this is a lot harder now. This is because there are a lot of high-quality and fairly cheap counterfeits available. This is the mechanism through which we talk about the challenges of signaling for the wealthy and luxury consumers today. In a market like today’s, where you have “super fakes” or AAA fakes, as they are called, these counterfeits are practically visibly the same. How can you, through consumption, signal your wealth or your other qualities to compete with anonymous strangers? This is going to be a challenging task for those who own wealth and who own luxury goods. As a result, they need to use some other tactics. They need to be able to find other means to signal that they are wealthy and to differentiate themselves from others.

When we consume luxury or any other goods, there are symbolic benefits or nonfunctional benefits of self-signaling or wealth-differentiating yourself from others. Of course, there are additional functional benefits of these goods. If you own 20 different sweaters, those 20 different sweaters also serve a purpose. What the rich can do is to purge items to the degree that they can own a fairly small number of expensive luxury goods to be able to signal their wealth. At the same time, they somehow sacrifice all those other functional benefits of those goods, which the non-wealthy cannot replicate to the same degree.

This is a reversal of tactics for the wealthy. They are trying to still spend money, but they are trying to do it on fewer items, imposing the costs of having to live with a fewer number of items. And that’s the story that we tell in the paper.

Knowledge@Wharton: During the coronavirus pandemic, we’ve seen tremendous changes in consumer behavior in terms of what people are buying, how they’re buying it, and how they’re getting together. People are no longer gathering in the same places they used to, where they could signal their wealth through what they were wearing or the cars they were driving. Has the pandemic accelerated this idea of minimalist luxury?

“Luxury brands still have room to play even with this kind of a trend in the marketplace.” –John Zhang

Yildirim: If anything, I think the pandemic taught us that conspicuous consumption is real because many of us are now spending time at home behind screens, and we don’t have these social interactions with anonymous strangers anymore. To the extent that we observe people spending less money on conspicuous items, but more on sweatpants or other comfortable items, that tells us that we don’t simply care about the quality of raw materials or craftsmanship or other characteristics of these luxury goods. Those things haven’t changed in the pandemic, right? The fact that we no longer buy those conspicuous things tells us that the reason that we consume these goods, at least in part, is the idea of signaling to others something about ourselves.

In another study, I’ve been looking at how COVID-19 changed the shopping behavior of consumers relative to pre-pandemic levels. I am looking at brick-and-mortar store traffic. What I have seen, looking at about twenty 20 different product categories and comparing before-and-after store traffic, is the traffic in all of these categories had declined. Some categories had a little less decline, such as home goods and office products, but all of them had seen a significant decline. But the two or three categories that have seen the largest decline were luxury consumption and apparel — fashion goods, shoes, and jewelry-related items.

Interestingly, men’s apparel pretty much floored. Women’s apparel also has seen a significant decline, but not as drastic as men’s apparel. But seeing these changes also confirmed to us that we care about others’ perceptions. If we don’t have these interactions to the same extent, we’re not going to consume these goods with the same motivation that we did before. If anything, the pandemic has taught us that conspicuous consumption is still pretty much alive, and it is pretty much a motivation for consumers to buy and consume luxury goods.

The second issue is the pandemic has also given us the opportunity to reevaluate our values. How do we prioritize our lives and think about our social interactions in relation to other things, to ownership of objects? I think there might be some value or some benefits to managers in thinking about how the values of consumers might have shifted during the period of the pandemic. For a luxury manager, the question should be: Will consumers enjoy consumption of goods to the same degree as they did before, or should we expect changes in how they value or how they see the benefits from consumption? I think this is going to create even more hurdles for luxury brands moving forward.

Knowledge@Wharton: That’s where your paper moves from the theoretical to the practical. You wrote, “The trend of minimalist luxury is not something to be alarmed about” — that luxury brands can preside over it if they know how to manage it. What do those brand managers need to be thinking about?

Zhang: Our research really shows that a luxury brand should not get alarmed about the trend of minimalist luxury for a number of reasons. First, minimalist luxury is only one of the multiple trends going on in the marketplace. Not all consumers will embrace it for all product categories. This means that luxury brands still have room to play even with this kind of a trend in the marketplace. Second, even if consumers embrace minimalist luxury in a specific product category, the brand needs not to suffer in revenues or in profitability. As a firm you can still maintain your revenues or profitability if you’re doing it right. When consumers buy less, but they also buy better; that means as a brand, if you cannot play with the quantity, you can definitely play with the price.

“Consumers wanting to own fewer items may not seem like good news from the perspective of luxury managers, but that doesn’t necessarily have to be the case.” –Pinar Yildirim

Yildirim: We would like to nudge managers to think more carefully about this up-and-coming trend. Consumers wanting to own fewer items may not seem like good news from the perspective of luxury managers, but that doesn’t necessarily have to be the case. As long as you can adjust your product portfolio and your pricing, you might very well ride on this trend and actually not suffer any losses. Those are the two actionable items that we would like to start recommending to luxury managers. You should think about your product portfolio, trying to perhaps narrow it down to the core products, and think about your pricing that is in line with consumers’ desires to signal their status or their wealth.

A second and perhaps more intuitive recommendation that we can make is try to keep the value of your luxury brand as clear and as undiluted to the consumer as possible. That means try to make clear your differentiation from the counterfeits to the extent that it’s possible. It’s a very challenging task because counterfeiters are really good today. They have very high-quality materials and practically the same factories producing these items as the luxury goods. But to the extent that it’s possible, try to differentiate yourself and make your products visible to others, and then this challenge will actually go down.

Knowledge@Wharton: What’s next for this line of research?

Zhang: The luxury goods industry is a big industry. It is highly visible, too. Strangely enough, there have not been many studies that think deeply about how to maintain the viability of luxury goods as a signal for social status in a very changing and dynamic environment. So, we will stay on this viability issue in the near future for sure.

Yildirim: The luxury industry or the entire research area of conspicuous consumption is quite an interesting area because it says so much about human nature. It tells us something about our desires for being in this world — how we want to live, whether we want to look like others or different from others, and how consumption serves this purpose of trying to differentiate ourselves from others.

Consumers over centuries have relied on different tactics for this. They were spending their wealth in order to signal things about themselves. Now they are reversing these tactics to some degree, and in the near future, they might be relying on other tactics. They might be using alternate ways, alternate methods, alternate channels, or dimensions of signaling, and we are on the lookout for this. We are actively observing and looking at how consumers are trying to communicate characteristics about themselves through consumption.

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