Many consumers are confused about the difference between a hierarchy of luxury goods and a hierarchy of costs. On one hand, it can be confusing to determine who is making the price comparison. On the other hand, most of us recognize certain product categories as being more costly than others. There are several types of luxury goods that fit into this broader category. Take some time to consider what you can buy for a reasonable price, regardless of whether it falls under the broader or narrower definition of luxury.
The luxury is a subjective term, depending on the person making the judgment. In general, however, it refers to the ability to buy quality products with a high level of perceived value. A luxury item typically commands a higher price than similar products in other markets. That means that only the highest quality items will command a premium.
Most of us live in a society where consumer goods are not always sold at true market value. We tend to think of retail prices as an accurate measure of true market value. This is a problem, however, because increased value for money does not always translate into increased sales or improved profit margins. Sometimes the prices of popular products go up so high that businesses cannot sell them to the target market without hiking up their prices. In such cases, increased profits could mean reduced losses for the business.
A more accurate measure of profitability is the Hierarchy of Costs. Just as the name implies, this hierarchy shows the prices of products as a function of their relative costs to the consumer. The consumer, of course, is the primary receiver of all costs. In most markets, the business owners see their costs as being the portion of the gross profits earned by the firm. This portion is called the gross margin.
By definition, a good has to be of high quality and have a significant cost of production. The Hierarchy of Luxury Goods is the part of the good’s hierarchy where these two things are found. High quality, low cost items dominate the goods hierarchy. These items include brand name goods, prestige goods, luxury raw foods, and other consumer goods that usually command a premium.
There are two types of consumers in the market: suppliers of goods and consumers of goods. Market suppliers, including wholesalers, manufacturers, retailers, and distributors, are included in the supply chain. Market consumers, including consumers in the distribution chain, are the ones who buy from suppliers. The difference between a market supplier and a distributor is that a distributor does not pass products to the final consumers, but instead keeps the costs of production and delivers the finished goods to the final consumers. Market prices are therefore determined by the differences in costs of production and distribution.
Luxury goods typically enter into the market through firms who specialize in the production of the items. These firms then sell the products to retailers or customers on the market. This is where the prices for the items start to become distinct from the prices at which they are sold to the consumers. In order to make good profits on luxury items, the firms must overcharge the consumers for them.
The hierarchy of Luxury Goods has been proven to exist because of the evolution of markets. With increased competition and changes in consumer behavior, firms needed to find ways to differentiate themselves from other businesses in the marketplace. The emergence of internet services led to the creation of niche markets where demand for goods and services was high, but there were no suppliers to drive consumer demand toward the firms producing the goods. Hence, luxury goods firms were created. They were able to provide goods that the consuming public wanted at higher prices because there were no middlemen to extract profits from the consumers.