Two examples of brands that where manufacturing costs are well below selling price are Hermès (luxury fashion) and Beats (high-end consumer electronics). Beats headphones are often over $200 in stores but cost $20 in materials and manufacturing costs (Schiesser, 2015). Likewise, a Hermès handbag that costs $4800 in stores only costs $180 to manufacture (Kaufman, 2000). Beats by Dre has been acquired by Apple in 2014, which is known for a premium product (People Aren’t Hearing All the Music, n.d.). Both companies position themselves as luxury or premium quality products.
How are they successful charging high prices?
In the case of Hermès, they market themselves as being artisans with six generations of talent and creativity built into their product. This view of themselves is absolutely true, as they do product a fine product from the finest materials, and they do have experience making fine leather goods since 1837 (Hermès, Contemporary Artisans Since 1837, n.d.). Everything on the Hermès website is expensive. A replacement strap for a dog purse is even costs $2,225 (Mini Dog Carres 16mm Bag Strap, n.d.). A men’s belt runs anywhere from $800 to $1,150 (Super H 32 Belt, n.d.). The Hermès Birkin bag, made popular by Jennifer Lopez, Cardi B, the Kardashians, and the Sex and The City television show (Hermès Birkin: where to buy one, how much it will cost you and why the bags are so hard to find – and still so popular, 2021), costs between $12,000 and $379,261 (Ginsberg, 2017). Cost to manufacture most of them is $800 (How much does it cost Hermes to manufacture a Birkin handbag, n.d.). Hermès is a “unicorn” company, according to Charles Gorra of luxury resale site Rebag. The limited quantities and the demand and waiting lists for the products drives up their prices. Hermès controls inventory levels in order drive up demand, and prices, of their products (Hermès Birkin: where to buy one, how much it will cost you and why the bags are so hard to find – and still so popular, 2021).
In the case of Beats by Dre headphones, they market themselves as “premium sound entertainment” and consider themselves to be “premium consumer headphones, earphones and speakers” (People Aren’t Hearing All the Music, n.d.). When reverse-engineered, is composed of $20.18 worth of materials and production and tooling costs. The most important component for sound quality is the metalized mylar diaphragm on the speaker drivers, which costs $1.50 each (Einstein, 2015). Beats headphones are manufactured in China, designed in the United States, and sold as a cutting-edge, high quality sound product that gives the user an experience in which the “intensity, emotion, and excitement” of music is finally able to be enjoyed (Burud, 2021). All of this branding and positioning accounts for their price.
How do they use customer information in pricing?
Hermès keeps customer data to keep track of their loyal customers. Certain products, like the Birkin bag, are only offered to loyal repeat customers. The Hermès sales associates look at consumer spending profiles in aligning their customers with their products (Birkin Bait: Is it Loyalty to the Brand or ‘A Means to an End’?, n.d.). Hermes prices based on the demand and the price that they luxury price that they can receive based on customers’ spending capacity. Their strategy is always to price with premium pricing.
Beats uses a skimming strategy as is common with electronics. Apple is notorious for price skimming, and as an Apple company, Beats follows suit. They hype their releases, back up their brand with prominent celebrities like Lady Gaga and Lebron James, and have made themselves a status symbol (YJ, 2021). Beats eve launched the $300 Beats Studio headphones in a recession in 2008, when premium products were not in as high a demand. In many ways, their pricing and positioning was ignorant of the economy. Their pricing reached for what Apple consumers could afford (Finkle, 2018).
Both Hermès and Beats priced based on the upper range of what discerning customers could afford. Material costs and labor for these items is insignificant in the face of the price the products are sold for.
by Art Ocain
Birkin Bait: Is it Loyalty to the Brand or ‘A Means to an End’? (n.d.). PurseBop. https://www.pursebop.com/birkin-bait-is-it-loyalty-to-the-brand-or-a-means-to-an-end/
Burud, H. (2021, September 21). Beats Company Belongs To Which Country? Who Owns Beats Company? Are Beats Made In China? https://technozive.com/beats-company-belongs-to-which-country/
Einstein, B. (2015, July 8). How It’s Made Series: Yup, Our Beats Were Counterfeit (But They Cost About the Same to Make as the Real Ones). https://beneinstein.medium.com/how-it-s-made-series-yup-our-beats-were-counterfeit-but-they-cost-about-the-same-to-make-as-the-364cc6808d18
Finkle, C. (2018, October 12). Beats by Dre: A Lifestyle Brand Case Study. https://brandmarketingblog.com/articles/good-branding/lifestyle-brand-case-study-beats-by-dre/
Ginsberg, L. (2017, June 1). You know you’re rich when you buy this — a $379,261 handbag is the most expensive ever sold at auction. https://www.cnbc.com/2017/06/01/this-379261-hermes-birkin-handbag-is-the-most-expensive-ever-sold.html
How much does it cost Hermes to manufacture a Birkin handbag? (n.d.). http://www.wanttext.com/Home/list-detail/1/how-much-does-it-cost-hermes-to-manufacture-a-birkin-handbag
Hermès Birkin: where to buy one, how much it will cost you and why the bags are so hard to find – and still so popular. (2021, December 9). South China Morning Post. https://www.scmp.com/lifestyle/fashion-beauty/article/3158723/hermes-birkin-where-buy-one-how-much-it-will-cost-you-and?module=perpetual_scroll_0&pgtype=article&campaign=3158723
Hermès, Contemporary Artisans Since 1837. (n.d.). Hermès. https://www.hermes.com/us/en/story/271292-contemporary-artisans-since-1837/
Kaufman, L. (2000, November 23). The $4,800 Handbag Under the Tree; Another Jolly Season for Luxury Goods. https://www.nytimes.com/2000/11/23/business/the-4800-handbag-under-the-tree-another-jolly-season-for-luxury-goods.html
Mini Dog Carres 16mm Bag Strap. (n.d.). Hermès. https://www.hermes.com/us/en/product/mini-dog-carres-16-mm-bag-strap-H075195CC9I085/
People Aren’t Hearing All the Music. (n.d.) Beats by Dre. https://www.beatsbydre.com/company/aboutus
Schiesser, T. (2015, June 22). $200 Beats headphones actually cost just $18 to make. https://www.techspot.com/news/61060-200-beats-headphones-actually-cost-18-make.html
YJ, O. (2021, September 2). The True Value of Beats Headphones. https://www.headphonesty.com/2018/07/true-value-beats-headphones/
Super H 32 Belt. (n.d.). Hermès. https://www.hermes.com/us/en/product/super-h-32-belt-H080044CB89S/