Episode #0105 - What we can learn from Rolex pricing

Pricing College Podcast

Today we're going to speak about Rolex watches. Rolex watches are a key topic. I suppose in pricing because they really do show the opposite of cost-plus pricing. They don't use cost-plus pricing, very much value base. Because if they did use cost-plus pricing, they would actually make much less profit than they're making today.

But what brought this topic to mind was a recent newspaper article on Rolex watches, in particular secondhand Rolex watches. The bubble for secondhand Rolex watches has collapsed. It got us thinking about the whole pricing methodology, branding, and marketing strategy behind Rolex. And really, we're thinking about how they are still masters of value-based pricing. So we're just going to talk you through some examples today.

I think it will be touched on some of the concepts that I'm sure most people listening are not in the watch industry or the luxury goods industry, but just some concepts that I think we can highlight from Rolex. Look, I think the first thing we point out is when the Japanese quartz watch revolution, which is a battery and a watch, really came on in the 50s and 60s. I think everybody expected this Swiss Watch Industry to literally disappear. It looked like what Netflix did with Blockbuster Video. The weird thing is that that didn't happen. And even though, in theory, mechanical watches, whereby the inside of the watch is something that Rolex focuses on, don't have to weigh them; they're all automatic; they move when you move your arm with tiny little gears, etc. inside.

In theory, technology is obsolete. You can get a better watch that tells the time quicker and faster. Sorry, more accurately. You don't want them to tell you if they move faster, obviously more accurate timekeeping, for probably just a Casio watch that might cost you $10. But the reality of it is that the demand for luxury watches is probably higher than ever. And I suppose that is, what are we talking about here? We're talking about, what are the themes that really highlight this: It's branding, its brand management, its status symbol, and it's really I think it's Rolex dug into and really looked at the value drivers that the people are using to look into their watch. So yeah, I think the first one we probably talked about is branding.

I suppose it's just looking back at what you were saying about the mechanical watch, and that's a brand in itself that even though there is a better time-keeping alternative like the digital watch, people like the novelty aspect of the mechanical watch. They're like looking at the cogs and gears moving in the watch, and then they can sort of show their friends and people go, “Oh, yeah, that's something different." And the difference is part of the branding appeal. It started off, I suppose, in terms of branding, looking at the use of the mechanical aspects of a watch to differentiate the brand. But now Rolex has moved into a very micro branding through very niche aspects based on functionality. For instance, they've got the diver's watch. They've got all sorts of different types of watches for other purposes and for people's hobbies. So it's kind of moved away from that more tangible branding through the mechanical watch. And what it's made of could be the gold trimming based on how people use the watch. So that's a very interesting and new development.

When we think of Rolex, we think of a status symbol. You're a captain of industry. You're the president. I believe the presence of America is giving a separate watch, which is called a Rolex Presidential, I believe, and only presidents of the US are given them. But yes, they assemble, and I think this is what has led to the bubble. There are other mechanical or other luxury watches, even in Switzerland, even owned by the same company, like Rolex makes Tudor watches, which are slightly cheaper price points. Some of the Japanese brands are Grand Seiko, obviously, Omega, these sorts of companies, but none of them holds the same status symbol. It's almost like a reserve currency or like gold that Rolex does.

Why is there a bubble in secondhand Rolex watches? It was through history. I believe the price of Rolexes does not decrease when you are in the secondhand market, as long as they are reasonably well maintained with the original box and the original papers. Obviously, in the secondhand market, there will be counterfeit issues. But for example, in China, a lot of people were buying Rolexes as status symbols, but I would also argue, potentially, it's a store of value to the same extent that a lot of people in India traditionally would buy gold and have a lot of jewellery and invest a lot of their funds into gold, the bet is a store of value and protection against inflation. And so that is maybe something that happened due to, you know, the COVID crisis and people's almost running to safe havens that might have been, they might have seen Rolex watches as a safe haven.

But clearly, Rolex has to really manage that brand, and that's what they are doing. They're limiting the number of watches released in any given year. I think our research says it's probably less than a million units a year, somewhere between 700,000 and a million people roughly estimated, which has increased in previous years, but obviously, the global population has also increased. So clearly, they could sell a lot more watches if they wanted to, but that would probably decrease the brand, so they're doing their own price and profitability analysis.

I guess they're obviously restricting significantly how you can buy the watches. Not everybody can sell them. You have to be a registered dealer. And quite often, you have to be a registered buyer, which really restricts your ability to buy a new Rolex. Certainly, in the last couple of years, you'd almost have to be on a waiting list. So there are restrictions that create exclusivity; it makes people cheer for something, whether it's the scarcity or not, and I think they are really masters at that.

I think we also touched on the second-hand or this or counterfeit market for these watches. In theory, they are everything that they do, and I think I'm talking more because I actually have an interest in watches. But one of the things that would separate the mechanical aspect is something that I do find strange. If you go back to the 60s and say, "Why would we have a mechanical watch?” People have kept I think there's an interest in it, but I think it's the only area I can think of where technology has moved on. But this area's almost kept it going. It's not as if there's a market for luxury cars with obsolete engines. That doesn't really happen. People want better engines. I can't think of any other device, fundamentally a watch that's designed to tell time. It's a very simple thing. But I can't think of anywhere else where we are using obsolete technologies and means or putting them up on giving them a higher status. It's almost like math or an intellectual hobby or pursuit trying to make these more and more reliable but obsolete machines. So I find that strange and I find the fact that we're still able to market it as a plus. If you go into a shop, many brands will sell mechanical and no mechanical watches. The non-mechanical will be more accurate, but it actually costs less. So what I used to really think of the value drivers, like at the end of the day, you ask, “Why do you have a watch?” to tell the time, but apparently, that's not actually the reason at all.

Maybe there's some kind of psychology behind this and people like actually seeing time move and that mechanical watch does give people that element of control and seeing time move that the digital watch just really doesn't, but I really did find that that interesting. When you were talking, it reminded me of how watches really do have those psychological value drivers. You mentioned status, which I think is one of the number one psychological value drivers with Rolex. Would you put that Rolex on? You know, you're number one and Rolex has done a really good job of protecting their brand, their brand story and their price point. And they're actually really good at using price as a psychological signal, or cue for value and status. They always have the top price, but they've actually organised their range to give people enough choice to get a Rolex at the lower end without cannibalising the rest of their range and keeping themselves exclusive and prestigious, which is a great piece of pricing work. And there's a lot of work that they've done with their pricing and product hierarchy to do that.

So obviously, they've got some great pricing people, but I've also got some great product managers that know exactly what their range is. Where does it fit in the market? And they work very closely with their pricing manager to really tease out the right price points, not just for individual attributes of that watch, but all those psychological value drivers that we talked about, putting a price on that without turning people away from the brand. So there are a number of things that the team are obviously thinking about. It's difficult stuff, it never stops, and they've always got to like time itself. They've always got to think about their price points because they constantly need to adjust those in relation to the customer on the market and everything that we've just discussed. So yeah, that was a really fascinating topic, Aodhan.

Thank you. I detect sarcasm in the voice getting praise. Okay, so one thing I would say that I do find interesting is Rolex. To some extent, they're very expensive, but they're not the most expensive watches. And they're also probably achievable if somebody really wanted them. Like, there's a very large percentage of what we'd probably call high net worth individuals in developed nations and globally who could, in theory, afford a Rolex if they really wanted one. Some of them probably start from the 10,000 US dollar market, that sort of thing. So people, in theory, could afford them. At that price point, it's out of the reach of the vast, vast majority. It's a huge investment, but people know how much they cost, so it's still achievable. That is almost that sweet spot, and I'm sure they've thought about that to a great extent.

The other thing I would say is quite interesting is the brand I mentioned earlier, called Tudor, which traditionally was lower at the end of the day. These watches started back 100 years ago as actual functional watches. They weren't really luxury items. And the Tudor brand was more of an everyday person's watch. You couldn't afford a Tudor or a Rolex but still wanted a high-quality watch. But what's interesting is that they really relaunched that brand separately 10 years ago, and when they relaunched it, the prices increased, so they pushed the prices up, and when the prices increased, the sales increased also, to pump more money into the brand. It's still an inferior brand to Rolex, but it's more of an everyday brand, and as you know, prices have increased, and the perception people have of it has improved. And sales have increased also. I don't know if profitability has, but I assume it has to.

So again, that's probably a good study on how you can almost build a brand, or reimagine a brand that is in an obsolete technology industry. It's not leading, it's got no real technological differences from other companies that haven't invented a new way of telling the time, but they've just reinvigorated that brand. And really, with marketing, branding, positioning, those sorts of aspects, which are maybe some things that people sometimes ignore, given the focus on technology. The pros are the features and benefits. I think it's the term that pricers like to use. But that's not what they did here. They pushed the hidden cash. Just one final point is, I think Joanna mentioned how there are watches for divers and racers. And it's almost a bit silly that all these very wealthy people are going to buy watches that are waterproof to 200 to 300 metres, and you know what percentage of them will even go two or three metres down, but it's hard to believe. Maybe the watch makes you think that you are an active man or James Bond. So again, what are the real drivers? I think that I will leave it there today.

When you were speaking, though, it just really reminded me how important the concept of price anchoring is within the watch industry. As a potential person that wants to buy into Rolex but can't afford the top range, What they would do to entice those sorts of people is use price anchoring by showing them almost the top range first and then showing them the other option, which is still pretty good. And then, psychologically, you think, “Oh, actually, it's so much cheaper. Maybe I could afford that." I couldn't get the top version, because it's too expensive, but I could afford this and then, gradually, you're thinking “oh, I can work my way up to the better brand." But that's what price anchoring does. It changes your behaviour to buy something that you wouldn't have thought of buying before. I'm thinking, actually, I've got a bargain at the same time. But really, if you take the old cost-plus perspective, at that point, you're saying, "I'm buying something that's way more expensive than it's actually costing," so I'm paying huge amounts for something that's literally all in my mind. It's all based on psychological value drivers and the status of being in this exclusive club. And even though you've just got the starter version, the cheaper starter version in the range, you're part of that member's club and they've got you buying that, changing your behaviour, changing your mindset, utilising a price point. So price anchoring is a very, very strong mechanism to change behaviours, and also change mindsets and emotions towards a purchase. So think about that the next time or with prices and product managers out there, maybe think about how you could use price anchoring, like Rolex has, to change your customer's viewpoint on your products, anyway. Well, I think you just got one more point that you'd like to share.

If this is just a bit of a weird one, I don't know how true this is, but talking about psychology, apparently, all traditional watches come with a fury in hand. Whether shown in pictures or not, they're always shown. with a time of 10 minutes to two. And if you look in shops, it allows you to check. Do you think that is always the case? Apparently, they're showing 10 minutes to two because, psychologically, it looks a bit like a smile. I don't know if that's the real reason. I've heard other arguments, but one of the reasons is that it looks a little bit like the watch is smiling at you. And psychologically, you like it more bizarre if it's true, but yeah, it's worth consideration. So let's leave it there today. Yeah, have a great weekend.