The Luxury of Counterfeits | John Zhang

How Luxury Counterfeits Impact Consumer Behavior

Dan Loney: What is the impact of counterfeit luxury items on the luxury product market in general? It’s an interesting question when you consider how the consumer thinks about the advantage that counterfeit products provide. But there is also how companies that produce luxury products, as well as people with means of buying luxury items, react to these knockoff items being in the mix.

Our next guest says that this all creates a maximalist luxury strategy. That guest is John Zhang, who is a marketing professor here at the Wharton School. He was also one of the people involved in writing this research paper back in 2021.

John, this is such an interesting topic, because I think so many people know these products are out there, but we don’t look deeper into the impact that they can have.

John Zhang: Absolutely. You would think that the existence of a counterfeit should be really bad for the authentic brands, but when you look into it, it turns out that’s not necessarily the case. In some cases, in fact, because of the change in the consumer behavior, the luxury brands may actually benefit from the existence of like counterfeits.

Loney: This maximalist strategy, tell us more about it.

Zhang: Well, imagine this. Why exactly do you want to spend so much money to buy the luxury brands in the first place? The reason is because you want to signal to others your status of wealth, right? Why you want to signal your status of wealth? The reason is because once your status is known, you can imagine that all the doors in the society will be open for you. So, you want to do that. But in order to do that, you have to send the effective signal to other people. The way you send the effective signal is to buy expensive luxury goods that other people without the wealth would not [be able] to mimic. You would stand out if you use the luxury goods, and then other people cannot.

Essentially for luxury brands, and the reason why they can charge you such high prices is simply because they help the people with wealth to send effective signal to others that, indeed, they are wealthy, and then they will reap the benefits from every corner of the society. Because of that, you can imagine that the presence of the counterfeits could be a problem for luxury brands, simply because the people would buy the counterfeits to mimic what wealthy people would do.

You can imagine that if I’m the wealthy person, I still want to stand out, and the way to stand out is to stack the deck. Make sure that you buy a lot more luxury goods and put them on display, so that the other people just cannot mimic that.

Loney: How does that change the perception and the thinking of the luxury brand? Because for a long time, correct me if I’m wrong, the idea of the luxury brand was to produce enough items so that people felt good. But there was an intrinsic value in the fact that they didn’t produce as many items. There was that value there. Now it seems like they feel a little bit like the more the merrier.

Zhang: That’s actually right. That’s the direction probably the luxury brands want to go. The reason is because, for the rich to stand out, and given that counterfeit goods are around and everybody can mimic you, what you want to do is make it more difficult for people to mimic the behavior you display. The way to do that is to buy a lot of luxury goods and put them on display at the same time. The person without money [would] have to go to the back alley to buy some of the counterfeit goods and try to assemble them together in such a big display, [which] is very, very difficult to do. So, that’s how you can stand out. Given that, if you’re the luxury brand company, you want to produce more variety of goods and that would satisfy the demands from the people who want to have this maximum display and to stand out.

Loney: Does the element of e-commerce change some of the mindset here as well? You talk about the back alleys. Realistically, if you go online, you’re going to see so many advertisements for, you know, a golf shirt from Augusta National that’s maybe not $200, but it’s $20. The internet has opened the doors to e-commerce really bringing in a lot of these knockoff items.

Zhang: That’s absolutely true. In fact, that if you go online, it’s much easier for you to buy the counterfeit goods. But even in that situation, you can imagine that if I’m the luxury brand, I can produce more different variety. It’s not just the clothes, apparel, bags. You could have the jewelry, you could have a cellphone, you could a lot of other things. In that case, that even if you buy online, it’s very difficult for you to assemble everything together.

Loney: One of the things you mentioned in the paper is that some of this happening can actually spur those who have the wealth to want to buy more products of the luxury brand. Tell us a little bit about that reaction.

Zhang: Well, that’s the idea. Once I was invited by a very rich student and to have a dinner with her. Indeed, she showed up with all the luxury goods from top to the bottom, and with the cellphone from Prada, and everything is Prada. I was wondering, what’s going on here? She was basically saying that in China there are a lot of fake goods. If you just use one or two, people probably automatically infer that those are fake goods. But if you do it from top to the bottom, with all the jewelry, with the cellphone, everything else, you can imagine that, even in China, to assemble them all together is very, very difficult. Unless you do it in the authorized store and where you have everything. So, that’s how you can actually stand out.

How Are Luxury Brands Staying Ahead?

Loney: This obviously has to affect the luxury company’s decision not only about how many items they’re producing, but the types of items that they’re producing.

Zhang: Absolutely, that’s really the indication. Of course, maximus luxury is only one of the trends initiated by the counterfeit goods. You have also minimus luxury. You want to buy fewer and buy better, which means that you probably want to produce some unique item that’s very, very expensive that the imitator just cannot afford to do it.

Loney: Is the luxury company’s production level designed to counteract the levels that the knockoffs are producing? The more you produce of the better product, the more people may stay away from the knockoffs.

Zhang: There has always been a race in there, right? If you’re the luxury brand company, obviously you want to stay ahead of the game and stay ahead of the curve. You want to produce more, innovate more so that you basically keep your distance between you and the counterfeiters. That’s always a good strategy.

Loney: How much does the brand still carry a lot of the weight in this decision process? When you think about some of the names out there — Hermes, Versace, etc. — you have an expectation of a higher end, higher quality product, and that brand draws the attention of the consumer.

Zhang: Obviously, those brands carry a lot of weight and they sell a lot of goods. They still command the loyalty of a lot of customers. For Hermes, for instance, you could wait for a couple years before you can buy anything, even if you have the money. In fact, nowadays they look at your total purchase and before they actually let you buy some of the new products.

Loney: What does this all mean for retail in general?

Zhang: I think the luxury brands are constantly innovative. They want to come up with newer products and better products, and they also retain some of the classic ones. I think in that particular game, the larger brands will always win. The reason is because in this society, just imagine that, without luxury brands, life would be a very — what would be the word I’m looking for? Would be very boring. Probably boring and also colorless.

Loney: What did you take from this research?

Zhang: Our research basically shows that, No. 1, something that looks bad and may not actually be bad, right? For instance, at one point in high technology that happened, too. Basically, people parrot some of the software, and eventually they realize that that’s good way to advertise for their product. I think in luxury goods industry, that happens, too.

And No. 2, the existence of counterfeit goods, in fact, will fragment the market. You have a people who pursue minimalist luxury. You also have people who pursue the maximum luxury. There are a lot of people who do something in between, which means that as luxury brands, you need to become aware of all those trends and accommodate the change in consumer behavior. That’s definitely a very important point we learned.

Loney: Has any of this changed the mindset of the companies that are producing the knockoffs?

Zhang: Apparently, the knockoffs become more and more profitable for the manufacturers. Not only you see a lot of very low quality knockoffs on the streets of New York, for instance, and you also see some of the super fakes. They look just as real as the real ones. You can actually buy it in a very secretive way online, for instance, and get those products. For those manufacturers, they make a tremendous amount of money because they don’t invest in the advertising. They don’t invest in the branding for those products.

Loney: A super fake is just that next level up for the people producing the knockoff?

Zhang: Absolutely. If you produce knockoffs, over time you’re going to get better at it. And in fact, you can do reverse engineering. You do a lot of innovation to catch up with real thing.

Loney: How does the consumer look at what’s going on with these two different styles of company and product right now?

Zhang: Hopefully, from the luxury brand’s point of view, you want some people who always use authentic goods. You probably have a people who always use the super fakes, the certain kind of a people, they probably cannot afford to buy the real thing. But eventually, if they get wealthy, they also buy the real thing. In a way, probably the super fake is a good introduction to those people for the luxury category.