This is the worlds leading source of financial content on the web, ranging from market news to retirement strategies, investing education to insights from advisors.
Forex Forever!

The Psychology Behind Why People Buy Luxury Goods

Author: Matthew Smith

Buying a luxury handbag these days seems to be no more uncommon than purchasing a pair of shoes at Target Corp. (TGT). The physical appeal of luxury goods is undeniable – the leather is softer, the shoes are more comfortable – but the price tag is often off-putting. Unless you've got a good job or fantastic savings habits, luxury consumer goods will sit on your credit card for a long time.

The Irrational Consumer

It's well known that people don't behave rationally, and considering the enormous consumer debt Americans have, consumers clearly don't always act in their best financial interests. Luxury goods are a great example of how irrational we can be; a decent and sturdy handbag can be purchased for $50, yet people will still spend thousands to buy a brand name. Why?

One reason is the way we tend to look at the positive elements of a product while ignoring its disadvantages. There's no need to explain why this works in the favor of the luxury goods companies' marketing departments. Take Apple Inc. (AAPL), for example. Consumers wait overnight for new releases and have immense brand loyalty even though Macbooks and iPhones aren't technologically unique or superior. In fact, Samsung makes phones with better features and Microsoft Corp. (MSFT) and Xiaomi make phones at a much cheaper price point. Nevertheless, iPhone second-quarter sales increased 35% from the previous year.

Since we perceive non-luxury goods as inferior, we are quick to point out the negatives of those products. When talking about a cheap foreign car that needs repairs, it's a piece of shoddy construction; on the other hand, a luxury car that needs repairs is just suffering from wear and tear. We conclude that higher priced goods are of better quality and we spend irrationally, believing you get what you pay for regardless of whether the goods are proven better than their affordable counterparts. (For more, see The Disposable Society: An Expensive Place To Live.)

Self-Esteem And Luxury Goods

According to researchers, low self-esteem is a big factor in whether a person will buy luxury goods that he may not be able to afford. For consumers trapped in institutionalized poverty or those living paycheck to paycheck, a luxury good can go a long way in increasing self-esteem or providing a sense of belonging. In China, men use luxury goods to show off their success and flaunt wealth. Chinese women, like American women, tend to purchase luxury goods in order to give in to hedonistic tendencies.

With marketing departments creating a need for luxury goods and the rise of online shopping, purchasing a $500 scarf can be as easy as clicking a few buttons. Luxury goods are the ultimate retail therapy, and fortunately for luxury brands, the Internet has made them easy accessible for impulse shopping when you're feeling blue. (For more, see How Do I Stop Emotional Spending?)

A sense of accomplishment is yet another reason why people buy luxury goods. Long gone are the days when your friends would throw a small party and someone would bake a cake to celebrate a new promotion; now becoming the boss means treating yourself to $700 Louboutins.

Authenticity Matters

Speaking of Louboutins, rational people would rather buy a pair of black shoes for $50 and paint the soles red than spend hundreds on a pricey pair of luxury shoes. But where's the fun in that? There's a reason why people will pass the fake Rolex sellers on the street to pay full-price for an authentic one: despite appearing the same, the owner will know that he doesn't have a real luxury good.

This flies in the face of reason yet again. If we buy luxury goods to show off to others and to feeling like we belong, why wouldn't a facsimile do the trick? Researchers at Yale have determined that this quest for authenticity develops early in childhood. A study that tried to convince children that a cloning machine had produced their favorite item found that most child refused to accept the duplicate as identical. It turns out that the sentimentality of the item – the memory or pride or feeling that comes from having purchased a genuine luxury good – is part of the reason that we seek authenticity. Simply put, treating yourself to fake Louboutins would be like not having treated yourself at all.

The Bottom Line

People buy luxury goods for a variety of reasons, all of which are related to the strong emotions that we attach to expensive material goods. Whether we are financially comfortable or not, we will often purchase luxury items to show off to or gain acceptance from others and to reward ourselves for an accomplishment. Now that we understand the psychology behind why people buy luxury goods, we'll be better equipped to quash down any emotions that try to convince the rational part of our brains that the more expensive something is, the better its quality.

last five articles

#841 How Much Medicaid and Medicare Cost Americans

Author: Matthew Williams

Medicare and its means-tested sibling Medicaid represent the only forms of health coverage available to millions of Americans today. They represent some of the most successful social insurance programs ever, serving tens of millions of people, including the elderly, younger beneficiaries with dis... see more

#961 5 Taxes Americans Hate the Most

Author: Andrew Taylor

It's generally accepted that taxes are necessary for the functioning of society, but they still get a pretty bad rap. Hating taxes is an American tradition. Not all taxes are treated equally, and some are despised more than others.So which do we hate the most? Here's a list of the f... see more

#1259 Getting A Car Title Loan

Author: Michael Harris

Strapped for cash? Even financially stable families may sometimes find themselves in a situation where they need cash fast. Unforeseen events can strip a person's savings or continued financial difficulties may cause a family to look for any means of finding a short-term loan.You've probab... see more

#1251 A Guide to Dividend-Paying Whole Life Insurance

Author: Andrew Jackson

There are many different options when it comes to life insurance policies, ranging from comprehensive whole life to limited term policies. While term policies are usually the cheapest form of life insurance, whole life policies offer a number of benefits that policyholders may want to consider, i... see more

#167 How the Social Security Reboot May Affect You

Author: Andrew Taylor

You've probably heard the federal government has made changes that may affect the way you can take your Social Security retirement benefits. While there's still potential for some tweaking of the language around these changes, I'd like to share some insight on what we know now and what it may mea... see more