What it means
Most products are bought for their function, but status symbols are bought partly for the message they send. A watch tells the time whether it costs $50 or $50,000, and the difference in price pays for the signal.
This behaviour is often called conspicuous consumption, a term from the economist Thorstein Veblen. Status goods sometimes behave oddly on price.
For ordinary goods, a higher price lowers demand, but for some luxury items a higher price can make the product more desirable because it is more exclusive. Economists call these Veblen goods.
Businesses selling status symbols manage scarcity and brand carefully. Limited editions, waiting lists and tightly controlled distribution all protect the feeling that not everyone can own the product.
Gross margins on such goods are often much higher than on everyday goods, because the brand rather than the materials sets the price. For finance professionals, status symbols matter in several ways.
They affect how consumer demand holds up in a downturn, how a luxury company's pricing power is valued, and how households make spending choices. Overspending on status can also damage personal finances, a point often raised in money coaching.
The nuance is that what counts as a status symbol shifts over time and between cultures. Yesterday's luxury can become tomorrow's commonplace item, and brands must keep reinventing what is desirable.
Social media has also widened the audience that sees these signals, which changes how people spend. For personal finance, the lesson is to separate what an item does from what it signals, and to price the signal honestly.
A buyer who knows that $15,000 of a purchase is pure signalling can decide whether that is worth the cost of delaying savings or debt repayment. Investors can apply the same idea by asking how much of a luxury company's margin depends on a brand that could fall out of fashion.
In practice
Real-world examples.
Example
A watchmaker produces only 5,000 limited edition watches a year, each priced at $20,000. Customers join a waiting list that can last two years. The scarcity itself is part of the appeal and keeps the brand's gross margin high. Producing 10,000 watches instead would add revenue in the short term but weaken the signal buyers are paying for.
Example
A young professional earning $70,000 leases a premium car at $900 a month to impress clients. Her financial adviser points out that the payments take about a fifth of her take-home pay. They agree on a cheaper vehicle at $450 a month, and she invests the $450 difference. Over ten years that adds up to $54,000 of contributions before any investment growth.
Example
A private members' club in a big city charges a $15,000 joining fee and caps membership. Its finance director knows that if the club lowered the fee to fill places, it would damage the exclusivity that members are paying for.
Case study
Seen in the real world.
Marlowe and Finch is an illustrative, fictional leather goods brand that sold handbags at $400. Sales were steady, but profit margins were thin because competitors offered similar quality at lower prices.
The founders launched a small collection at $2,400 with a numbered serial plate and a six-month wait. Customers queued, and each bag carried a gross margin several times higher than the $400 line. Within a year the small collection produced more profit than the entire original range, on a fraction of the unit volume.
The illustrative lesson is that the price itself was part of the product. The higher price signalled rarity, and the company's finance team learned to forecast the collection by waiting list length rather than by traditional demand curves. The founders were careful not to discount the collection, even when stock lingered for a few weeks. Cutting the price by 25% would have brought in extra sales, but it would also have told existing owners that their bags were worth less than they paid, and the brand's pricing power would have suffered.
Watch out
Common mistakes.
- Assuming people always buy less when prices rise, when for status goods a higher price can raise desirability.
- Treating a status purchase as an investment, when most such items lose value quickly after purchase, apart from a few rare exceptions.
- Believing status spending is irrational and should be ignored in forecasts, when it is a predictable and significant part of consumer behaviour.
Questions
People also ask.
What is a Veblen good?
It is a product whose demand rises as its price rises, because the high price itself confers prestige.
Do status symbols hold their value?
Some rare pieces do, but most depreciate, so buyers should not count on getting their money back.
How do status symbols affect personal budgeting?
They can crowd out saving, so many advisers suggest setting a fixed limit for discretionary luxury spending before buying.
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