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Why People Buy Luxury Goods

It's common knowledge that brand-name items cost more money than their off-brand counterparts. But that doesn't prevent consumers from paying up. In fact, according to one study, the wealthiest households (the top fifth of earners) spend approximately 65% of their consumption on luxury goods and 35% on necessities. By comparison, middle-income households spend 50% on luxuries and 50% on necessities. Even lower-income households (the bottom fifth of earners) spend 40% on luxuries and 60% on necessities.1

Why do consumers choose to spend more money on luxury goods? The following factors help explain this financial behavior.

Ignorance is bliss

Consumers have the tendency to focus on the positive attributes of a product while ignoring its drawbacks. Non-luxury items are viewed as inferior, so it's easier to identify the negatives of those products over the brand-name ones.

For example, let's say you're in the market for a new phone. What sounds more appealing: an expensive smartphone produced by a well-known brand name, or a cheaper smartphone with comparative features made by a less-recognizable brand? Luxury retailers and their marketing departments rely on consumers to buy the more expensive products because of the legitimacy and quality associated with brand names. As a result, it's easier for consumers to ignore the higher cost of the pricier product and purchase it anyway, because it feels as though it's worth the extra money.

A mood booster

Do you treat yourself to a shopping spree when you're in a vulnerable emotional state? If so, you may be splurging on items you can't afford in order to boost your mood. On the opposite end of the spectrum, you may celebrate a big promotion or other life milestone by spending hundreds (or thousands) of dollars on a designer item. The instant gratification that comes with extravagant spending is a feeling that some consumers can't pass up.

In addition to your emotions, your self-esteem can also determine how likely you are to buy luxury goods. Consumers who want to feel better about themselves might buy expensive items because they serve as status symbols. Whether or not you're able to afford it, a flashy product can act as a physical representation of your success in life and increase your self-esteem.

Knockoffs won't cut it

You've probably passed by a store or kiosk selling discount goods that are supposed to look like authentic luxury items. Even though they look like the real thing, there's a reason why you're likely to pass up knockoffs in favor of more expensive goods: authenticity. Purchasing a knockoff might save you money, but the knowledge that you're toting around a fake diminishes the meaning behind the purchase. In other words, buying an authentic luxury good also provides a sense of accomplishment or pride. Those feelings aren't the same when it's a knockoff item — treating yourself to a fake is really like not treating yourself in the first place. Consumers who continue to seek that sense of authenticity wind up spending more money on higher-end items again and again.

Shop smarter

If you want to rein in your spending, use good common sense when shopping. Ask yourself questions to help decide whether a purchase is really worth it. Why do you want this particular item? Will buying it affect you later? Can you afford it? Do you actually need it? If you can't live without it, do some comparison shopping to see whether you can score a better deal on a generic, nonbrand-name counterpart.

Avoid shopping when you want to reward yourself or boost your mood. But remember that it's okay to splurge from time to time as long as you plan your purchase and save for it accordingly.

1 MarketWatch, July 21, 2017

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020.