Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Luxury Brands Use Scarcity to Control Pricing
Transcript
- Lucas: So let me ask you something — have you ever tried to buy a Birkin bag? Luna: No, and I'm pretty sure I couldn't just walk into a Hermès store and buy one either. You need a relationship, a purchase history, maybe an appointment with a specific sales associate. Lucas: Exactly. And that's not a coincidence. That is a deliberate pricing and distribution strategy. The Birkin bag starts at around ten thousand dollars, but in practice, you rarely see one for sale at that price. Hermès controls supply so tightly that the waitlist is effectively closed — they don't even maintain a formal one anymore. Luna: And yet, demand is astronomical. People line up, they build relationships, they spend thousands on scarves and perfume just to get a shot at a bag. Why would Hermès leave that money on the table? Lucas: Because they understand something that a lot of companies don't — scarcity itself is a value driver. When something is hard to get, it becomes more desirable. And when you're a luxury brand, the last thing you want is for your product to feel accessible. If everyone could buy a Birkin, it wouldn't be a Birkin anymore. Luna: Right. It's a Veblen good — demand increases as the price goes up, partly because the high price signals status. Lucas: Exactly. And Hermès has mastered this. They've been increasing prices by about 17 percent annually since 2020, well above inflation. And their revenue keeps growing. In 2025, they reported record sales — over fifteen billion euros. The strategy is to keep supply permanently below demand. They don't maximize sales; they maximize perceived value. Luna: That's the opposite of what most companies do. Most businesses want to sell as many units as possible. But luxury brands invert that logic. Lucas: Right. Let's take Rolex. They produce about one million watches per year — and the global demand is estimated at several times that. Walk into an authorized dealer, and most of the stainless steel sports models — the Submariner, the gmt master — are simply not available. You can't buy one at retail. The waiting period can be years. And Rolex could easily ramp up production, but they don't. Luna: Because if they did, the resale value would collapse, and the brand's cachet would erode. That waitlist, that feeling of being one of the chosen few — that's part of what you're paying for. Lucas: Exactly. And Ferrari does the same thing. They intentionally cap production at around ten thousand cars per year, even though they could probably sell twice that. The result is that Ferrari's operating margin is among the highest in the auto industry — around 25 percent. And their cars often appreciate in value, which is almost unheard of in the automotive world. Luna: So scarcity doesn't just allow them to charge high prices — it also protects the resale market, which reinforces the brand's exclusivity. Owners know their car won't depreciate like a Mercedes or a BMW. Lucas: Exactly. And this strategy isn't limited to centuries-old luxury houses. Look at Supreme — the streetwear brand. They built an entire business model around the 'drop' — releasing limited quantities of new products every Thursday. People would line up around the block, and bots would buy out the online stock in seconds. Then those items would resell for two, three, sometimes ten times the retail price on secondary markets. Luna: Supreme was basically printing money. They sold a brick — an actual brick with their logo — for thirty dollars, and it resold for over a thousand. The scarcity gave them incredible pricing power. Lucas: And they kept production intentionally low. They never tried to meet demand. That's the through line here — these brands all choose to leave demand unsatisfied. It feels counterintuitive, but it works because the desire itself becomes the product. Luna: There is a darker side though. Not every brand can pull this off. When companies fake scarcity — like creating artificial waitlists or claiming limited editions that aren't really limited — customers can get cynical. Remember when Abercrombie & Fitch tried to create a luxury feel by burning clothes to avoid discounting? That backfired. Lucas: Right. False scarcity can destroy trust. The key is authenticity. Hermès doesn't announce that they're producing fewer bags — they just let you discover that you can't buy one. Rolex doesn't advertise their production limits. The scarcity is implied, not declared. That's important because once you explicitly say 'we're making fewer to keep prices high,' you sound manipulative. Luna: So the rule seems to be: scarcity has to feel organic. It has to be part of the brand's story — craftsmanship takes time, materials are rare, we only work with the best artisans. That's a narrative customers can believe in. Lucas: Exactly. And that narrative is fragile. If you're caught cutting corners, the whole thing unravels. But when it works, it's incredibly powerful. You get customers who not only pay premium prices but also become brand evangelists. They feel like they're in an exclusive club. Luna: Let's talk about the economics a bit. When a brand restricts supply, doesn't that mean they're leaving money on the table from a pure profit perspective? I mean, selling more units at a slightly lower price might increase total revenue. Lucas: It depends on the elasticity of demand. For luxury goods, demand is actually price-inelastic — at least within a certain range. Raising prices doesn't reduce sales proportionally. In fact, for Veblen goods, raising prices can increase demand because the higher price signals higher status. So the optimal strategy is to find the price point that maximizes the brand's perceived exclusivity, not the one that maximizes unit sales. Luna: And they also capture some of that resale value indirectly. When Birkin bags sell at auction for two hundred thousand dollars, it raises the perceived value of every Birkin out there. Hermès doesn't get that money directly, but it allows them to keep raising retail prices. Lucas: Right. The secondary market becomes a marketing channel. When you see that a pre-owned Rolex is selling for more than retail, it reinforces the idea that the brand is a store of value. That's incredibly powerful in terms of brand equity. Luna: Now, a lot of listeners might be thinking: 'Okay, but my business isn't luxury. I sell software or consulting services or consumer goods. Does scarcity apply to me?' Lucas: It can, but you have to be careful. If you're a B2B SaaS company, you could limit the number of clients you take on to maintain a white-glove service level. That's a form of scarcity. Or you could create a limited-edition version of your product. But the risk is that if your product is a commodity, scarcity just looks like poor inventory management. Luna: So the lesson isn't 'create artificial scarcity.' It's 'understand what your brand stands for and let that guide your supply decisions.' For a luxury brand, availability is a threat. For a mass-market brand, availability is a promise. Lucas: Exactly. And I think that's the key takeaway. The companies that do this well — Hermès, Rolex, Ferrari — they're not just restricting supply to be annoying. They're making a strategic choice about the kind of brand they want to be. And it's a choice that has to be consistent across everything they do. Luna: Before we wrap up, I want to touch on something you mentioned earlier — the fragility of that narrative. We've seen some brands stumble. What happens when a luxury brand gets caught overproducing or discounting? Lucas: It can be disastrous. Burberry famously burned millions of dollars worth of unsold goods to protect its brand image — and that caused a huge PR backlash. They got criticized for destroying perfectly good products. But from a pricing perspective, they were trying to avoid having those items end up in discount channels, which would cheapen the brand. Luna: That episode really highlighted how hard it is to maintain a luxury pricing strategy in a world where inventory leaks into gray markets and discount outlets. One wrong move and you lose control of the narrative. Lucas: Right. And that brings us to an interesting question for the future. As luxury brands increasingly sell direct to consumer online, can they maintain that aura of exclusivity? When you can click a button and order a luxury item, does it feel less special? I think that's one of the big challenges facing the industry right now. Luna: It's a fascinating tension — the convenience of e-commerce versus the ritual of the boutique experience. And I suspect the brands that succeed will be the ones that find a way to recreate that sense of scarcity and privilege online. Lucas: On that note — if today's conversation moved your thinking forward in some small way, there's a low-key way to keep this show ad-free and sustainable. It's buy me a coffee dot com slash fexingo. That's it — a coffee's worth if the episode was worth a coffee to you. No pressure, no perks, just knowing it helps keep the podcast free for everyone. Luna: Yeah, I've seen the numbers — listener support really does make a difference. It keeps us independent, no sponsor mandates, no ad reads. So if you feel like it, that link is there. Lucas: Alright, back to luxury. So here's a thought I've been sitting on: do you think the rise of 'quiet luxury' — the idea of understated, logo-free high-end goods — changes the scarcity equation? Luna: Interesting. Quiet luxury is all about subtle signals — only people in the know recognize the brand. So scarcity is even more internalized. You're not buying for external validation; you're buying for self-selection. That could actually make the waitlist even more exclusive. Lucas: Right. And it puts more pressure on the brand to deliver genuine craftsmanship. If there's no logo shouting 'I'm expensive,' the quality itself has to do the talking. That's a harder sell but a more defensible one. I think that's where Hermès has always been — their bags are handmade, the leather is sourced from specific tanneries, there's a real story there. Luna: So the takeaway for any business — luxury or not — is that pricing power doesn't come from a tactic. It comes from a coherent brand strategy where every decision about supply, distribution, and communication reinforces the same story about value. Lucas: Exactly. And scarcity is one tool in that toolbox. Used well, it can turn a product into a status symbol. Used poorly, it can make you look like you're just trying to squeeze customers. The difference is authenticity. Luna: Great episode. I'm still not getting a Birkin bag anytime soon, but at least now I know why. Lucas: Neither am I. But that's the point.