The Art of Selling Luxury in a Slowdown

Here's what business owners who sell non-necessities or services can do in a tough market.
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Whenever times get financially tough, one of the first things experts advise is to cut out the $4 coffee. Nowadays, it's a double-whammy when you consider the gas you'll burn to get your $4 latte.

For consumers, that's sound advice, but what if you're the shop selling $4 coffee? What can a business owner who sells a non-necessity luxury good or service do when consumers have a gorilla grip on their every dollar.

Just last month,

Starbucks

(SBUX) - Get Report

reported a 28% drop in second-quarter profit. Not sitting idle, Starbacks CEO Howard Schultz has said his company will launch three new drinks this summer. They're not the only ones revamping their menu,

McDonald's

(MCD) - Get Report

has just added two new chicken items to its menu while Taco Bell, Subway and others have started boosting their value menus.

The Bureau of Economic Analysis shows consumer spending since November 2007 has dropped 0.2% for food, 0.4% for clothing and shoes, 0.6% for furniture, and 3.9% for jewelry and watches.

If your business is a luxury brand that sells items costing more than a gourmet coffee or crispy chicken sandwich, Milton Pedraza, CEO of New York-based Luxury Institute, has a few words of advice.

Don't Discount

First, avoid discounting. "It's a short-term trick that erodes your luxury brand for the long term," says Pedraza. Instead, he recommends business owners with luxury goods and services focus on one-of-a-kind, custom-made and/or made-to-order sales. Pedraza also says businesses should push limited-edition items. By doing this, the purchaser's decision must take time into consideration -- the consumer can't wait until the economy turns around, it forces them to act now.

Analyze Your Customer Database

Second, Pedraza recommends analyzing your customer database and identifying the purchasing patterns of your regular customers. "If the client orders a navy blue blazer every 18 months and it's past due, send a custom reminder email," says Pedraza. Moreover, if the customer has just purchased the navy blue blazer, Pedraza suggests sending an offer for gray pants a couple of weeks later, followed by a shirt and tie offer the following week.

To pull this off, Pedraza says, "Customize, customize, customize, instead of the lazy spamlike blanket discount most luxury brands are serving up in desperation." In an economic slowdown like the one we're in now, Pedraza says to use surgical tools, not hatchets, in your quest to lure consumers.

Create a Referral Program

Third, create a customer referral program with incentives for your staff and consumers. Software providers

SAP

(SAP) - Get Report

and

Oracle

(ORCL) - Get Report

both have a referral program to target the small to midsize business, as well as

Bank of America

(BAC) - Get Report

and many others. Now is the time to market your referral program and perhaps even spruce up your Web site to make participation as simple as possible.

However, not all businesses in the luxury game are feeling the same pinch. According to Pedraza, businesses selling primarily to the affluent consumer earning roughly a $150,000 income, but with little or no net worth, are faring far worse than businesses catering to upper affluent millionaires. Pedraza highlights how

Neiman Marcus

(NMG)

, catering to the upper affluent, is doing better than

Nordstrom

(JWN) - Get Report

. First-quarter sales figures prove this to be true.

Neiman Marcus saw first-quarter sales slip 1.9%, while Nordstrom's dropped 3.8%. So if you're a consumer shopping at Neiman Marcus, be sure to pick up a latte and chicken sandwich on your way home.

Steve Cooper spent over six years at Entrepreneur magazine and Entrepreneur.com. He was most recently the managing editor of Entrepreneur.com and was previously the research editor for Entrepreneur magazine. He has a degree in journalism from San Francisco State University and runs his own business, Hitched Media, Inc.