Cognitive switching and the reaction to luxury increases

“If consumers believe that brands set unfair prices, luxury brands might encounter cognitive switching that high-income customers are not willing to accept, even if they can afford to pay a higher price”. This is what cognitive switching is all about

 

It is called ‘cognitive switching‘. It is activated in our brain when prices exceed the acceptable range we have in mind when we are about to make a purchase, and we decide whether to pay, switch to a cheaper alternative or give up.

“Low-income consumers trigger it all the time for financial reasons. But high-income consumers are not immune to making the same arguments for different reasons,” explains Stephen Rogers, CEO of the Deloitte Insights Consumer Industry Centre. “If consumers believe that brands set unfair prices, luxury brands may encounter a cognitive shift that high-income customers are unwilling to accept, even if they can afford to pay a higher price.”

Cognitive switching

By raising the price bar ever higher, it is therefore not so automatic that the customer, even the richest one, is always willing to accept (and pay for) the value of that particular product. On the other hand, the economic and financial context does not help. Redundancies are also beginning to affect managers, executives, and people in top positions, and the places where they ‘park’ their wealth, such as the stock and property markets, are under pressure. Especially today, after the failure of the Silicon Valley Bank.

Looking between now and the end of the summer, PwC‘s Global Consumer Insights Pulse Survey, which polled over 9,000 consumers in 25 markets, found that the luxury/premium sectors will bear the brunt of a spending slowdown. According to the study, 53% of consumers expect to reduce spending on luxury/premium or designer products. Clothing and footwear purchases are also set to decrease, according to 41% of consumers. “With rising prices,” comments PwC’s Sabine Durand-Hayes, “consumers around the world are cutting back on non-essential spending and spending more time looking for cheaper alternatives.

No one is immune

This is also true for the wealthiest people, those who usually do not mind prices but might be put off by the continuous increases of the past years. “Even HNW (High-Net-Worth) and UHNW (Ultra-High-Net-Worth) consumers have told the Luxury Institute that continuing to raise prices for the same products has its limits,” reveals Milton Pedraza of the Luxury Institute. The Institute, reports Forbes, predicts limited growth for most of the luxury sector in 2023 and a recovery in 2024.

What alternatives?

What are the alternatives that affluent consumers are choosing? Many are turning to second-hand shops and vintage shopping. Research firm Cowen predicts that recommerce (which includes resale, rental, and subscription) will account for 14% of the clothing, footwear, and accessories market by 2024.

“With luxury brands recently raising the prices of some goods by almost 40 percent, designer items have become much more valuable and harder to buy,” Kunal Kapoor, CEO of The Luxury Closet, a leading luxury resale platform, tells the South China Morning Post. “The best brands are almost the same everywhere, so it is straightforward to participate in resale.”

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