Expensive materials, delicate craftsmanship, and an economic principle that turns the usual equation of supply and demand on its head. WSJ explains why some watchmakers can charge hundreds of thousands of dollars for a single timepiece. Illustration: Alex Kuzoian/WSJ
- Take a look at this watch. It's encased in sapphire crystal. It has 60 different movements, and includes a dome that rotates in sync with the lunar cycles. And it sells for more than $380,000. But even this isn't the most expensive watch that money can buy. That's because watches, like other types of luxury goods, are subject to a little known economic principle that allows companies to charge sky high prices. These are called Veblen goods, and they turn the usual equation of supply and demand on its head. We'll explain.
Let's start off with the more obvious reasons why luxury watches command such a high price. Number one, the high quality of materials. A luxury watch can have hundreds of different parts, and these can take hundreds of hours to produce and put together. Watches can be made with materials like gold, silver, and diamonds. And inside, bearings that help keep time are made with precise synthetic rubies.
KARINE SZEGEDI: The material is a very important part.
- This is Karine Szegedi, who has analyzed trends in the Swiss watch industry for over a decade.
KARINE SZEGEDI: A steel, or if you have gold, or if you have gold and diamonds, of course then already, just the price of the material is very significant.
- Number two, luxury watches also take a high caliber of craftsmanship to produce. For more complicated pieces with a premium finish, it can take months or even years to make a single watch.
KARINE SZEGEDI: Most of the watches are Swiss made, meaning that it's Swiss watchmakers working on the watch. And you know, the Swiss label is the most expensive in the world. And the more time they spend on the watch, the more cost goes into it.
- But Szegedi says that while materials and craftsmanship can be expensive, they make up only a fraction of the overall price. Number three, the price of a luxury watch is largely subject to what economists and marketing experts like Yves Hanania call "perceived value."
YVES HANANIA: Perceived value is how a customer would value what he buys. There is a segment out there of men and women who would buy watches which is an indication of their own success, or where they stand in life.
- This concept is pretty clear. To raise the price, luxury watch companies use marketing tactics to captivate buyers. Brands like Rolex sponsor professional sports like car racing and tennis.
ANNOUNCER: Another Rolex golden moment from Wimbledon.
- They also tie promotions to high profile events. For example, Buzz Aldrin or the now-iconic Omega Speedmaster Professional when he became the second man to step foot on the moon. The Speedmaster Professional is the only watch certified by NASA for manned space missions, which Omega plays up in its branding. Since 1995, James Bond has worn an Omega Speedmaster in every film.
Q: Ah, 007. One last thing for you.
JAMES BOND: Does it do anything?
- It tells the time.
YVES HANANIA: Celebrity marketing here can be an important element to the perceived value. Because if James Bond does wear that watch, I can wear that watch and I get me a little closer to his lifestyle and his power of seduction.
- Hanania explains that this status symbol is also seen as a long term investment.
YVES HANANIA: There's one very important element of perceived value, is when you buy a watch, it's not like you buy it for you. Not only you see that investment, but you see it as a very emotional thing, to pass it on to your kids or even grandkids.
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- But in the watch industry, there's a hidden economic factor that drives price as well. It's based on the law of demand, which says that if the price of a good goes down, the demand for it will go up. You've seen this when products go on sale. When a TV is discounted, more people want to buy it. But luxury watches appear to contradict the law of demand. This is because they're classified as a Veblen good, named after the American economist Thorstein Veblen.
The Veblen Effects Theory suggests that for certain luxury goods, as the price increases, so does the demand. Marketing expert Pinar Yildirim said that this is because expensive Veblen goods have the ability to show off one's status.
PINAR YILDIRIM: Think of an item that helps you to, especially if you're interested in signaling your wealth, that helps you to separate from others. What's the most effective way to do that? It's a very high price. Because it's very difficult for others to be able to pay the same price. It's very costly for others to imitate you. That's why people are willing to pay that extra price, because it helps them to really separate themselves from others.
- And for many high end watches, there can be an additional twist. The more expensive it is, the more exclusive it becomes. And the harder it is to attain, the more that people want to own it. This is called the snob effect. It helps explain why Veblen goods carry a high perception of value, which is why brands like Richard Mille and Patek Philippe can charge hundreds of thousands of dollars, or more, for a single watch.
PINAR YILDIRIM: And this is not just luxury watches. It's true for luxury cars. It's true for luxury handbags, luxury shoes. It's the items that help you signal your status, your wealth.
- But the Veblen and snob effects only work up to a certain point. This is what's known as the "sweet spot" in pricing. At a certain price, even demand from luxury buyers will start to decrease if they feel that the higher price no longer represents a higher level of value. And there's another characteristic of Veblen goods that separates them from normal goods as well.
PINAR YILDIRIM: When you cut down on the price of a normal good, you will typically find higher numbers of people who want to purchase that item. But this is not necessarily true for Veblen goods. If you cut down on the price of a Veblen good, you might actually find fewer number of people wanting to buy that item, because it no longer helps you to signal your wealth as effectively as it did before.
- Unlike some designer goods that do go on sale, Veblen goods are items that are priced to be more exclusive, and therefore more unattainable. This is why they're rarely discounted. It's the idea that the cheaper item is the less status and therefore perceived value it holds.
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