Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Luxury Brands Raise Prices Without Losing Customers
Transcript
- Lucas: So there's this bag. It's made of calfskin or crocodile leather, stitched by hand over eighteen to twenty-four hours by a single artisan in a workshop outside Paris. You cannot order it online. You cannot walk into a store and buy it off the shelf. And its price has gone up about forty percent in the last five years. Luna: You're talking about the Birkin bag from Hermès. And forty percent — that's way above inflation, above even typical luxury price increases. Lucas: Exactly. And here's the weird part: as Hermès raises the price, demand doesn't fall. It actually seems to grow. Waitlists get longer. Resale prices climb. That violates the basic supply and demand curve we learned in Econ 101. Luna: It's the Veblen effect, right? Named after the economist Thorstein Veblen. For certain luxury goods, the price itself becomes part of the product's appeal. Lucas: Right. A higher price signals exclusivity, craftsmanship, status. If the Birkin cost five hundred dollars, it wouldn't be a Birkin. It'd be a nice handbag. The high price is a feature, not a bug. But there's more to it than just the Veblen effect. Hermès has built an entire system to protect that pricing power. Luna: Let's talk about that system. What are the specific levers they pull? Lucas: First, scarcity. Hermès deliberately underproduces. They could make more Birkins — they have the capacity, the artisans, the leather. But they choose not to. In 2024, the waiting list for a Birkin was estimated at two to three years for a standard leather model, and indefinite for exotic skins. That scarcity creates an aura of unattainability. Luna: And that makes people want it more. There's a whole psychology around 'if I can't have it, I must have it.' Lucas: Second, distribution control. Hermès does not sell its products through third-party retailers, department stores, or online marketplaces. No Amazon, no Nordstrom, not even its own e-commerce site for Birkins. You have to go to a Hermès boutique, build a relationship with a sales associate, and often purchase other items before you're even offered the chance to buy a Birkin. Luna: That's the 'bait and switch' strategy, in a positive sense. You buy scarves, belts, fragrances to show you're a loyal customer, and then maybe, just maybe, you get offered the bag. Lucas: Third, price increases. Hermès raises prices every year, often by double digits. In 2023, they raised prices globally by about seven percent. In 2024, another eight to ten percent depending on the product. And the Birkin, being the flagship, gets the biggest bumps. A standard leather Birkin 30 now retails around twelve to fourteen thousand dollars. In 2020, it was about nine thousand. Luna: And yet sales keep growing. Hermès reported revenue of about thirteen point two billion euros in 2024, up about fifteen percent year-over-year. So the price increases are more than offsetting any unit volume decline. Lucas: But here's the key insight: Hermès could easily maximize short-term profit by producing more and selling to everyone who wants one. They'd make billions more in the short run. But they deliberately choose not to. They're protecting a hundred-and-eighty-year-old brand. They're playing the infinite game, not the finite one. Luna: It's a fascinating counterpoint to most businesses, which chase growth and market share. Hermès chases exclusivity and price power instead. Lucas: And they're not alone. Rolex does the same thing. They produce about a million watches a year, but demand is estimated at two to three million. No discounting, no online sales, no outlet stores. And they've been raising prices aggressively, too — a Submariner that cost eight thousand dollars in 2020 now retails for about ten thousand. Luna: Chanel is another example. They raised prices on their classic flap bag by over sixty percent between 2019 and 2024. A bag that was five thousand dollars now costs over eight thousand. And they've also tightened distribution, pulling out of department stores and focusing on their own boutiques. Lucas: What all three companies have in common is that they treat price increases as a brand signal, not just a revenue lever. When a luxury brand raises prices, it tells customers: we are becoming more exclusive, our products are becoming more valuable, our craftsmanship is worth more. That message resonates with the core customer base. Luna: But there's a risk, right? Raise prices too much, too fast, and you can alienate your aspirational customers — the ones who buy entry-level products hoping to trade up someday. Hermès has a whole range of lower-priced items like scarves and fragrances that serve as entry points. Lucas: Exactly. The Birkin is the halo product. It's the thing everyone talks about, but only a tiny fraction of customers ever buy one. The real revenue comes from the thousands of smaller items — silk scarves at four hundred dollars, cashmere blankets at two thousand, perfume at one hundred fifty. Those products benefit from the Birkin's halo. They feel more desirable because they're associated with that ultimate status symbol. Luna: So the pricing strategy has to be holistic. You need the ultra-expensive flagship to create the brand perception, and then a tiered product range to capture different levels of willingness to pay. Lucas: And Hermès is meticulous about not diluting that perception. They don't do sales. They don't have outlet stores. They don't advertise in mass-market channels. Their marketing is almost entirely word of mouth and editorial placement in high-end magazines. They want to be discovered, not sold. Luna: It's the opposite of what most brands do. Most brands want to be everywhere, shouting about their products. Hermès wants to be nowhere, barely whispering. Lucas: That restraint is exactly what gives them pricing power. If you can't easily get the product, you're willing to pay more when you finally can. And you're less price-sensitive because you've already invested time and effort in the chase. Luna: Let's talk about when luxury pricing goes wrong. Because not every brand gets this right. Burberry is a cautionary tale there. Lucas: Burberry in the early 2000s was a classic luxury brand, but then they over-licensed their check pattern. It ended up on cheap scarves and hats sold in discount stores. The brand became associated with a certain kind of flashy, low-end fashion. They had to spend years burning inventory and repositioning to reclaim their luxury status. Luna: And more recently, in 2017, they made a different mistake. They burned thirty-seven million dollars worth of unsold goods to protect the brand from being discounted or sold on the gray market. That was a drastic move, and it worked in terms of brand perception, but it also drew criticism for being wasteful. Lucas: It shows how important distribution control is. Burberry's problem was they lost control of where and how their products were sold. Once you let your product end up in a discount bin, you've destroyed the price perception. Luxury brands need to be fanatical about channel management. Luna: So for a luxury brand, pricing power isn't just about setting a high price. It's about creating a whole ecosystem that supports that price: scarcity, distribution, marketing, product hierarchy. Lucas: And that's the lesson for any business, even non-luxury ones. If you want pricing power, you have to build a moat around your product. You need something that makes your product hard to compare directly to competitors. For luxury goods, that moat is craftsmanship, exclusivity, and brand story. For a software company, it might be data network effects or switching costs. But the principle is the same. Luna: It's interesting — we've talked about how these episodes help us think about our own work. And it's actually a good moment to mention that if these conversations have moved your work forward in some small way, listener support is what keeps this show ad-free. We keep it independent so we can dig into cases like this without any sponsor influence. Lucas: Yeah, and it's a tiny thing — but if you've gotten value from the show, you can support us at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. No pressure at all, just a way for people who find the show useful to help us keep going. Luna: And we really appreciate it. Now, back to Hermès — one more thing I want to touch on. How does the resale market affect their pricing power? Because Birkins often sell for more on the secondary market than retail. Lucas: That's actually a huge advantage for Hermès. The fact that a Birkin can appreciate in value — a used one can sell for twenty to thirty thousand dollars, double the retail price — reinforces the idea that it's an investment, not just a purchase. That perception further reduces price sensitivity. Buyers think of it as an asset that holds value, so they're willing to pay the retail price and even accept the wait. Luna: So the secondary market acts as a marketing tool, effectively. Hermès doesn't have to advertise that their bags are valuable — the resale market does it for them. Lucas: Exactly. And Hermès has even started to take control of that secondary market. In 2023, they began offering a certified pre-owned program for their watches, and there's speculation they'll do the same for handbags. That would give them even more control over pricing and brand perception across the entire lifecycle of the product. Luna: It's a full-circle strategy. You control production, distribution, retail pricing, and eventually even the resale market. That's as close to total pricing power as a brand can get. Lucas: And it's why Hermès consistently has the highest operating margins in the luxury industry — around forty percent, compared to LVMH's twenty-six percent or Kering's twenty percent. They have pricing power that their competitors can only dream of. Luna: So what's the one takeaway for a business that isn't Hermès? What can a small business or a startup learn from this? Lucas: I think the core lesson is: don't compete on price if you can avoid it. Build something that people can't easily compare to alternatives. Create scarcity — even if it's just limiting the number of customers you serve or the time you offer a service. Control how your product is sold — don't let it end up on discount sites. And use a flagship product or service as the halo that lifts the perception of everything else you offer. Luna: And be patient. Hermès didn't build this in a year. They've been at it for nearly two centuries. But the principles are timeless. Lucas: Exactly. Pricing power isn't a tactic. It's a long-term strategy that requires discipline, consistency, and a willingness to say no to short-term revenue. For Hermès, that discipline has made them one of the most valuable brands in the world.