By Steven Pearlstein
WashingtonPost.com
Here’s one of the great paradoxes confronting American business today: Why is it that consumers seem willing to spend huge gobs of money to buy status but are incredibly tight-fisted when it comes to paying for service?
Consider, if you will, the designer handbag, which has now achieved the standing — and in some instances, the price — of the mink coat or diamond earrings in the female imagination. No longer are many women content to own a few nice leather and straw bags in the standard sizes and colors. They’ve even gone beyond an unnatural yearning for this year’s “It” bag as memorialized on “Sex and the City.” Being seen with a Mark Jacobs Stam or a Chloe Paddington has become an obsession that now drives the growth of the luxury-goods industry.
To see the power of the purse for myself, I took a stroll this week through the Collection at Chevy Chase, a new retail complex located strategically between Neiman Marcus and Saks Fifth Avenue on Wisconsin Avenue. With stores like Christian Dior, Louis Vuitton, Max Mara, Bulgari and Jimmy Choo, this is what passes for Washington’s version of Rodeo Drive. And to oversimplify things only slightly, it’s all about handbags. Handbags adorn the window displays. And handbags are the first thing you see when you walk in the store, each one displayed on its own glass shelf, like a piece of fine art. There are even uniformed guards watching over them, as in a museum.
Considering some of the prices, it’s no wonder. Other than the small evening bags, it’s hard to find one of these bags for less than $700, with the average price closer to $1,500. And if you’re interested in bags made from ostrich or crocodile, or the ones with sterling silver buckles, you’re looking at $5,000, $10,000 or even $15,000. According to Women’s Wear Daily, Hermes is charging $148,000 for a crocodile version of its Birkin bag, but don’t bother trying to get one — there’s a waiting list.
Obviously, this is a rarified slice of the market, but there’s a broader phenomenon at work here. Women who used to pay $100 for a bag are now paying $300, and those who once paid $300 are now springing for $600. And according to WWD, industry executives don’t think they’re anywhere near the point of price resistance.
Take the example of Coach, the leading purveyor of designer handbags, which has enjoyed 30 percent growth, and a 25-fold increase in its share price, since it was spun off from Sara Lee in 2000. Long a staple in better department stores, Coach really took off when it began selling its $200 and $300 satchels at its own sleekly designed stores. Now, Coach is moving up-market with its new Legacy line, with bags approaching $1,000.
So what is it about handbags?
It turns out that customers love them because they are the quickest and easiest way to update a wardrobe and send a signal to the world (other women, that is) about your style and success. You can carry a new bag many times more than you can wear a new suit. And while not every woman can look good in a pair of designer jeans or a low-cut cocktail dress, anyone can look good with a new purse.
Businesses love handbags because the profit margins are almost too good to be true. As one top industry executive told me this week, there is simply no way to justify the run-up in wholesale prices in terms of higher costs for materials or workmanship or even marketing — it’s all about brand premium. And retailers love them because, in contrast to clothing or even shoes, there are no problems with fit and sizing, there are no alterations, and they don’t take up lots of space.
Women, of course, are not alone in paying ridiculous sums to purchase status goods. Men have their cars and watches, their fishing gear and their flat-panel TVs. And is there any doubt that one reason top schools and colleges have been able to raise tuition with impunity is the perceived status they confer on students and their parents?
But what is so hard to understand is why consumers who are willing to pay ridiculous sums for status goods are such ruthless and unforgiving penny-pinchers when it comes to paying for service.
For years, airline executives have said that they simply can’t compete if they charge $25 more than their competitors for a roundtrip ticket to Chicago, even if they use the money to provide more legroom, or eliminate those awful lines at check-in, or provide you with a glass of wine and a simple cheese-and-fruit plate on a five-hour flight to San Francisco.
And how many times have we heard retail executives complain that they can no longer afford to have a satisfactory number of experienced, well-trained salespeople on the floor because the added cost would make them uncompetitive?
You get the same story from insurance companies and software makers in explaining why you have to wait endlessly on hold to talk to someone who can explain why your claim was rejected or how to unstick your computer: Our customers won’t pay for that.
In the lingo of business strategy, these industries have become commoditized, no different than the businesses of selling gasoline or corn oil. And the common view among executives in these industries is that no matter how much or how little service you wrap around these commodity products, customers will invariably base their decisions on price.
Except, of course, when they don’t.
I wonder what the beleaguered chief executive of JetBlue would say this week if you asked whether his passengers would have been willing to pay a bit more to make sure their favorite airline had the people and systems in place to respond to inevitable weather emergencies.
Would the owners of Woodies or Marshall Fields or Jordan Marsh still have department stores to run if they had tried to match Nordstrom’s service rather than Wal-Mart’s prices?
And who do you think will win the “broadband war” between the cable companies and the phone companies — the ones with the lowest price or the ones with the best service?
Not every business can be lucky enough to be selling thousand-dollar handbags to rich women who have gone handbag crazy. But every business can learn an important lesson from Hermes, Dior and Jimmy Choo — namely, that you’d be surprised how much people are willing to pay for something they really value.
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