A luxury good is a non-essential product. Consumers don't need luxury goods to live. Examples include clothing from high-end designers, designer luggage and handbags, jewelry and watches, high-end vehicles, over-the-top vacations and real estate, and certain services, such as a live-in nanny.
The appeal of luxury goods is undeniable, but the price tag can be off-putting. Buying these goods can be cost-prohibitive unless you have a job with a high salary or a willingness to go into credit card debt. So why do people make these extravagant purchases?
Key Takeaways
- Buying luxury goods can create a financial burden (unless, of course, you can afford to pay for them).
- The luxury goods market is worth billions and is growing, though research indicates that people are cutting back on non-essential spending across the U.S. and Europe.
- People buy luxury goods despite not being able to afford them for several reasons, including a sense of irrationality, a belief that a higher price equals higher quality, a desire for higher self-esteem, and a desire for a sense of accomplishment.
Irrationality
Consumers aren't always rational. According to some modern behavioral psychology studies, many consumers who buy luxury goods aren't in a financial position to afford luxury goods. The proof may be in the high rates of consumer debt in America. Total credit card debt for the fourth quarter of 2023 was $1.129 trillion.
A high-quality, durable handbag can be purchased for around $100, but some consumers opt to spend thousands of dollars on a luxury-brand handbag that performs the same function and is of the same relative quality.
Equating Higher Price With Higher Quality
One possible explanation is the human tendency to overemphasize the positive elements of a product and ignore its disadvantages. Great marketing and brand power may contribute to this.
Some consumers will wait overnight to grab new releases of iPhones, iPads, and Mac computers even though Apple (AAPL) products aren't necessarily technologically unique or superior. Samsung and other brands offer more variety and (according to some experts) more bang for a consumer's buck when it comes to smartphones, compared to Apple.
Microsoft (MSFT) and Xiaomi make phones that typically have a cheaper price point, but Apple experiences a high degree of brand loyalty and seems to break sales recordsyearafter year.
Some peopleperceive non-luxury goods as inferior based on their characteristics or quality. They come to the conclusion that higher-priced goods are simply superior. They may believe that you get what you pay for, regardless of whether the goods are better than their more affordable counterparts.
A Desire to Boost Self-Esteem
Self-esteem can be a factor, as well. This may be especially true if you can't easily afford the cost of these items. Whether it's basketball shoes or a polo, a luxury good can go a long way toward increasing self-esteem for some people, providing a sense of belonging and higher status.
A $500 scarf is just a click away with the rise of online shopping, and luxury goods can serve as the ultimate retail therapy for some people. The Internet makes it all easily accessible for impulse buying, aided by credit and a "buy now, pay later" feature on the checkout page that allow you to split the purchase into a handful of equal payments.
You can also invest in the luxury goods market. There are several exchange-traded funds (ETFs) and mutual funds that track this market.
A sense of accomplishment is another reason why some people buy luxury goods. They want to reward themselves for their hard work by treating themselves to something they might not be able to afford.
Authenticity Matters
Someone may decide to pass up a fake Rolex and pay full price for an authentic one even if the two watches look identical. Why? The owner will know that they don't have a real luxury good, even though it may appear the same to a stranger. But why wouldn't a facsimile do the trick if we buy luxury goods to show off to others and feel like we belong?
Researchers at Yale University have determined that this quest for authenticity develops early in childhood. A study that tried to convince children that a cloning machine produced their favorite toy found that most children refused to accept the duplicate as identical. The sentimentality of the item and the memory or feeling that comes from having purchased a genuine luxury good is part of the reason that we seek authenticity.
How Big Is the Luxury Goods Market?
Demand for luxury goods typically rises when incomes do. People tend to loosen their purse strings and spend more on items they don't necessarily need when the economy flourishes.
Research indicates that people have begun cutting back on non-essential spending across the U.S. and Europe, even though demand for these goods is still high.
The luxury goods market in 2023 was estimated at $253.7 billion. This number is expected to increase to $369.8 billion by 2030. Almost a third of this, $115.4 billion, is expected to come from luxury apparel alone.
What Are the Most Common Luxury Goods That People Purchase?
Some of the most common types of luxury goods include high-end designer apparel, handbags, jewelry, watches, and luxury cars. Apparel is so popular that this segment is expected to make up about one-third of the luxury goods market by 2030.
How Can I Spot a Fake Luxury Good?
Counterfeit goods are more common than you might think, especially when it comes to the luxury goods market. One of the most obvious ways to spot a fake is by the price. Be cautious if someone sells you a designer handbag for $100 when it normally retails for $3,000. You can also tell a knock-off from the real thing by the craftsmanship. Counterfeit luxury items may be shoddily made. Counterfeiters also use fake logos or alternate spellings of brand names.
The Bottom Line
People buy luxury goods for a variety of reasons. Nearly all of them are related to the strong emotions we attach to the purchase of expensive material goods. You may decide to purchase an item to achieve a certain feeling, regardless of whether you're in a financial position that allows you to do so. You might be looking for a feeling of accomplishment from hard work or to gain acceptance from others.
So be careful when you're considering a luxury purchase. Is it actually what you want, long-term—even when the credit card bill comes due? If you can truly afford it, and you go in with your eyes open, then go ahead. Buy it. But if you suspect you or a loved one may be buying luxury goods for the wrong reasons, tread carefully. Buy with both your head and your heart—not one or the other.
