The luxury pyramid | A luxury industry deep dive

Luxury isn’t just about price; it’s about psychology, status, and the fascinating pyramid of luxury.

In this episode, we break down the tiers of luxury, explore the emotional allure of high-end goods, and uncover why some brands soar while others fall. Want a more profound understanding of the luxury industry? Then listen now!

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Transcript

Welcome back, everybody! In the previous luxury episode, we talked about how luxury attracts people, its contradictions, and how companies play into our basic human desires and the paradoxes that come with it. Welcome to episode 4, The luxury pyramid, where today we’re going a step further, examining the mechanics of luxury, the power of branding and the luxury industry itself, and more. I’m excited. Let’s talk luxury!

Chapter 1 - The luxury market

The luxury market is massive. It is estimated to be around $370 billion dollars and is expected to grow to around $420 billion by 2028. It is estimated to grow by around 5% a year. This is fueled by several factors, such as rising demand for luxury products in emerging markets, like China and India, where more people are becoming wealthier. But also the demographic shift is meaningful. Younger generations, especially Millenials and Gen Z, are spending more on luxury products.

The global luxury industry is very diverse: from cars, to jets, to drinks and fashion to cosmetics, fragrances, watches, jewelry and handbags. 

Luxury cars are the single biggest channel, worth around $550 billion, with personal luxury being the second largest, worth around $350 billion. Think: clothing, accessories, watches, jewelery and eyewear. Another pretty interesting statistic is that 85% of all sales are still being made in-store or offline. While the whole world is going digital and is under the spell of AI, the luxury industry is the outsider here. Luxury is not really made to be purchased online. It lacks the emotional en connection to the customer. A key aspect for luxury brands.

The most important markets for luxury brands are: the United States, Japan, China, France, Italy and the United Kingdom.

Chapter 2 - Brands

Picture this, you’re shopping for a bag. The purpose of the bag, usually is to carry something. Books, a wallet, perhaps some make-up. Right? The first bag is €50, another, nearly identical in function, is €70k. Rationally, most of us can justify the €50 choice, but the €70.000 dollar bag? That’s a whole different level, of, I’ll say it, craziness. And yet, people buy it. So, why?

The answer lies deep within our human psychology. Luxury brands have perfected the art of tapping into our basic instincts and deepest desires for status, exclusivity, and identity. An emotional connection. Things we talked about in episode 3.

Think about it: luxury items go beyond serving a purpose. The purpose is not the main reason. Its more about what the item resembles. Take a Birkin bag, for instance. If the goal were simply to carry a few groceries or stash a wallet, paying that kind of money makes no sense. You’re not buying a luxury product for its function. To be honest, most of the time the function of a cheaper alternative is better.

Do you need a family car for the city? A Toyota is probably a better choice then a Ferrari. More reliable, cheaper, more storage, easier to driver.

Do you need a watch to tell the time? A smartwatch or a simple Fossil watch is probably a fine choice for its price compared to a Rolex or Patek Philippe.

You want a comfortable pair of shoes. A pair of Nike shoes is probably more comfortable than the classic Gucci Horse bit shoes.

The point I'm making is this. A luxury item is more than its function, more than the sum of its materials or practicality. When someone buys luxury, they’re investing in an idea, a feeling, and a signal of exclusivity that can’t be replicated by ordinary goods, even if it's imperfect. This also aligns with the "uniqueness theory," which suggests that people tend to want to be different from others. And owning an item that not many people want or can afford, is one way of doing so.

So much of the value isn’t in what the item can do, but in what it represents. Our minds are wired to chase that sense of rarity, and luxury brands know it. They surround the item with an aura, something that taps into our desire to be unique and stand out. The high price isn’t about practicality; it’s about the lasting appeal of exclusivity. 

I find it fascinating because I have no personal connection to it, partly because I can’t really afford it, and partly because, honestly, I don’t care. At least, that’s how I feel right now, though I can’t say how I’d act if I had billions to spend. Thinking about all of this only makes it more intriguing. If you get this, you also understand that there are different levels of luxury and know how to spot the difference between true luxury and, say, premium or fake luxury. Let’s take a closer look at the different tiers of luxury.

When we talk about luxury, big names like Louis Vuitton, Cartier, Rolex, Gucci, and Hermès come to mind. But are they all on the same level of luxury? What about brands like Nike, Adidas, Puma, Omega or even Brunello Cucinelli? In luxury, brands segment into distinct categories that reveal a lot about target audiences, exclusivity levels, and brand positioning. Understanding them is critical. If you thought Hugo Boss was luxury back in 2015, you were in for a rude awakening.

There are basically two segments: the major and minor leagues. The major leagues, like LV, Dior, Gucci and Chanel determine the styles and rules. The brands within the minor leagues, like Celine, Armani, Balenciaga operate in their own market, but like to copy what works from the major leagues. There are a few players within the minor leagues that do set their own rules and trends, which we’ll talk about in a bit.

Alright. Let’s talk about the luxury pyramid. It's good to know that we created this luxury pyramid, and it can vary depending on the investor. The pyramid is also dynamic, meaning companies can move up or down. However, moving up is much harder than moving down. One mistake, and you go down, but climbing the pyramid is very difficult. It requires immense patience and making the right choices consistently over many years.

Let’s break it down from the bottom up, moving through the tiers of premium to ultra-luxury:

• Premium: At the base, we have brands like TAG Heuer and Hugo Boss, we call this tier premium. They offer excellent quality but don’t quite cross into true luxury. These brands are stylish and high-end, but they’re not rare or exclusive. Other examples are Nike, Tesla, Patagonia, Kenzo.
• Accessible Luxury: Next, we step into brands like Michael Kors, Coach, and Tory Burch. This is tier 2 or as we like to call them accessible luxury. These are for those looking to get a taste of luxury without the steep price tag. They’re fashionable and approachable, offering a balance of prestige and affordability. Many ultra luxury brands have slipped down to accessible luxury. It appears that Gucci is also sliding down into accessible luxury, while management does appear to be doing the right things to turn it around. But like I said, falling down a mountain is easier than climbing back up.
• The third tier we like to call niche Luxury. This is quite a special tier, with brands like Loro Piana and Brunello Cucinelli. These don’t flaunt their luxury. We also call this tier ‘quiet luxury’. They have exceptional quality and are very exclusive. They cater to the very wealthy, like Jeff Bezos and Mark Zuckerberg. Niche luxury can also be listed under a type of ultra-luxury, but tends to be lesser known by the public. For example, the t-shirts Mark Zuckerberg, famous for wearing basic grey t-shirts, all come from the Brunello Cucinelli brand. They have no logos but can cost over a $500 dollars for a basic t-shirt. The extreme wealthy know what you’re wearing, but every one else doesn’t. If you know, you know type of luxury.
• The fourth and second-highest tier, we call high-end Luxury: This tier includes icons like Louis Vuitton, Chanel, Cartier, and Gucci—globally recognized brands that combine tradition, status, and craftsmanship, appealing to wealthy buyers. These are often brands that are instantly recognizable. Think of Gucci’s signature red and green designs, Louis Vuitton’s iconic logos on bags, or Cartier’s distinctive jewelry. Many people who buy these brands want to show they have both taste and money—a kind of aspirational buyer. Of course, this doesn’t apply to everyone, but a large portion fits this description. They appreciate the quality and craftsmanship but also enjoy showing they can afford it and love how it makes them feel. Its for the upper middle class and for people who want to appear rich, and wear clothing with striking logo’s to show that they have money. And while true in some cases, being rich is relative.
• We then arrive at the very top, we have the pinnacle of luxury. Or as we like to call them ultra-luxury. Brands like Hermès, Patek Philippe, and Ferrari fit this tier. These names are all about scarcity, heritage, and the highest handmade quality possible. They heavily invest in brand image and retaining heritage. They don’t care about short-term profits and are all about the very long-term. Their products aren’t just bought; they’re coveted, catering almost exclusively to the ultra-wealthy.

Each of these tiers targets a unique customer, carving out a specific position within the luxury space, all while maintaining their identity and brand exclusivity. These categories give structure to the luxury landscape, defining who the brand is for and what it represents.

At first, I don’t really understand why some people pay these absurd amounts for products. Sure, there are the usual reasons—appreciating quality, the feeling it gives you, or simply because they can—but I think there’s another factor: investment.  

For people who can afford a Hermès bag or a Patek Philippe watch, it’s not just about fashion or quality; it’s also a way to invest their wealth. These individuals could put their money into stocks, bonds, real-estate or other assets, but another investment type is to buy luxury goods. And surprisingly, it can be a great investment.  

Take a Hermès bag, for example. If you’re lucky enough to get one, its value often increases fivefold almost immediately. The same goes for a second-hand Patek Philippe watch. Buyers are drawn to these luxury items because they tend to hold, if not gain, value.

If these products lost 50% of their value after purchase. I truly believe the wealthy would buy far fewer of them. 

Consider this: an average person with $100K in the bank is offered a $50K watch but doesn’t know if its value will drop or increase. Chances are, they wouldn’t take the risk. Too much uncertainty.  

But what if the same person knew for certain that the watch would triple in value after purchase? Who wouldn’t go for it? That’s part of what makes ultra-luxury so intriguing to the truly wealthy—it’s not just about status or indulgence, it’s also about the investment itself. Knowing its very likely the value will increase.

Chapter 3 - Episode takeaway

So, what’s the key takeaway from this episode? Well, it comes down to a few important points.

• First, the luxury market is different than most other industries. Almost all sales still come from physical locations. People don’t want to pay large amounts of money for luxury products online because it is not just about the luxury product. It’s also the experience and emotional connection to the brand.
• Secondly, the luxury pyramid is important to understand. Placing a brand in the wrong tier can be a big mistake and be very costly. Also, not every exceptional luxury company is a good investment. People recognize high-quality businesses, which tend to trade at expensive valuations.
• Last but not least, people buy luxury for several reasons. Having a unique experience, appreciating the craftsmanship, showing of, the emotional connection, but also as an investment. This might come in handy if you’re analyzing a luxury business and want to understand why people buy the products or services.

What a fascinating world, isn’t it? Let me end this episode with a quote i found by Coco Chanel, saying “ Luxury is a necessity that begins where necessity ends”. And I just thought, what a great way of explaining the strange luxury industry.

In the next luxury episode we’ll talk the anti-marketing laws of luxury, and important KPIs to look for within the industry. It'll be fun.

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