Okonkwo Prelims

and calls for a clear set of objectives behind its strategy. Overall, companies set
prices to maximize profitability, return on investment, increase cash flows and
market share as well as optimize the production capability. Since luxury brands
are premium priced, the pricing objective and emphasis is on profitability and
return on investments. This is because prices between premium and economy
differ by at least a factor of ten and the profit margins are even higher.
The process of calculating and equating costs to pricing is not very simple.
This process is often done using the ‘Extended Strategic Pricing’ model,
which is presented in Figure 5.14. It indicates a high, medium and low level
of measurement in pricing versus product quality. This model is appropriate
for luxury brands especially in the current luxury market context where offer-
ings from several brands currently feature a gradual gravitation from
premium-pricing towards the medium-pricing range for certain products.
The pricing strategy also includes an evaluation of the key objectives
behind the chosen strategy to determine its success potential. The elements
of this analysis consist of the pricing for the brand’s products, the features of
its customers, and the stance of its competitors. The customer aspect
involves ensuring that there is a ready consumer market willing to pay the
set price for the products and services offered. Price and cost are relatively
different. The total cost of purchasing a product for a consumer incorporates
the price-tag on the product as well as several other ‘costs’ such as time,
energy, transport, mental effort and psychological costs. These factors are

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the art of creating and managing luxury fashion brands

Product quality

Low Medium High

Key: Traditional luxury goods pricing strategy

Extended luxury goods pricing strategy

Low

Medium

High

Price

Economy Value Penetration

Pricing Position Pricing

Poor value Medium High value

Position Value Position

Pricing Position Pricing

Price Poor value Premium

Skimming Position Pricing

Pricing

Figure 5.14 The extended strategic pricing model
Source: Adapted from Principles of Marketingby Brassington and Pettitt (2003).