Pricing For Cool: Burberry and Nancy Gonzalez

I've been meaning to do a post about pricing in luxury goods for a while, but a recent alert by analyst Lisa Rachal at Redburn Partners and a recent chat with Santiago Gonzalez, the C.E.O. of Nancy Gonzalez, reminded me. (Nancy Gonzalez makes brightly-colored crocodile bags and is the number one seller at Bergdorf Goodman and has been selling for two seasons at Harrods. They make more croc bags than anyone in the world.) In Milan, Santiago told me that they have had to train all of their employees in Colombia. They flew in expert technicians from France and Italy to teach workers how to dye and work with crocodile. But Santiago had to teach some of the business side people himself. His head of pricing came from the sugar industry. "When he saw how I priced the bags, he was amazed," Santiago said. In sugar, if the price goes up a penny the ramifications are extreme. But in handbags (or any other luxury good) mangers look at a bag, look at the amount of money it took to make it, and look back at the bag and then decide the price. Of course, they're going to at least double the cost of construction. But after that the only rule is, there is no rule. The bag is priced according to what managers think a consumer will pay for it. I call it "pricing for cool." Of course, they will also be thinking about the other bags in their line, and what they cost, and about how much their competitors' bags cost, but the relationship to cost of construction is almost non-existent. Why do you think the margins at Louis Vuitton are so great? In Lisa's memo today she says that the bags at Burberry are still not achieving the margins they did during the era of the PVC check legacy collection. Burberry Bag Burberry's bags are now leather, and decidedly hipper, so they are demanding higher prices, but the company has had to raise prices slowly, to test consumer reaction. (See my previous post on Burberry Bag Test). Had the company launched bags with higher price points, they wouldn't have to go through this process of educating the consumer but now they're afraid that a dramatic increase in price would have a similar effect to that of the sugar business. In other words, start cool -- stay sweet. □