00:00:00
John Zhang: Absolutely. You would
think that the existence of a
00:00:03
counterfeit should be really bad
for the authentic brands. And—
00:00:08
but when you look into it, it
turned out that that's not
00:00:10
necessarily the case. And in
some cases, in fact, that—
00:00:14
because of the change in
the consumer behavior, the
00:00:19
luxury brands may actually
benefit from the existence of
00:00:22
counterfeits.
00:00:24
Welcome to <i>The Ripple Effect</i>, the
podcast that takes you on a
00:00:27
journey through the minds of
Wharton faculty. I'm your host,
00:00:30
Dan Loney, and in each episode,
we'll be diving deep into the
00:00:33
inspiration behind the
groundbreaking research that
00:00:37
Wharton professors have
conducted and exploring how
00:00:40
their findings resonate with the
world today.
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So what is the
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impact of counterfeit luxury
items on the luxury product
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market in general? It's an
interesting question when you
00:00:51
consider how the consumer thinks
about the advantage that
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counterfeit products provide.
But then there is also how
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companies that produce luxury
products, as well as people with
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means buying luxury items, react
to these knockoff items being in
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the mix. Our next guest says
that this all creates a
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maximalist luxury strategy. That
guest is John Zhang, who is a
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Marketing Professor here at the
Wharton School. He was also one
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of the people involved in
writing this research paper back
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in 2021. John, great to see you
again. How are you?
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Well. Good to see you, Dan.
Very good.
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This is such an
interesting topic, because I
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think so many people know these
products are out there, but we
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don't look deeper into just the
kind of— the impact that they can
00:01:38
have, not only on the consumer,
but on the companies involved.
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Absolutely. You would think that
the existence of counterfeits
00:01:46
should be really bad for the
authentic brands. But when
00:01:50
you look into it, it turns out
that that's not necessarily the
00:01:53
case. And in some cases, in
fact, that because of the
00:01:57
change in the consumer
behavior, the luxury brands
00:02:02
may actually benefit from the
existence of counterfeits.
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So this maximalist strategy,
tell us more about it.
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Well, imagine this, then. Why exactly
you want to spend so much money
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to buy the luxury brands in the
first place? The reason why you
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want to do that is because you
want to signal to others your
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status of wealth, right? Why do
you want to signal your status
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of wealth? The reason is because
once your status is known, you
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can imagine that all the doors
in the society will be open for
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you, right? So you want to do
that. But in order to do that,
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you have to send the effective
signal to the— to other people.
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The way you send the effective
signal is to buy expensive
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luxury goods that other people
without the wealth would not
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want to mimic. And so then you
would stand out if you use the
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luxury goods, and then other
people cannot. So essentially,
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for luxury brands, and the
reason why they can charge you
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such high prices is simply
because they help the people
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with wealth to send the effective
signal to others that indeed
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they are wealthy, and then they
will reap the benefits from
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every corner of the society.
And so because of that, you can
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imagine that the presence of the
counterfeits could be a
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problem for luxury brands,
simply because the people
00:03:20
would buy the counterfeits to
mimic what wealthy
00:03:24
people would do. Right? In this
case, you can imagine that if
00:03:27
I'm the wealthy person, I still
want to stand out. - Sure. Yeah.
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And the way to
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stand out is to stack the deck,
and in fact, make sure that
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you buy a lot more luxury goods
and put them on display so that
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the other people just cannot
mimic that.
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So how does that then
change the perception and the
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thinking of the luxury brand?
Because for a long time, correct
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me if I'm wrong, the idea of the
luxury brand was to produce
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enough items so that people felt
good. But there was an intrinsic
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value in the fact that they
didn't produce as many items.
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There was that value there. Now
it seems like they feel a little
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bit like the more the merrier.
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That's actually, right. That's the
direction, probably, the luxury
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brands want to go. The reason is
because for the rich to stand
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out, you can imagine that,
given that counterfeit goods are
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around, and everybody can mimic
you, okay, then what you want to
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do is make it more difficult for
people to mimic the behavior you
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display. Okay? The way to do
that is to buy a lot of luxury
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goods and put them on display at
the same time. - Right.
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But if you—
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actually, let's suppose, are the person
without money, and you have to
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go to the back alley to buy some
of the counterfeit goods and try
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to assemble them together in
such a big display, it's very,
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very difficult to do. So that's
how you can stand out. So given
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that you can imagine that, if
you're the luxury brand company,
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obviously that you want to
produce more variety of goods,
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and that would satisfy the
demands from the people who want
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to have this maximum display,
and— and to stand out.
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Does the element of e-commerce
change some of the mindset here
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as well, only because they say—
you talk about the back alleys.
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Well, realistically, if you go
online, you're gonna see so many
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advertisements for, you know, a
golf shirt from Augusta
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National, that's maybe not $200
but it's $20. And a customer may
00:05:30
feel very comfortable then. I
mean, the internet has kind of
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opened the doors to e-commerce,
really, bringing in a lot of
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these knockoff items.
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That's absolutely true. In fact,
if you go online, it's much
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easier for you to buy the
counterfeit goods. But still,
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even in that situation, you can
imagine that if I'm the luxury
00:05:49
brand, I can produce more
different variety. And for
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instance, it's not just the
clothes, apparel, bags. You
00:05:56
could have the jewelry, you
could have a cell phone, you
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could have a lot of other
things, right? So in that case
00:06:02
that, even if you buy online,
it's very difficult for you to
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assemble everything together.
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One of the things you mentioned
in the paper is that some of
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this happening can actually spur
on those that maybe have the
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wealth to want to buy more
products of the luxury brand.
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Tell us a little bit about
that reaction.
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Well, that's the idea—
in fact, once I was invited
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by a very rich student to
have a dinner with her. Indeed,
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she showed up with all the
luxury goods, from top to the
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bottom, and with the cell phone
from Prada, and everything is
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Prada. So I was wondering what's
going on here. And she was
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basically saying that, you know,
in China, there are a lot of fake
00:06:42
goods. If you just use one or
two, okay, people probably
00:06:47
automatically infer that those
are fake goods, right? But if
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you do it from top to the
bottom, with all the jewelry,
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with the cell phone, everything
else, you can imagine that even
00:06:57
in China, to assemble them all
together is very, very
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difficult. And unless you do it
in the authorized store and
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where you have everything. So
that's how you can actually
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stand out.
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So the luxury companies, with
all of this going on, this
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obviously has to affect their
decision not only about how many
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items they're producing, but the
types of items that they're
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producing going forward as well.
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Absolutely, that's really the
indication. Of course, that the
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Maximus luxury is only one of
the trends initiated by the
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counterfeit goods. And you have
also minimus luxury. So you want
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to buy fewer, and buy better.
And so— which means that you
00:07:35
probably want to produce some of
the unique item that's very,
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very expensive, that imitators
just cannot afford to do it.
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Is there an element of how
much the luxury company is
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producing designed to counteract
the levels that the knockoffs
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are producing? You know, to— the
more you produce of the better
00:07:58
product, the more people may
stay away from the knockoffs.
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There has always been a race in
there, right? So if you're the
00:08:04
luxury brand company, obviously,
you want to stay ahead of
00:08:07
the game and stay ahead of the
curve. You want to produce more,
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innovate more. And so that you
basically keep your distance
00:08:14
between you and the counterfeiters.
That's always a good strategy.
00:08:19
How much, then, does the brand
still carry a lot of the weight
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in this decision process? When
you think about some of the
00:08:27
names out there, Hermes,
Versace, etcetera, those brands,
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you have an expectation of a
higher end, higher quality
00:08:36
product, and that brand draws
the attention of the consumer.
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Well, obviously, those brands
carry a lot of weight, and they
00:08:44
sell a lot of goods. They still
command the loyalty of a lot of
00:08:48
customers. For Hermes, for
instance, you could wait for a
00:08:51
couple years before you can
buy anything. That— even if you
00:08:54
have the money. And not only
that, in fact, nowadays
00:08:58
they look at your total
purchase before they actually
00:09:02
let you buy some of the new
products.
00:09:04
What does, then, this all mean
for retail in general? Having
00:09:09
this— to a degree, I guess, it's a
change of mindset by the luxury
00:09:12
brands of being able to produce more,
to be able to fit into the marketplace.
00:09:17
Well, I think the luxury brands
are constantly innovative. They
00:09:21
want to come up with newer
products and better products.
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And of course, they also retain
some of the classic ones. And I
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think in that particular game,
obviously, that the larger
00:09:33
brands will always win.
The reason is because, in this
00:09:38
society, just imagine that
without luxury brands, life
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would be a very, very— I
guess what— what would be the
00:09:46
word I'm looking for? Would be very—
- Boring. - Boring, probably.
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Boring and also colorless, yeah.
00:09:53
What did you take from this
research? What were the insights
00:09:57
that really have driven your
thinking moving forward about
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what luxury is probably doing
now and where luxury will take
00:10:04
us in the future?
00:10:05
So our research basically shows
that— number one, that
00:10:08
something that looks apparently
bad may not actually be
00:10:14
bad, right? So for instance, at
one point of high
00:10:17
technology that happened too, is
basically that people parrot the
00:10:21
some of the software. And
eventually, they basically
00:10:24
realize that that's a good way
to advertise for their
00:10:27
product. I think in the luxury goods
industry, that happens too.
00:10:30
Okay, so that's number one. And
number two, that the existence
00:10:34
of counterfeit goods, in
fact that will fragment the
00:10:38
market. In fact, you have a
people who pursue minimalist
00:10:41
luxury. You also have people who
pursue the maximalist luxury.
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There are a lot of people who do
something in between, right? So
00:10:48
which means that as luxury
brands, you need to become
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aware of all those trends and,
in fact, accommodate the change
00:10:56
in consumer behavior. So that definitely
is a very important point we learned.
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Has any of this changed
the mindset of the companies
00:11:03
that are producing the knockoffs?
Like, in terms of the type of
00:11:07
quality that they feel they need
to have so that they can be
00:11:10
successful, knowing that the
luxury brand has obviously
00:11:15
changed their philosophies as
well.
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Well, apparently, the knockoffs become
more and more profitable for
00:11:21
the manufacturers, right? And so
not only you see a lot of
00:11:24
very low quality knockoffs
on the streets of New York, for
00:11:28
instance. And you also see
some of the super fakes. And in
00:11:32
fact, they look just as real as
the real ones. And in fact,
00:11:37
you can actually buy it in a
very secretive way online, for
00:11:42
instance, and get those
products. In fact, for those
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manufacturers, they make a
tremendous amount of money
00:11:47
because they don't invest in the
advertising. They don't invest
00:11:50
in the branding for those
products.
00:11:53
So super fake is just that next
level up for the people
00:11:57
producing the knockoff.
00:11:58
Absolutely. If you produce
knockoffs, over time, you're
00:12:01
going to get better at it. And
in fact, you can do reverse
00:12:04
engineering. And in fact, you do
a lot of innovation there too,
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to catch up with real thing.
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How, then, does the consumer
look at what's going on with
00:12:12
these two different styles of
company and product right now?
00:12:16
Well, hopefully, from the
luxury brands' point of view,
00:12:19
you want some people who
always use the authentic goods,
00:12:23
right? You probably have
people who always— who use the
00:12:27
the super fakes. Certain
kinds of people, they probably
00:12:31
cannot afford to buy the
real thing. But eventually,
00:12:35
if they get wealthy, they also
buy the real thing. So in a
00:12:39
way, that probably is, super
fakes are good introduction to those
00:12:45
people for the luxury category.
00:12:47
John, great to see you again.
Thanks very much.
00:12:49
Really good to
talk to you, Dan.
00:12:50
Thank you.
John Zhang, joining us here.
00:12:53
Wharton Marketing Professor.
00:12:55
Thank you for listening to
<i>The Ripple Effect.</i>
00:12:57
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00:12:59
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00:13:02
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