How Luxury Brands Are Manufacturing Scarcity in the Digital Economy
Traditional luxury goods companies have treated digital as a channel. But they’re now starting to treat it as a marketplace in its own right, thanks largely to Blockchain technology, which has delivered the Non-Fungible Token. Today, the key ingredients of luxury – rarity, exclusivity, and cost — can also apply to virtual products, as companies like Balenciaga, Louis Vuitton, and Gucci have realized.
Can digital be luxury? Until very recently, most consumers and luxury companies would have said no. Luxury is about exclusivity, whereas digital about making products, data, and knowledge accessible — the two would seem to be mutually exclusive. According to this logic digital is only ever going to be a channel or, at best, an add-on supplementing and amplifying a physical product or experience.
To be sure, the add-on can offer considerable value or access whole new customer groups. Tiffany’s engagement ring finder app is a case in point: it allows users to try on engagement rings using augmented reality in the app before entering the boutique. Louis Vuitton has collections of accessories that League of Legends players can buy online and then collect in stores. Gucci last year offered Pokémon GO players the ability to purchase fashion items from Gucci’s partnership collection with The North Face at one of the Gucci-Poke stops. Game company Epic Games has partnered with brands from Balenciaga to Louis Vuitton and committed $100 million for game creation in 3D space.
But it’s turning out that the digital world can also provide the basic ingredients of luxury goods and services quite independent of any physical artifact or experience.
Ingredient 1: Rarity
Even in the physical world, telling the difference between original and copy can be difficult. Distinguishing “real” digital products from equally digital copies has long been seen as well-nigh impossible. But technology, as ever, is coming up with a solution: non-fungible tokens (NFTs).
Leveraging blockchain technology, NFTs can be attached to digital products, such as a digital painting, making it possible to establish authenticity and proof of ownership. As a result, sales of products with NFTs have spiked, reaching $10.7 billion in Q3 2021. An NFT tacked on the digital artwork by the artist Beeple sold for nearly $70 million in March 2021 at Christie’s. Investment Bank Morgan Stanley estimates that NFTs could make up 10% of the luxury market by 2030 — a $50 billion opportunity.
NFTs also allow brands can create completely personalized fashion items: The first virtual hoodie NFT by the brand Overpriced sold on the platform BlockParty for $26,000. Companies such as RTFKT or PlattformE offer options for NFT holders to get a physical version of their digitally owned product with the help of flexible production processes such as 3D printing. This flexibility also offers the possibility to produce the products on-demand only when the NFT holder has tested them virtually and decided to own the physical version, avoiding the long-standing problem of overstock, which is particularly prevalent in the fashion industry.
But rarity and personalization are not enough. Luxury goods must go beyond rarity and find ways to tap into the dreams, fantasies, and ambitions that fuel our desire. Well, digital can do that too.
Ingredient 2: Exclusivity
In the digital world, we can present ourselves pretty much how we like — and change those identities very quickly. Some luxury brands have already spotted the opportunity this presents: Balenciaga, for example, has developed a virtual fashion collection in Fortnite — players can showcase their affiliation to the brand community by buying branded virtual clothes or “skins” for their avatars. Burberry is experimenting with in-game NFTs to offer skins to virtual avatars such as their limited edition, limited quantity character named Sharky B in the multiplayer game Blankos Block Party.
Trading Platform DMarket estimates the market for digital skins and in-game purchases to be around $40 billion per year. Establishing a global intra-operability across ecosystems that allows items to be worn and exchanged on different platforms will only enhance consumers’ ability to project their identities and status, increasing the value of the digital products that enable this.
It’s not just gaming. Online communities such as the Bored Ape Yacht Club or Pudgy Penguins are becoming popular among digital collectors. Membership of the community is obtained through purchase of an NFT linked to an image (for example, a picture of a bored ape or a pudgy penguin), and the tokens serve as an entry ticket for access to collectible digital goods and services. According to the Chainalysis 2021 NFT Market Report, membership tokens for these communities have been the most popular NFTs in 2021. In August, for example, Mutant Ape Yacht Club developer Yuga Labs sold 10,000 membership NFTs in just one hour, generating a transaction value of $96 million.
What’s more, the virtual goods and services sold in games and communities are often individually very expensive — bringing us to another key luxury ingredient.
Ingredient 3: Price
In December 2021, one of four exclusive NFT items was just sold on Mutant Ape Yacht Club for $3.6 million. Brands have already taken notice. Dolce & Gabbana’s recent sale of nine NFTs for $5.7 million is just one example that highlights the potential. Karl Lagerfeld’s limited edition with 77 digital pieces for €177 sold out on the platform The Dematerialized after just 33 seconds. In 2020, the digital fashion company RTFKT, now owned by Nike, has partnered with artist Fewocious to launch three sneaker designs priced between $3,000 and $10,000. More than 600 pairs were sold in seven minutes.
In fact, some consumers are willing to pay even more for digital products than their physical counterparts. Recently, the limited-edition digital version of a Gucci Dionysus handbag, sold for just $4.75 in Roblox, fetched $4,000 in the secondary market — more than the price for the physical version of the bag. The sneakers by RTFKT traded at double their prices weeks after their launch. This opportunity is attractive. Unlike in the physical world, the digital traceability of transactions makes it possible for brands to get a share of each future resale, opening a new route to ongoing profits. Balenciaga has even created its own business division dedicated to virtual goods in the metaverse. The margins for virtual products are also high, as the cost is much lower for digital than for physical products. In addition, there is no cost to the unsold inventory.
The companies described here are expanding what it means for a product to be rare, exclusive, and expensive — and the opportunities for creating consumer and business value are only likely to increase, for what these luxury trailblazers are learning will inevitably create new kinds of products and services inside and outside the sector.