Even as industry analyst Bain doubles its growth estimates for the 2017 luxury goods market from 1-2 percent to 3-4 percent, citing consumption in both Europe and China offsetting weakness in the USA and South-East Asia; the luxury world with brands like Burberry, Michael Kors, Tiffany, Ralph Lauren, Tod’s and Coach have all posted weak demand, yet, one brand remains seemingly oblivious and defying the downward trends of the wider luxury market. How is such performance possible (or even likely) when Hermes continues to make their desirable Hermes Birkin bags more and more un-affordable?

Posting 7.7% growth, Hermes is defying expectations. How?

Luxury Science: Why Hermes Wants You Unable to Afford their Bags (but able afford the other stuff)

According to Luca Solca, head of luxury goods at BNP Exane Paribas, Hermes has managed to achieve cult desired status through a well crafted business strategy of “frustrating consumer demand” – that is to say, as a business, Hermes flies in opposition of tried and tested economic models. Basic economic theory dictates that as demand increases, supply usually increases to match demand (in order to realise and maximise profits) but when the supply curve begins to outstrip demand that prices start to fall.

Yet with at least a million Birkin bags in circulation, the economic theory would predict a proportional decrease in price for almost all types of goods and services yet Hermes has managed consumer demand to such a degree that not only do prices of Hermes Birkin bags NOT decrease, they increase!

Hermes Birkin on the left and the Kelly, pictured right.

To explain this phenomenon, many economists turn to Thorstein Bunde Veblen, famed Norwegian-American economist, sociologist and a critic of capitalism. In his 1899 book, The Theory of the Leisure Class, Veblen outlines that conspicuous consumption is performed to demonstrate wealth or mark social status; as a result, the higher the price, the higher the demand, since the cost of the item is itself a proclamation of status, why else does one buy a Richard Mille, but I digress. Thus, when it comes to Veblen goods like Hermes bags, the science runs contrary to traditional economic theory.

That said, with Hermes, that ‘Veblen goods’ explanation is too simplistic. While 1843 magazine declares Hermes bags as “non conspicuous” by virtue of the lack of logos, referencing global recognition of Gucci’s double-Gs, the signature design of the Hermes Birkin and Kelly make these products distinctive status symbols. While this theory appears true since Gucci and Louis Vuitton does indeed charge more for “logo-free” non conspicuous handbags and accessories, one needs only to walk into Gucci stores to see that there is plenty of supply for their quieter bags. Surely the explanation lies elsewhere?

Hermes Rose-Gold Collier de Chien In Barenia, Black Epsom & English Green Epsom

First, we have to understand that Hermes business strategy of “frustrating consumers” revolves around making it extremely difficult for people to buy its most desired products, e.g. the Birkin and Kelly handbags; Second, they do this while making tangential brand association still possible – from US$100 Hermes perfumes to US$400 scarves, these are products within reach of traditional wage earners while enjoying the aura of exclusivity which extends from high-demand bags like the Birkin and Kelly.

Understanding the science of desire: Dopamine

When your average white collar worker sees the US$100 Hermes perfumes to US$400 scarves, these are attainable goods associated with unattainable bags. Thus, biological science explains the “halo effect” which extends the aura of desirability from Birkin to the entry level products within the Hermes collection – it might not be the very item (aka Birkin) you desire but another product within reach is attainable. Therefore, for the average income segment of the market, Hermes seeds a market full of “soon-to-own Hermes” fans with small, attainable goods, keeping their desire firmly centered on the ultimate goal. Every time we buy an Hermes product, we receive a small burst of dopamine and this “feel good” physiological reaction is what keeps our interest for the brand because it gives us pleasure and makes us hungry to repeat the process for that dose of dopamine.

For the high income segment of the market, Hermes pursues a different strategy, a wait-list but the wait-list is never too long, just long enough to maintain your interest without making you entirely frustrated with the brand. Psychologically speaking, this aspect of the strategy deals with creating anticipation. Anticipation is rooted in the portion of the brain known as the cerebellum, which controls “automatic, “non-thinking” behavior, nevertheless, the net effect also depends on dopamine – with anticipation always in play, the human brain CRAVES dopamine. Dopamine stimulation happens when we experience and expect good things. Anticipating positive events sustains the output of dopamine into the brain’s chemical pathways.

The Hermes silk twilly

Simply described, the business strategy for Hermes can be summed as high sales volume tempered by consumer perceptions of exclusivity while producing products which are attainable to the aspirational and just out of reach for those who can afford it. Both sides of the equation are driven by how the brand plays on our dopamine levels through simple psychological strategies.

Hermes and its Veneer of Un-attainability

Hermes simply violates all rules of modern retail, as luxury conglomerates start going into eCommerce, looking to make shopping as effortless as possible, Hermes is simply going against the current. The company is not even online in the modern sense, when it comes to social media, you will find nary a celebrity or personality on their Facebook or Twitter accounts. Nor will you find a brand ambassador or face to the brand. At Hermes, Hermes IS the personality.

Famously, Hermes CEO Axel Dumas, a sixth-generation descendant of founder Thierry Hermes once joked at a luxury conference that the direction is for things to be difficult to find, even on their own website, and it’s true, visiting Hermes.com is an exercise in charming frustration as animated illustrations greet you. It’s not immediately clear where to go to find what you’re looking for and there aren’t clear labels and buttons to press. You don’t even find their famed bags – the Hermes Birkin and the Kelly online, everything is “experiential”.

Hermes mystery boxes filled with pieces created in Hermès’ Petit h lab

In fact, such is the power and mystique that the French fashion house once famously (perhaps notoriously) offered a monthly mystery box, an entry level version priced US$245 and a privilege version priced US$1,875 filled with pieces created in Hermès’ Petit h lab, literally using leftover materials from the main line to create luxe one-offs.

As of 2016, Hermes has started to offer bags like Evelyne, Garden Party and Picotin around low four figures and it remains to be seen if that even tarnishes the vaunted orange halo effect one bit. Given Reuters data as per May 2017, we believe this would be highly unlikely.