Made Of - The Intrinsic Value of Luxury Goods

Some days ago I came across a brief post on social media that reflected the direct relationship between the cost of raw materials used in luxury goods (such as gold, pearls, etc.), and the retail price of these goods.

Basically, whoever wrote it (or someone in the comment section) defended that brands were hypocrite because they justified their price tag with the use of these materials when the cost to acquire them has significantly decreased over the last decades due to the finding of new deposits (in case of precious metals and stones) and the development of innovative extracting and industrial production techniques (Referring to alligator farms, industrial pearl production, synthetic diamonds and other similar activities).

As I remember, the article only focused on this side of the subject by considering it a way to mislead customers.

Personally, I believe this reveals someone who doesn’t understand the luxury goods market (or how any market works) and what brings up the value of a luxury product – of which the raw materials are definitively a small part in most situations.

Even though this can be accurate to a particular range of aspirational brands, luxury brands don’t use this “clutch” to justify their price. Usually, and by what I have noticed by my experience, only the public that actually can't afford luxury goods associates the use of, lets say diamonds, to an extraordinarily high price tag, not to seem elitist, but when you think about it, it’s easy to understand – most of this audience are ignorant regarding these products and materials simply because it’s not something in their “reality”.

So, if what drives value up isn't raw materials, what is? The answer can be divided into two different categories, let's call them "The Brand" and "The Effort".

"The Brand", meaning the prestige brought to the product by a combination of past history, design clues, past products, values and all the other elements that make a luxury brand ( To learn more about this read my articles "What makes it luxury? - Part 1" and "What makes it luxury? - Part 2").

Secondly, "The Effort" that went into the development of the product. Englobing several elements such as the creativity of the designer, the skills of the craftsman that manufactured it and all the time and indirect costs related to the development of innovative techniques and processes that were needed to produce the final output.

These two elements will be worth well over 90% of any true luxury goods, see the example of a Patek Philippe watch – the raw materials might be worth a little less than a few thousands, but then the final retail value can ascend to several hundreds of thousands of euros.

The “industrial” production of luxury raw materials (Or sourcing) is also something that cannot be simplified to the point it was in the article.

Firstly, the cost of raw materials acquired from the “wilderness” are always more expensive than the ones produced on farms or industrial facilities.

Secondly, the use of “industrial” produced raw materials is more a matter of sustainability than costs cutting – see the example of Hermés and Chanel: With such a high demand for their products in exotic leathers, finding local hunters and small independent farms was not practical nor sustainable in the long term, this led to a significant investment in animal farms (producing crocodile leather for example) besides increasing the availability of the raw material for production, it also meant to reduce significantly the extinction threat to several species and to help balance sensible ecosystems.

Chanel took this approach regarding their iconic perfume, the Chanel nº5. One of the ingredients is a rare flower, the jasmine flower, a plant that was starting to be very rare in the wild – at this point there were two options: stop/reducing production of the most successful perfume in history until the plant was extinct or plant fields of jasmine in France – Chanel partnered with the Mul family and picked the second option.

When analysing this second element, a third one arises – demand. The luxury market has never been this strong at any time in history, especially after the luxury conglomerates conquered the markets in 90’s and led demand to increase dramatically.

Overall we can get to the conclusion that linking the cost of raw materials with the retail price is absurd since there are so many other elements that need to be considered in the "luxury equation".

(Images from top to bottom: Hermès Kelly bag in crocodile; Elizabeth Taylor's necklace by Bulgari; Embroidery detail in Balmain dress; Chanel nº5; Audemars Piguet Full Pavé diamond detail; Saint Laurent boot in Lizard skin.)

#Luxury #LuxuryValues #Business #IntrinsicValueOfLuxury #Dubai