Luxury Brand Sales Strategy

Should luxury retailers discount products to drive sales or preserve their exclusivity? ISB’s Sarang Deo finds when markdowns work – and when they don’t.

How often do you see a bright red “SALE” tag outside a Dior, Prada, or Chanel store? Unlikely – because discounts are believed to be luxury’s cardinal sin. Seeing one, a high-end shopper might think: Has the brand diluted its exclusivity by flooding the market with discounts? 

For retailers like Farfetch, Saks Fifth Avenue, Neiman Marcus, and others, markdowns on seasonal luxury items like high-fashion apparel, handbags, shoes, or luxury cruise tickets are not as straightforward as slashing prices. While discounts can boost short-term sales, they come with trade-offs—compromising exclusivity and encouraging customers to wait for discounts instead of paying full price.

A new study by ISB’s Sarang Deo, along with Kenan Arifoğlu and Seyed M. R. Iravani, finds when and why luxury brands should consider markdowns. Using a game-theoretic model, a mathematical tool which examines decision-making where each player’s outcome depends on the choices of all players, the researchers analyse the cost of markdowns.

The study particularly asks:

1. When should luxury retailers offer markdowns?

2. How do exclusivity-seeking consumers shape pricing strategies?

3. What happens when strategic consumers, who time their purchases for markdowns, collide with those willing to pay for exclusivity?

How to price luxury

The game-theoretic model developed by researchers explored how luxury pricing plays out when a retailer has the market all to itself.

In this model, consumers were categorised into two groups. Exclusivity-seeking consumers, or snobs, who value rarity – if too many people own a product, they find it less desirable. For them, buying early is not just about getting the product but also about the status that comes with being among the first. Strategic consumers, on the other hand, are forward-thinking. They anticipate markdowns and decide whether to buy immediately or wait for a better deal. 

But not all luxury shoppers think alike. Some prioritise a product’s usefulness, known as its functional value, while others are drawn to the exclusivity it provides or its social value. This mix of priorities makes pricing a complicated decision for retailers.

The study breaks down pricing into two periods:

First period: The retailer sets a price and decides how much stock to order. Consumers then choose to buy immediately or wait, based on whether they think prices will drop. Snobs, eager for exclusivity, tend to purchase early.

Second period: The retailer may lower the price if the stock remains, giving strategic shoppers the chance to buy if the product is still available.

By analysing how these consumers make purchasing decisions, the researchers reveal what really happens when luxury brands consider the risk and reward of markdowns.

Markdowns as a strategy, not shortcut

While some experts argue that luxury is all about exclusivity and that retailers should avoid markdowns, this study suggests otherwise. It found that luxury retailers should offer discounts—and, paradoxically, it is consumers' very desire for exclusivity that makes it necessary.

When executed strategically, discounts attract new customers without significantly lowering the perceived value for high-end buyers. The study revealed that markdown pricing works best when exclusivity-seeking behaviour is moderate. If a large proportion of consumers value exclusivity, the retailer should avoid markdowns to preserve the brand’s image. If it is low, markdowns help drive sales without significantly harming brand value.

Researchers found that understocking—keeping inventory low even when demand is high—can create a ‘buying frenzy’, where consumers become more willing to pay full price due to perceived scarcity. When exclusivity-seeking behaviour is strong, the fear of missing out on a limited product pushes high-value customers to buy early at full price. By creating artificial scarcity, luxury brands reinforce their premium positioning.

Interestingly, the study found that strategic consumer behaviour is less damaging when exclusivity is highly valued. Snob consumers are less likely to wait for markdowns, reducing the negative impact of strategic delays. However, the study warns that completely ignoring strategic behaviour can still lead to a substantial drop in profits.

The authors prove that markdowns are more than just a short-term sales tactic; they are a strategic tool that luxury brands can use to preserve exclusivity while maximising profits. For markdowns to be effective, luxury retailers must understand their customer base. By carefully managing pricing and consumer expectations, brands can increase sales without undermining their prestige.

Author: ISB Editorial Team