The Luxury Paradox: How Hermés Balances Exclusivity and Customer Loyalty

If you follow the luxury industry at all, you might’ve heard a little something about 2023’s best performing company in the industry, Hermés. Now, luxury brands aren’t necessarily known for their retention efforts. Most customers buy one or two luxury products from a brand and say that’s enough.

But Hermés isn’t just a winning brand because they play it safe when it comes to pricing and strategize carefully when it comes to marketing. They’re also well known for their discrete loyalty and retention frameworks that keep their customer loyalty rate sky high.

Spending Smarter, not Harder

In a consumer survey conducted in 2022, only about 8% of US luxury fashion users had heard about Hermés in any kind of marketing form within the prior 3 months. On the other hand, their sales in 2023 skyrocketed 16% compared to 2022, while other huge luxury brands including Gucci and Estee Lauder reported a pretty substantial fall.

So if Hermés wasn’t even spending that much on marketing, how is it that their stock price rose by 33% while their biggest competitors took a crazy hit?

First of all, even though Hermés wasn’t spending as much as other companies in the luxury industry, they were spending their marketing budget in a more strategic way. They planned to reinvest 4% of their revenue into promotions, which is drastically low when compared to brands like LVMH, which spent nearly 36% of its revenue on marketing campaigns.

But instead of throwing their money at billboards and social media, they spent their relatively low budget on events that appealed more to their existing customer base, rather than trying to attach themselves onto new customers.

Now, is it starting to make sense?

Hermés realized that the key to increased revenue wasn’t attracting new customers, but instead, achieving more value out of their current ones. A recent study showed that the top 5% of customers at luxury brands contribute nearly half of their total sales.

Retention was Hermés’ golden ticket, and they knew this very well.

Balancing Loyalty and Exclusivity

Luxury companies have a hard time getting away with loyalty programs because they tend to cheapen the brand. But this doesn’t mean that they don’t have a retention strategy at all. It just means companies like Hermés have to get more creative.

In fact, it’s predicted that Hermés spends nearly 1/4th of their yearly budget on customer loyalty. But unlike a normal loyalty program, their customer loyalty strategy is more secretive and exclusive than you might think.

Here, 7% of the 10% of Hermés users are loyal customers. That’s 70%.

You may have heard of the infamous Birkin bag or Kelly bag, which sell for tens of thousands of dollars. Despite these insane prices, luxury shoppers long for these products. But the thing is, not everyone can get their hands on them even if they could afford it.

Hermés only offers these bags to their most loyal customers — those who have had the strongest purchase history and the deepest relationships with store associates. And the most interesting part is, they don’t specify what qualifies a customer for this special treatment, so all customers are left spending and spending, and top customers are heavily rewarded.

It’s no wonder why 70% of Hermés customers display hefty amounts of loyalty to the brand.

Takeaways

So the key to more revenue isn’t necessarily more customers — instead, it’s a combination of:

• Allocating a sizeable budget to retention and loyalty
• Making customers feel exclusive (which is more than just offering them extravagant bags)
• Focusing on increasing AOV for existing customers

Learn from Hermés and think quality over quantity when it comes to your customers.

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