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The China Premium. Fake Prestige Sells Tickets.

By Dan Harris on Posted in China Business

Spoke with a client the other day, who for reasons that will soon become apparent, I am not going to name. This company makes a mid-line consumer product that sells for approximately $150 in both the United States and in China. Its sales in China had been okay, but nothing inspiring. Then he hired a marketing guru who told him that the company needed to vault its product into the luxury category and it should do so by changing the colors of the product (from mostly silver and blue to mostly black and gold) and double the price and give it a new name “made up to sound prestigious and old-line.”

The company did this and within months, its China sales had doubled and its profit margins had shot through the proverbial roof.

Is this a one shot lucky thing, or is this going to be true of lots of other products as well? Let me just say that there is no way in hell that I would pay $300 for this product and I would not have even believed there would be a luxury market for it.  What is going on with the China consumer?

  • Bill rich

    Luxury looking expensive goods in China have the face utility which is way more significant for Chinese than others. My friend once show me his very expensive watch and told me how expensive it was. My reply was “Does it run faster than my Timex ?”. But it worths the expensive price tag it carries to him.

  • Michael Farrar

    It’s the concept of the Veblen good. Veblen goods are a group of commodities for which people’s preference for buying them increases as their price increases, as greater price confers greater status, instead of decreasing according to the law of demand.

  • http://www.puddingandchopsticks.com Homer

    I see this just about everyday and it makes me cringe when we see it.
    Let me think what I can write off the top of my head.
    DIO Coffee, Jazz Island, both are way over priced and are mediocore in my opinion. Starbucks is about the same price as in the States. Is still over priced in some of the things it carries, but the big thing in the gifts and merchandise which by are the same price if not more than the States.
    Furniture. I had a friend purchase an apartment in Northern China. He was looking into furnishing it. Facets, toilets, sinks, everything was way more then it’s counterparts in the States. And most was unbranded items. Not the name brand Kohler that you might expect. Construction costs were about the same as the States. Even though the standards where below what you might expect for that price.
    Bars put on a luxury face and charge more. I’ve see it.
    Electronics, there was a Android tablet that was priced way over the top. It was touted as a gift for government officials and was price quite high for a knock off type tablet. Sorry I don’t remember how much.
    Panda poop tea anyone?
    Some of the reasons that goods could be expensive I would think would be import taxes. But, I think much more than that is exactly what your client has done. Just jack the price up and add some “luxury” to it and away you go. I would venture to say a large, very large percentage of products in China are like this. Way over priced.
    In fact anything that can be gifted, is over priced. Any luxury item, over priced. Why, well, I can only imagine it’s a number of reasons. But one thing they seem to all have in common is bragging rights. Read: gives the owner face.
    Yep, that crappy bed costs me 15,000 RMB. Oh you must be rich.
    Which puts the rest of us that could care less, but actually want the products because of a specific function, at a dilemma. Pay the super over inflated cost or not buy it at all. Makes life difficult when you have no choice.
    Not one person I have seen use an iPhone does anything more than text and QQ. Oh, and flash it around like massive diamond engagement ring. At least for the most part, Apple products are set prices. So that’s good at least.
    But again, I haven’t met everyone so what do I know. But it sure makes it hard when I want to go buy something that should be fairly cheap, but because they have talked to a marketing compnay has jacked up the price to make it appeal to the “Chinese consumer” well that just chaps my underside.
    Such in China.

  • Will

    I agree with Michael above – the demand for the products increased as a result of their cache. In your example, the cache is built through the combination of a rebranding and an increase in sticker price, which can function as a proxy for actual worth. I would hazard a guess that, performed independently, these two things may not have had the effect that they did when done together.
    I was in China recently and was agog at the prices for some luxury goods at Chinese malls. Considering the average Chinese worker is lucky to make what, 5000 RMB a month (that’s a guess), before living expenses, I had to wonder who could actually afford (or hope to afford) the luxury goods.
    It seemed me that there were very few people, who happen to be extremely well off for whatever reason, who could afford the goods. This could play into the effect you’re describing above – assuming that there is only a small percentage of people who can even afford the good as priced originally, and assuming that the small percentage of people have an excess of disposable income, such that their decisions are not only driven by brand, but inversely by price (which feeds back onto the brand), you start to see how easily your example above can take place. This represents a very different target market in China than one for the same exact good in the United States.

  • nulle

    average chinese worker makes about 2000 rmb a month.
    I pose a question to those out there…why buy a Coach/LV bag, or a diamond for that matter? Does each of those functionally better than a standard leather bag or a man-made diamond (about 5k/carat)? Ask yourself why you are paying extraordinary high prices?
    I recall how DeBeers trying to outlaw man-made diamonds from being sold at jewelry stores to protect their business when a man-made diamonds are functionally identical to a ‘real’ diamond via GIA 4C standards.
    at the end of the day, it is cache and exclusivity (and face) that draws people in China to buy certain goods are above standard prices.

  • Ethan

    Chinese consumers simply have not had sufficient exposure to top shelf items to know what is really worth the price and what is not.
    So your newly rich are just buying whatever is expensive sounding, and, expensive. Because that is pretty much the only metric they have to measure things by; other than maybe one other criteria, that it is made by westerners.
    You see this on the streets and with your co-workers all the time. Sad if they are your friends, funny when they are not.

  • ceh

    There are countless examples. There is actually a clothing brand called “Rich Boss” in China that takes up space in high end malls. PBR sells a beer for $44/bottle in China. Need I say more? China’s masses are poor, and this is a fact not likely to change in our lifetimes. Thus, any product they are likely to buy is not something you can make money selling. Forget “one billion customers,” the real path to making money in China is “ten million rich people who haven’t a clue.” The blind leading the blind causes this to trickle down to the “middle class” too, but get in while the gettin’s good, because it will largely disappear in a generation.

  • Twofish

    Prestige is psychological. There’s no such thing as “fake prestige” since if you have prestige then by definition it’s real.
    Will: It seemed me that there were very few people, who happen to be extremely well off for whatever reason, who could afford the goods.
    A small fraction of 1.3 billion is still huge. Also, it’s a common misconception that China is a poor country. It isn’t. One analogy that helps to understand China is to think of China as a country with 150 million people that live at the wealth of the United States that’s attached to another country with 1.15 billion that live at lower standards.
    One of the reason that foreign luxury goods are popular among China is that there are a lot of social climbers that want people to think that they *aren’t* the average Chinese person. The average Chinese person can’t afford this but *you can because you are special*. One common situation (cell phones and cars) is that you have global brands that appeal to social climbers whereas the most local people buy local brands which foreign companies don’t try to compete with.
    Ethan: So your newly rich are just buying whatever is expensive sounding, and, expensive. Because that is pretty much the only metric they have to measure things by; other than maybe one other criteria, that it is made by westerners.
    Most of those goods are in fact Made in China. They are branded by Western brands. Often the expensive goods come off the same assembly lines as the cheap ones with perhaps some more quality control.
    You get into weird metaphysics. You have a purse come up an assembly line that is licensed by a major European brand and sold through their stores, and that purse is “real”. The factory then illegally runs another shift, and produces exactly the same purse, and that purse is “fake.”
    But it helps to remember that when you are buying a purse, you are not really buying the purse.

  • hanmeng

    Will, nulle, I believe the word you’re looking for is “cachet”, not “cache”. Otherwise, I pretty much agree.

  • http://inbeijing.tumblr.com Laobaixing

    “Prestige is psychological. There’s no such thing as “fake prestige” since if you have prestige then by definition it’s real.”
    That’s an essential point that often gets overlooked when people comment on what should or should not be a prestige item. (Although I would say that prestige is social, but perhaps that’s just my bias as an anthropologist) Some of the comments seem to presuppose that there are some items that are appropriately luxury goods, whereas others should not be. Does that mean that Chinese people are being fooled into arbitrarily selecting some goods as luxury, or that we’ve been fooled into taking different goods as luxury items? When I first went to China I was talking to some classmates in my study abroad program who were buying knock off luxury handbags. When I suggested that the quality of the knockoffs was probably not as good, they replied that the real ones were horribly made too.