Seth Godin on Luxury vs Premium

Seth Godin had an interesting post over the weekend on the difference between luxury and premium pricing. While I think he is on target with his definitions, I think he misstated some of the reasons.

He says, “price is related to scarcity” and “a $20,000 gown is not a premium product. It’s not better made, it won’t hold up longer, it’s not waterproof or foldable. It’s just artificially scarce.” Taken together these two statements seem to imply that scarcity is more of a factor in pricing than it really is.

There are plenty of things that are scare that have little or no value:

  • My son’s first drawing
  • Old golf clubs (unless they belonged to JFK)
  • Latin scholars
  • COBOL programmers
  • Pink-crayon-signed copies of Ron Baker’s books

I will grant that price is related to the perception of scarcity, but price is not determined solely or even mostly on scarcity. It is is determined by the perception of the customer.


  1. Totally agree! Scarcity is not the only factor. But I think, it’s the only factor if we’re talking about consumer goods…. while consumer perception in the only factor when we’re talking about premium or luxury goods…..!

  2. Ed:

    I think both trains jumped the track a little bit. And frankly, I’m surprised it was missed. First, Godin makes an assumption that cannot possibly be validated, and, anyway, he’s wrong to assume facts “not in evidence.” A $20,000 gown may have no value, intrinsic or otherwise, to HIM, but I’m willing to bet that designers aren’t making gowns for Seth Godin anyway. Second, a gown could very possibly HAVE a lot of actual tangible value built into it.

    Maybe a Nylon dress isn’t worth $20,000, but what if the dress is made of some kind of really fancy fabric, with little crystal thingies sewn all over it, and sequins, and, I don’t know, dog fur, or whatever, and it takes, say, five hundred hours to build, or bake, or whatever you do, and all the little minions who work on it are from an island deep in the Pacific, and they had to be saved by someone from the Snarling Snuffleupagus (this sounds oddly familiar to me. . . .)?

    But let’s wander back to the point, shall we? Price MAY or MAY NOT be related to scarcity, but it can also be related to quality, and it can be related to value.

    For example, if your personal surgeon Bobby is reasonably considered to be the best Prostate Man in all of Creation, he is a scarce commodity (all those prostates, and only one Bobby), which drives up his price for the, uh, you know, the operation.

    But, since Bobby is ALSO known to be the best in his field, that drives up the price because of perceived value (especially if you’re going under the knife, and you know Bobby’s hand never slips).

    Bobby gets a premium since he IS premium, and his goods is, uh, good. Now, I don’t know how to suss that all out, you know, what percentage of Bobby’s value is based on scarcity, and what percentage is based on intrinsicness, but, I’m getting older every minute, and one of these days, I may have to find out.

    Price is not the main driver here; value, and most especially, the PERCEPTION of value (on the part of the consumer) is what very often drives the purchase decision of a good, whether it’s a “Luxury” good or a “Premium” good. Sometimes it can be both. Maybe sometimes it’s neither. But value is only rarely directly linked to true, final, intrinsic price considerations. That doesn’t make price irrelevant, just different.

  3. James,

    Thanks for your comments. I think we agree. A few minor points:

    1. A dress is not more valuable because of the extra effort (thingies, 500 hours and such) that went into producing it. Something is value because someone (or many someones) believe it is valuable. This is the great fallacy of Marx’ Labor Theory of Value. The lump of coal found behind the diamond took more effort to extract, but it is worth less than the diamond, not because it is scare, but because individuals desire it.

    2. Dr. Bobby desired as a surgeon for his effectiveness in dealing with a disease that people have. Dr. Betty could be the only person capable of a specific kind of surgery (scare), but if a pharmaceudical is developed that cure the disease without surgery is developed, she would be out of work. Scare or not.

    3. I completely disagree with your conclusion that “value is only rarely directly linked to true, final, intrinsic price.” I would say that price is not EQUAL to value, that is true, but price should ALWAYS be linked to value.

  4. Ed: I think we agree more than we disagree, but, in an effort to help our friend Seth, I want to take another pass at this.

    1. Marx notwithstanding (and I’m not a Marxist, although I believe I once channeled him at dinner, when they brought the bill), the dress with thingies and labour IS more valuable, because people DO value it more. It has proved itself in the marketplace. Do I think this is good, or right, or appropriate? Oh, HELL no. I think it’s insane and over the top. But people do, in fact, pay many thousands of dollars for wedding dresses with extra bells and whistly whistles, despite my strong protestations.

    Quite apart from the fact that this proves I have absolutely no power to influence the “Over the Top Wedding Dress Market,” it also proves that these items do affect perceived value. Extending the argument to a ridiculous degree, I’m willing to bet all the money in my pocket (forty-seven cents!), against all the money in your pocket, that a dress covered in coal would sell for less than a dress covered in diamonds, regardless of the amount of effort expended to extract either from the grip of the nether regions of the earth. I also think that, in this case, scarcity is a factor. . .the conclusion is fallacious; there’s a great deal more coal than diamonds, regardless of the method of extraction. That you found some coal with your diamond (or diamond with your coal) may be a happy accident, but it doesn’t change the scarcity factor on a comparative basis, and that’s kind of what the scarcity argument is about.

    2. I agree that Dr. Betty is walking around with Damocles’ sword pointed at her head, but her ability to DO that particular type of surgery is what makes her skill valuable. And the argument that she’s only as good as the next pharmaceutical breakthrough might be true, but so what? Until it comes, her skill at schwacking away at the hitch in your giddy-up has value in the marketplace.

    Your argument is that she’s only valuable until her skill is supplanted, but when isn’t that the case? Horses and buggies became less valuable when cars came on the scene, but until that moment, they were valuable indeed. SuperJumbo Airlines will immediately lose its value in the marketplace the very second we’re able to teleport, but, until then, it has intrinsic, marketable value. Price will erode, too, but that’s a corollary of declining value, so, there is a link between price and value, however tenuous.

    3. I don’t think we really disagree with respect to my conclusion, but maybe we do. However, in your comment you say “price should ALWAYS be linked to value.” I agree with you. In fact, I couldn’t agree more. . .price SHOULD be linked to value. I’m just saying that it doesn’t always work out that way. And, to be fair, on re-reading it, I realized that I wrote it in reverse. What I meant to say was “Price is only rarely directly linked to final, intrinsic VALUE.” And I stand by that conclusion. I just hope Seth can.

    Warm Regards,


    p.s. To be honest, this was, I think, mostly an exercise in describing price vs. value, but I remain committed to the idea of value pricing. And of diamonds instead of coal on wedding dresses, regardless of how crazy the idea is.


  5. James,

    Thanks for the dialogue. Your PS was right on this is an exercise in price as compared to value.

    To net it out:

    1. Value is in the eye of the beholder. It is subjective.

    2. Value is the major, not sole, contributor to price.

    3. Cost and effort can influence the price that is set, but do not influence the value since… see #1.

    PS – If by “directly linked to final, intrinsic value,” you mean that, “price is rarely exactly equal to value.” We agree.

  6. James, Ed,

    Ok, I’m not going to add to this, except to say that there is nothing “intrinsically” valuable about anything.

    Here is what Carl Menger, the Austrian economist and one of the fathers of the Marginalist Revolution and subjective theory of value, wrote in his 1873 book Principles of Economics, at the age of 33:

    “Value is?nothing inherent in goods, no property of them. Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men?[T]he value of goods?is entirely subjective in nature.

    “The value of goods arises from their relationship to our needs, and is not inherent in the goods themselves?.Objectification of the value of goods, which is entirely subjective in nature, has nevertheless contributed very greatly to confusion about the basic principles of our science?.The importance that goods have for us and which we call value is merely imputed (Menger, 1873, Principles of Economics, pg. 120-21, 139).

    (All quoted from page 71, Pricing on Purpose).

    Understand that, and you understand that value is truly subjective, and not intrinsic.

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