Milton Pedraza, CEO of the Luxury Institute, details the redesign of the luxury business model, which he believes will result in a true customer-centric industry
The luxury industry enters the last quarter of 2011 with some degree of uncertainty as it prepares for 2012. Many senior luxury executives, coming off a year of banner sales and profits, for some even above 2007, are asking the same question: Will it last? The fundamentals for rapid growth both locally and globally, including in China, are waning a bit and brands now must find a way to gain market share.
Customer Relationship Management (CRM) initiatives have begun to measurably pay off for luxury brands. Data collection efforts have improved but after-sales service and the critical relationship-building function of clienteling continue to be a major challenge. Most luxury brands lose eighty to ninety percent of customers in any given year, and are deficient in retaining even half of their top customers.
Contrast those metrics to Zappos’ customer retention rate of 75 percent and you begin see the massive opportunity that luxury brands have in creating customer-centric cultures. The good news is that many companies do have the CRM tools to measure the bleeding so now it is time to mobilize and humanize the entire industry for true relationship-building. Here are seven trends that all luxury brands should follow in 2012:
Just like they have thorough yearly medical check-ups to maintain their personal health and prevent major issues from becoming catastrophic, luxury executives are embracing the annual brand health assessment as a critical tool in their arsenal. Despite running quantitative surveys and receiving endless streaming social media feedback, there is nothing comparable to gathering target consumers of appropriate gender and age groups for candid and sometimes heart-wrenching dialogue. Brands are recruiting current customers, lapsed customers and aware non-buyers in all major geographies to scrutinize every dimension of their business.
The rich dialogue yields vital learning from consumers as to how they are really making luxury decisions and how they compare brands vs. key competitor brands. This blunt and powerful reality check on every critical component of a brand’s luxury value proposition delivers invaluable insights and prevents luxury executives from being blindsided by major evolving issues or from investing precious resources in useless gimmicks. Expect many more luxury brands to implement this type of exercise in 2012 as they realize an ounce of prevention is really worth a pound of cure when it comes to customer experience.
Many luxury brands, especially family owned companies, have grown up organically with little in the way of brand strategy. As they grow larger, they begin to realize the need for a solid brand platform in order to guide growth activities in all channels and geographies. Sophisticated luxury brands will begin to codify their brand heritage and history, along with their mission and values, in order to establish a credible, compelling, actionable and measurable brand positioning.
While some argue that luxury brands do not need a positioning strategy, many luxury CEOs and Boards realize that depending solely on an arbitrary communications plan misses the holistic nature of a luxury brand and creates inconsistency in today’s increasingly competitive luxury world. The lack of coherence between critical brand elements across many constituencies has made brand strategy and platform an essential tool for growth. Look for several luxury brands to develop solid brand platforms and figure out who they truly are, and who they are not, in 2012.
Before 2007, many luxury brands diversified into numerous product categories and sub-brands, thus expanding their target consumer base. As top-tier luxury brands have emerged from the recession stronger than ever, many luxury executives realize that part of their survival and recovery success was in paring back product lines and eliminating mass products that eroded brand equity and alienated their best customers.
Pruning the vines is now a necessary annual exercise. Luxury retailers have ruthlessly cut inventories, eliminated low-end mass-market products, shut down unprofitable stores, and discontinued relationships with non-performing distribution partners. Hermes’ huge and highly profitable success continues to prove that “less is more” matters tremendously in luxury. As growth begins to slow down in 2012, look for luxury retailers to pare back even more intelligently, thus positioning their brands for perhaps somewhat slower, but more sustainable and far more profitable, future growth.
While online sales are critical for multi-channel luxury retail brands, they are likely to account for only 20% of sales, at most, over time. In previous years, many luxury retailers became enamored with the online channel and diverted investments online to the detriment of optimizing the experience for customers across all channels, particularly in stores and call centers. In recent Luxury Institute surveys, only 10-15 percent of a luxury brand’s customers state that they have a relationship with a sales professional and can name that person.
Meanwhile, customer attrition rates in the luxury industry are at an astronomical 80-90 percent. CRM systems and metrics have highlighted that customers who have a true human relationship with a brand ambassador typically buy double from that brand and stay loyal for a longer period of time. Luxury executives now fully recognize the obvious: the true humanization and relationship-building aspects of brand-building depend on the individuals who interact physically with their customers. Look for a massive emphasis on relationship-building in 2012 as luxury brand executives shift investment back into people.
Yes, luxury consumers are online and are members of Facebook. And, yes, many luxury brands have millions of fans who like them on Facebook. And yes, Facebook tries to come up with a new way to influence purchases online every six weeks. However, there is no evidence that having all those millions of fans, most of whom are purely aspirational, has helped luxury brands in acquiring new customers, creating better relationships and increasing sales and profits significantly.
In focus groups and quantitative surveys that the Luxury Institute has conducted, significant percentages of younger and older luxury consumers alike do not place much importance on the social media presence of a luxury brand, with some even reacting negatively to a brand’s association with these mass market channels. Many see Facebook, Twitter, and other platforms as strictly social and they resent the commercialization of social media. Look for luxury brands to demand that their agencies and social media partners prove empirically that they can deliver sales and profits in 2012, without damaging brand equity.
Mobile applications are still in the early days and top luxury brands have yet to use mobile apps to generate any significant revenue thus far. The market is inundated with amateurish apps that are irrelevant and that give luxury consumers little incentive to download or use them routinely. As Operational CRM systems gear up to provide customized, one-to-one intelligence to apps builders and users, luxury brand apps will begin to proliferate.
The difficulty is that the technology-driven apps will become utilities, with very few providing true, long-term sustainable competitive advantage. The ones that are truly useful will be immediately and effortlessly copied by competitors and will become another seamless channel to connect with customers. In 2012, look for luxury brands to focus on what mobile applications do to build a customer relationship because most really great apps will quickly become commodities.
Luxury online-only retailers that deliver discounted products and hold flash sales have had great sales growth up to now. Profitability is elusive for most companies as there are too many similar players in an industry where differentiation is critical. During the recession, these retailers were able to gather luxury brand inventory and sell it to discount-hungry consumers. But discounting as a business model is tough on margins. You need to be a category killer for that and, as we have seen, even category killers are casualties of innovation.
Several of these sites boast that their algorithms can serve up customized offers to their eager buyers. That will only take these companies so far and in 2012, the truly smart players will realize that they need to establish human relationships. They will begin to evolve to be more like Net-A-Porter and Zappos than like each other. Look for most of these brands to try to establish personalized, customer-centric cultures in 2012.