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Apple don’t understand the luxury market – the $17,000 Apple Watch Edition could damage Apple’s brand

The $17.000 Apple Watch Edition in rose gold

The $17.000 Apple Watch Edition in rose gold

There are two fundamental flaws in the way Apple have positioned the $10,000 to $17,000 Apple Watch Edition. First, a luxury product that will be obsolete after one year contradicts the luxury market’s fundamental logic of permanence and long lasting value. Instead, the Apple Watch Edition risks being perceived as an ostentatious display of money today, and an embarrassingly outdated item after next year.

Second, the bling factor of the $17,000 Rose Gold Edition conflicts with Apple’s core brand values among its broad user base. Apple stand for cool 21st century modernity, elegant simplicity, and near affordability for the middle class. One of Apple’s most important user segments is the creative class in the advanced economies. They have a laid back, postmaterialist and slightly bohemian anti-establishment value system. Conspicuous consumption and a materialist 1980s style display of wealth is the antithesis of this socio-economic segment of the market.

Navigating the luxury brand market

Strong brands always stand for something and have a clear identity. They are a statement and are by definition limited in scope. It is difficult for brand owners to extend their brand into new product categories or market segments. The risk is that their core brand value will become diluted, or even worse, that their extension will destroy the original brand value. Despite their efforts to nurture and communicate their brand message, brand owners are not in control. A brand’s “brand” is the sum of the perception of the brand by all users, former users, and non-users. It is the consumers’ opinions that ultimately determine a brand’s value.

The luxury market has its own particular logic and it’s difficult for non-luxury brands to break in to this market segment. Luxury brands typically offer a combination of superior quality, high performance and features, superb services, brand mystique, and a compelling narrative of the brand’s pedigree and origins. They are produced in very small series and are often more or less handmade. They tend to be built upon emotional appeal and are imbued with a sense of exclusivity and sophistication. Luxury brands are strong and often controversial. They can be beloved by the target market but viewed as ridiculously overpriced and “out” in other socio-economic market segments. For many buyers of luxury products, the strong brand identity becomes a part of their own self-expression.

But the luxury market is not just driven by status-seeking and symbolic appeal. The majority of luxury products have superior functionality, very high performance, and a solid build quality that gives them a much longer life span than similar mainstream market products. The second hand value of most luxury products is quite high and can even appreciate over time. Permanence is a core value in this product category. For example, the watchmaker Patek Philippe’s advertising slogan is: “You never actually own a Patek Philippe, you merely look after it for the next generation.” De Beer’s slogan is “A diamond is Forever”. Paying an exorbitant price for a product with very high second hand value and a long life span is to some extent rational.

Luxury brands can be divided into two segments. One segment consists of well-known brands that are easily recognisable. For example: Rolls-Royce cars, Louis Vuitton handbags, Four Seasons Hotels, or Rolex watches. These brands enable the customers to display sophistication and wealth, and are in some sense aspirational brands. The other segment of the luxury market consists of smaller brands that are less well-known by the general population but highly regarded by the in-the-knows. The fact that so few people recognise these brands makes them even more exclusive for the connoisseurs. They are usually more expensive than well-known luxury brands and offer an even higher level of sophistication and exclusivity. In the game of social status, buyers who prefer this upper echelon of luxury brands tend to turn their noses up at those who buy well-known luxury brands. They view them as unsophisticated and solely interested in displaying their wealth. Interestingly, anti-establishment middle class consumers often share this disdain for what they consider to be the nouveau riche’s vulgar display of wealth. For example, the urban hipsters who happen to be one of Apple’s core customer segments.

Difficult for digital tech products to enter the luxury market

There are very few market-leading tech brands that have attempted to enter the luxury market. The fast pace of innovation and increased raw performance quickly renders last year’s top-of-the-line products obsolete. For consumers who easily can afford it, it is only natural to frequently replace their TV, computer, phone, etc. However, paying ten times the price for a “luxury computer” or “luxury mobile” that will be disposed of after a couple of years serves little purpose. Functionality and performance trump any potential symbolic luxury brand mystique. Even in the early 1990s when mobile phones cost $4,000 there were no luxury mobile phones. Functionality was the only thing that mattered during this phase of rapid technological development.

There exists a niche market for very expensive laptops from the major OEMs, but they can hardly be called luxury as the high price is based on the expensive high performance components that go into the machines. Sometimes these laptops are white labelled by luxury brands such as Ferrari or Bentley. There is also a microscopic market for bespoke laptops. For example, a MacBook Pro built into a new luxury case or covered with 24 karat gold. But there are no independent luxury laptop brands that produce better computers than the market leading OEMs.

However, some luxury technology products do exist. For example: audiophile sound equipment, watches, and cars. In these product categories, performance is dependent on craftsmanship, build quality, and analogue technology, which improve at a snail’s pace compared to microprocessor based products. As these products will not become obsolete after one year there is room for luxury brands in these categories. They will retain a high second hand value. Hence, buying these luxury products can almost be justified without resorting to emotional brand mystique.

Vertu – the exception to the rule

There are rare examples of luxury tech products, but they are mostly the exception to the rule. A few iPhones have been refitted in gold or platinum cases, covered with diamonds and sold with a six or seven figure price tag. However, the only luxury phone brand with any significant sales volume is Vertu. During its time as the worlds’ leading mobile phone maker, Nokia entered the luxury market with the subsidiary company “Vertu” in 1998.

Pre-smartphone mobiles had a slower technological trajectory and Vertu positioned itself with craftsmanship, style and service – not advanced phone functionality. Their phones are priced from $6,000 to $300,000. Vertu use materials such as titanium, gold, leather, buttons made of sapphires and rubies, sapphire displays, etc. The most expensive models are decorated with diamonds. They also offer a bundled luxury 24/7 concierge service for their customers, reachable via a dedicated button on the phone. But as a phone maker Vertu have not been competitive. The product release cycle of their flagship model “Signature” has been around a decade. They launched their first Android smartphone only in 2013. Before that Vertu could only offer feature phones.

Vertu could not compete in the smartphone market during the period of early rapid technological development (2007-2013). Only when technological development slowed down and matured was it possible for a luxury brand to enter the smartphone market.

The luxury phone market is a tiny niche market. Vertu have sold around 350,000 phones worldwide since their first model launched in 2002. They only made eight of their $310,000 “Signature Cobra” model. There is not much for mainstream tech players to take away from Vertu’s narrow business model. Are customers paying for the bundled concierge service, the brand mystique, or the device itself? Their main markets have been Asia, the Middle East and Russia, where cultural differences make an ostentatious display of wealth socially acceptable. A few celebrities have been spotted with Vertu phones, but they are regularly given free luxury products as promotion. Vertu have a strong brand message in their target market. However, this message will probably evoke an equally strong (albeit negative) reaction among the tech savvy urban middle class in advanced economies.

Apple’s dilemma

Brand owners can’t have it both ways. Their brands have to stand for something, and they can’t stand for mutually exclusive messages. Ostentatious Bling and Cool Advanced Technology do not make a good match. Apple are undermining the core values of their own brand by entering the bling market. The Apple Watch Edition is not even high quality bling. It’s just an overpriced, mass-produced Apple Watch made in gold that will lose most of its value next year. Apple’s current support program ends seven years after they stop producing a product. If they don’t make an exception for the Edition, Apple will officially declare the 2015 Edition obsolete in eight years and cease all service. Clearly, they have a lot to learn about what constitutes a luxury product.

The dilemma is that luxury products are built to last while the microprocessor based components in tech products rapidly become obsolete. Buyers who can afford the best will not settle for last year’s inferior technology. There may be a few oligarchs who want to flaunt their conspicuous consumption by buying a $17,000 Apple Watch Edition, well aware that they will dump it in a year for the Apple Watch 2.0. But for the rest of us such a purchase just seems irrational and pointless. In my opinion, the Apple Watch Edition has a negative brand value.

Imagine if Apple had released a $17,000 iPhone Edition in rose gold back in 2007. (The first iPhone was a 3.5 inch feature phone that came without the app store and without 3G connectivity.) What would the used price for that phone be today? Scrap metal value of less than $1,000? Compare that to the value development of a Rolex or a Hermès Birkin handbag bought in 2007.

How Apple could turn things around

The good news for Apple is that there is a way to improve the situation. In order to make the high price of the Edition more justified, Apple could offer buyers a premium membership scheme (including those who have already bought the Edition). All members would be offered the opportunity to upgrade their Edition Watch on release day for ten years for $999 per upgrade. They could send in their old Edition watch and Apple would transfer everything on the old watch to the latest Edition model and send it back to them (or perhaps swap the electronics inside). To sweeten the deal, Apple could also offer a guarantee that premium Edition members will be able to buy new iPhones as well as all other new Apple products on release day. This offer wouldn’t cost Apple much and would propel sales of the Edition because it removes rapid obsolescence from the equation. Owners of Edition watches would no longer be viewed as vulgar show-offs, but as people who made a somewhat rational decision by paying a premium for a ten year upgrade guarantee and access to new Apple products on release day.

A way for luxury brands to enter the IoT wearable space

The formula above could be the key to the future IoT market for luxury smart wearables. Many luxury brands are eager to enter this market. Smart luxury earrings, necklaces, rings, pendants, brooches, sunglasses, pens, or watches could be sold with an upgrade guarantee.

An ultra-expensive price for the initial purchase would preserve the luxury product’s mystique and exclusivity. Each time the luxury brand releases a hardware upgrade, they could offer to swap the electronics and battery inside the product for a minor upgrade fee. If the product can’t be disassembled, users would be allowed to return their original product and have it replaced by the latest model for a replacement fee. This would tie the customers closer to the brand and generate ongoing cash flow in the form of upgrades. It would also ensure that obsolete products are removed from the market instead of being sold for embarrassingly low prices on eBay.

Update: 7 September 2016, Apple have stopped selling the Apple Watch Edition and removed any trace of it from the Apple website. Probably due to near zero sales. This is a blow to the view of Apple as an infallible strategic genius, Apple’s luxury watch dream is over

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