How luxury brands manufacture scarcity in the digital economy

How luxury brands manufacture scarcity in the digital economy

Traditional luxury goods companies have treated digital as a channel. But they are now starting to treat it as a market in its own right, largely thanks to Blockchain technology, which provided the non-fungible token. Today, the key ingredients of luxury – rarity, exclusivity and cost – can also apply to virtual products, as companies like Balenciaga, Louis Vuitton and Gucci have realized.

Can digital be a luxury? Until very recently, most luxury consumers and companies would have said no. Luxury is about exclusivity, while digital is about making products, data and knowledge accessible – the two seem to be mutually exclusive. According to this logic, digital will never be more than a channel or, at best, an add-on complementing and amplifying a physical product or experience.

Certainly, the add-on can provide tremendous value or access new customer groups. One example is Tiffany’s engagement ring finder app, which allows users to try on engagement rings using augmented reality in the app before entering the store. Louis Vuitton offers collections of accessories that League of Legends players can buy online and then pick up in store. Last year, Gucci offered Pokémon GO players the opportunity to purchase fashion items from Gucci’s partnership collection with The North Face at any of the Gucci-Poke stops. Gaming company Epic Games has partnered with brands from Balenciaga to Louis Vuitton and committed $100 million to creating games in the 3D space.

But it turns out that the digital world can also provide the basic ingredients for luxury goods and services, independent of any physical artifacts or experiences.

Ingredient 1: Rarity

Even in the physical world, it can be difficult to tell the difference between the original and the copy. Distinguishing “real” digital products from equally digital copies has long been considered nearly impossible. But technology, as always, offers a solution: non-fungible tokens (NFTs).

Leveraging blockchain technology, NFTs can be attached to digital products, such as a digital painting, which helps establish authenticity and proof of ownership. As a result, sales of products with NFTs soared, reaching $10.7 billion in Q3 2021. An NFT tacked onto artist Beeple’s digital artwork sold for almost $70 million in March 2021 at Christie’s. Investment bank Morgan Stanley estimates that NFTs could account for 10% of the luxury market by 2030, a $50 billion opportunity.

NFTs also allow brands to create fully personalized fashion items: Overpriced’s first virtual NFT hoodie sold on the BlockParty platform for $26,000. Companies such as RTFKT or PlattformE offer NFT holders the opportunity to obtain a physical version of their digital product using flexible production processes such as 3D printing. This flexibility also provides the ability to produce the products on-demand only when the NFT holder has tested them virtually and decided to own the physical version, thus avoiding the long-standing problem of overstock, particularly prevalent in the manufacturing industry. fashion.

But rarity and customization are not enough. Luxury goods must go beyond scarcity and find ways to tap into the dreams, fantasies and ambitions that fuel our desire. Well, digital can do that too.

Ingredient 2: Exclusivity

In the digital world, we can present ourselves pretty much however we like and change those identities very quickly. Some luxury brands have already spotted the opportunity this presents: Balenciaga, for example, has developed a virtual fashion collection in Fortnite — players can show their affiliation with the brand’s community by purchasing virtual clothing or “skins”. branding for their avatars. Burberry is experimenting with in-game NFTs to gift skins to virtual avatars such as their limited-edition, limited-quantity character named Sharky B in the Blankos Block Party multiplayer game.

The DMarket trading platform estimates the market for digital skins and in-game purchases to be around $40 billion per year. Establishing global intra-operability across ecosystems that allows items to be worn and exchanged across different platforms will only enhance consumers’ ability to project their identity and status, thereby increasing the value of products. numbers that allow this.

It’s not just the game. Online communities such as the Bored Ape Yacht Club or Pudgy Penguins are becoming popular among digital collectors. Community membership is obtained by purchasing an NFT linked to an image (e.g. an image of a bored monkey or a chubby penguin), and the tokens serve as an entry ticket to access collectible digital goods and services. According to the Chainalysis 2021 NFT Market Report, membership tokens for these communities were the most popular NFTs in 2021. In August, for example, Mutant Ape Yacht Club developer Yuga Labs sold 10,000 Membership NFT in just one hour, generating $96 million in transaction value.

Additionally, virtual goods and services sold in games and communities are often individually very expensive, which brings us to another key ingredient of luxury.

Ingredient 3: Price

In December 2021, one of four exclusive NFT items was just sold on Mutant Ape Yacht Club for $3.6 million. Brands have already noticed this. Dolce & Gabbana’s recent sale of nine NFTs for $5.7 million is just one example that highlights the potential. Karl Lagerfeld’s limited edition with 77 digital pieces for €177 sold out on The Dematerialized platform after just 33 seconds. In 2020, digital fashion company RTFKT, now owned by Nike, teamed up with artist Fewocious to release three sneaker designs priced between $3,000 and $10,000. Over 600 pairs were sold in seven minutes.

In fact, some consumers are willing to pay even more for digital products than their physical counterparts. Recently, the limited-edition digital version of a Gucci Dionysus handbag, which sold for just $4.75 on Roblox, fetched $4,000 on the secondary market, more than the price of the physical version of the bag. RTFKT’s sneakers were trading at double their price weeks after launch. This opportunity is attractive. Unlike the physical world, digital traceability of transactions allows brands to get a share of every future resale, opening a new path to continued profits. Balenciaga has even created its own business division dedicated to virtual goods in the metaverse. The margins of virtual products are also high because the cost is much lower for digital products than for physical products. Plus, there is no cost for unsold inventory.

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The companies profiled here are expanding what it means for a product to be rare, exclusive and expensive – and the opportunities for creating value for consumers and businesses will only increase, as what these luxury pioneers learn will inevitably create new types of products and services inside and outside the sector.

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