The Virtuous Circle of Luxury Brands
– On the revenue side: mega-brands – mostly thanks to economy of scale – enjoy better ad rates, have bigger advertising budgets and therefore also deliver a better return on PR investment – because media companies will not cut short coverage of important customers. All of the above drive awareness and equity.
– On the cost side: purchasing power also translates into better retail conditions and better retail opportunities (e.g. right to first refusal, better locations). This makes more economical to vertically integrate the business: thus bigger brands also are more likely to have direct models (e.g. vs. distribution through wholesalers and third party distributors), which also ensures better brand deployment and control, in addition to higher operational margins.
Moreover the framework can be used to shed light on growth drivers for any type of luxury brands (i.e.; mini, niche, big and mega), while providing some very actionable insights:
– The PR Leverage: the math is simple: not having big budgets for advertising, small emerging brands tend to rely a lot on PR to build their equity. But will the media listen, will they report about your event? Not always: first of all because the worthiness of a PR message is important, not all content is king, not all content is interesting; and so it is the delivery of the message, the PR agency, the mavens spinning your content. Also ink (eg. electronic or physical) is a scarce resource, which is more likely to be allocated to media customers. This is why it is well known that creativity becomes essential to get coverage. But too often when letting creativity loose, we forget that the execution should make the brand shine and not vice versa. And too often we forget the Return on Investment on PR. Not being able to generated several multiples of free coverage vs. investments, should make us reconsidering PR as the right brand building tool.
– Flagships as a development tool: both scholars and hands-on experts agree that a retail strategy based on flagships is the ideal strategy for any luxury brands. By looking at the model, we come at the same conclusion. It is a catalyst for growth because of the vertical integration and the better control and execution at brand level. Some also go as far as to claim that a flagship has positive influence on wholesale sales, e.g. on sales through independent players either complementary or competing with the flagship itself. However I have not seen an evidence to that, or to the contrary. What becomes critical to assess as that in the past flagships have always been looked as “marketing tools” because they cost more and take longer to break even. While bigger brands can afford to wait so long for a flagship to turn on green territory – although not immediate whether they plan to – it is clear that smaller brands should develop a sustainable retail strategy, because this catalyst for growth can easily transform into a catalyst for ruin.
– The Aspirational, Ethereal brand communication, but not only: point of sale execution is critical to sales conversion. And while is not the most aspirational of the advertising disciplines, it is a critical to create a viable business. Too often we disregard it because of its intrinsic lack of aura, but trade marketing can be a deciding factor for many upcoming brands. It is what drives in-store conversion, it is what makes customers that are just window-shopping, to actually spend money.
–The balance between a Direct vs. Indirect model: a direct route to market, provides higher operational margins, and better control of the brand deployment. But it is also more resource intensive – specially at the very beginning – and it is a catalyst for growth only once you already have reached a tipping point. Whilst the indirect model, can help generate quick turnover, it basically delegates brand execution in someone else hands. And these hands have brains: those brains know too well that a brand-owner will rid of them once the brand has reached critical mass and a certain equity. In a nutshell: because it is not conceivable that all early-stage luxury brands choose a direct route to market, should you firm decide to go for a indirect model, make sure your commercial organization can deliver turnover as much as marketing plans, and has the ability to deliver through third party organizations. Plan ahead for vertical integration, and make sure that those investments don’t unbalance your business.