The Upside of Incompetence: How Discounting Luxury Affects Retailer Price Image

“Luxury” is typically defined partly by its premium pricing (Bain and Co. 2014; Grossman & Shapiro 1998; Kim & Ko 2010). Theories on luxury management emphasize that consumers draw inferences on the basis of the price of luxury offerings, and there may be a perceived skepticism when luxury products are sold at a lower price (Kapferer 2015, Uggla 2017). While historically luxury items were rarely discounted, in recent times, retailers are breaking with tradition. For instance, both Macy’s and Lord & Taylor have recently announced plans to discount luxury cosmetics brands like Bobbi Brown and Estée Lauder across all stores (Kapner and Terlep, 2017). Likewise, in a different category, Carnival Cruise Lines has pursued a similar strategy in pricing offerings on its ships. Goods and services from “luxury” categories (e.g., steak & lobster) tend to be priced low relative to other cruise lines, where more pedestrian offerings (e.g., beach towels and sweatshirts) are comparable to competitors’ prices. The purpose of this research is to investigate the effects of discounting luxury products, on the retailer’s overall reputation for pricing. Specifically, we examine whether discounting luxury offerings will reduce the retailer’s price image more than taking similar price reductions on non-luxury offerings. We propose that discounting luxury items will indeed have a larger influence on price image, than discounts of the same size on non-luxury items. This prediction is based on the notion that, given the importance of premium prices in defining luxury, retailers that reduce the price of luxury items will be seen by consumers as less competent, because they don’t understand the value of their own offerings. Specifically, we propose that discounting on luxury (versus not luxury goods) will result in lower price image perceptions, which is mediated by a reduction in the perceived competence of the retailer. We tested these predictions in a series of five experiments across four distinct retail settings: a liquor store, a hair salon, a cruise line, and a mass retailer.