China's Luxury Market from Perspective of Behavioral Economics
Economists do not buy luxury goods
While China continues to add to its consuming class, the newer consumers face fierce competition, have more modest opportunities, and are likely to enjoy lower incomes and income growth as the economy matures. This will have a somewhat restraining influence on the powerful system 1 driven heuristics which lead the consumers to luxury goods.
At the same time, younger consumers have greater demands and competition for their money. Having missed the "housing lottery" (today the housing prices are in an entirely different league as compared to what the previous cohorts experienced) housing appropriates a much larger proportion of their incomes, and leaves behind a much smaller surplus for luxury consumption.
One of the key contributors to the luxury market in China was the fact that because of the discontinuity in consumption in China, there were few “anchors" to which the consumers could compare the prices and quality. Hence the luxury products had the advantage of setting their own anchor and the consumers had no comparison benchmarks. However, with the rapid development of local, mid-priced brands, comparative anchors are emerging in many categories. This will make consumers look relatively unfavorably at the high-priced luxury brands.
Behavioral science suggests that experiences are more satisfying than product purchases. As is happening globally, Chinese consumers also increasingly look for experiences rather than products. While the consumption of luxury experiences may continue to gallop at a brisk pace, it may come at some cost to the traditional luxury products.
In the initial stages of a market's development, one key driver for the adoption of luxury products is the differential between consumers' ability to pay and their confidence in their judgment and discernment. This diffidence translates into the consumers buying luxury brands, using price as a heuristic which serves as an indicator of quality and desirability. As consumer confidence continues to increase, the consumers are more likely to rely on their judgment than the heuristics.
- "Noble edge effect" leads to the creation of positive valence for brands that espouse a purpose. While the Chinese consumers may be lagging on the global trends of sustainability and concern for the environment, the trend for conscientious and responsible consumption is only likely to increase further, which will also put a damper on the frothing sales of luxury.
While the explanations from behavioral economics about what has been driving the luxury market in China still hold strong, historical and cultural accelerators of the luxury market in China are likely to play a diminishing role in the coming years. Consumers are using newer heuristics which serve as choice factors. This implies that luxury may need to be re-framed in China. While the market will continue to grow modestly on the strength of economic growth and further corrections of imbalances (e.g., the tax differential) the brands that make a serious attempt to understand the changing consumer heuristics, are the ones who will be able to nudge the consumers to their brands.
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