What’s Considered Luxury Goods, and Why do People Buy Them?

Alevin Chan

Alevin Chan

Last updated 25 January, 2023

Luxury goods are generally seen as unaffordable by the masses, and paradoxically, their high prices add to their appeal. Why do some people go out of their way to buy luxury goods, and is it ever a good idea?

By now, you’d have probably seen (or at least heard about) the Tik Tok videos in which a teenager named Zoe received shade for calling the Charles & Ketih handbag she received a “luxury handbag”. 

It wasn’t just the usual catty remarks though. Some comments outright insulted her for not knowing the difference between a luxury brand and a mass market one. 

While the incident ended relatively well, with many coming out in support of Zoe – who herself won praise for her calm, mature handling of the matter – it nevertheless raises the question: What counts as a luxury good? And why do people still buy them even with their ridiculous price tags?

What’s a luxury good?

For the purposes of discussion, luxury goods do have a specific definition – products that are considered elite, upscale or extraordinary in a particular society, prohibitively costly, and thus disproportionately owned by the upper echelons. 

In economics, luxury goods are said to have high price inelasticity – as income rises, demand for a luxury good increases more than proportionally. In other words, the richer people get, the more they will seek out and buy luxury goods. 

This increased demand causes the price of luxury goods to rise even further, helping to perpetuate and maintain a cycle of high price-high-demand, which is the hallmark of the luxury goods category.

And while we’re accustomed to the idea of designer shoes, haute couture and supercars as typical luxury goods, it’s important to realise that what is considered a luxury good varies by culture and income level. 

For instance, a champagne brunch might be considered a once-in-a-blue-moon indulgence by the average office worker, the same might be just a typical Sunday for the stars of Bling Empire.

Why do people buy luxury goods?

Often, what makes luxury goods so attention-grabbing is the jaw-dropping price tags they come with. 

When a pair of Gucci sunglasses is 50x to 100x more expensive than a pair of shades from, say, Owndays – while not offering any overt advantage or benefits or special powers – what is the justification for spending that kind of money (other than “because you can”)?

Psychologists have posited that people splurge on luxury goods as a form of conspicuous consumption – that is, the purchase of goods, products or services mainly or solely to show off one’s wealth. 

Another oft-cited reason is the sense of accomplishment that comes from buying branded items. This is especially so for those who find motivation in being able to afford the finer things in life.

Luxury goods as investments?

And then there’ll always be a small minority who convince themselves that buying luxury goods makes for a good investment. Unfortunately, that argument is as thin as the tissue paper that their expensive items come wrapped in. 

You see, for something to be considered an investment, it must 1) have inherent value that appreciates over time, and 2) be easily tradable. In other words, there must be a market with the right balance of supply and demand – and even then that doesn’t automatically mean your “investments” will give you good, or even any, returns.

Let’s take luxury watches as an example. Both Rolex and IWC are highly sought-after brands in the timepiece category, yet when it comes to resale value Rolex is generally considered to offer better value than IWC. Why? Simply because Rolex is a more popular brand among watch enthusiasts.

This means that if you poured all your money into IWC, you might find yourself being unable to sell them off for profit when you need to, compared to if you had chosen to go with Rolex instead. 

The key takeaway is this: While luxury items can appreciate in time, and offer good returns, they are subject to their own unique investment risks too. 

Hence, if you’re going to buy luxury goods, don’t delude yourself into thinking that you can rely on them to fund your retirement.

Luxury is what you make of it

Now let’s go back to the Tik Tok saga. Recall that the academic definition of a luxury good is one that is not easily afforded by the average person. 

So then, were Zoe’s detractors right – that Charles & Keith, being priced for the mass market, isn’t a luxury brand and therefore cannot be considered a “luxury handbag”?

Well, it’s all a matter of semantics. These same people who decried Zoe’s use of the term “luxury” are failing (whether purposely or otherwise) to understand the context within which she uses the term. 

As Zoe already explained, it took a lot for her family to come up with the money to buy her that “big girl” handbag. Given the circumstances, the bag certainly can and should be considered a luxury – one that her family worked hard to buy out of their love for her (we should all be so lucky!). 

Let’s reframe: You scrimp and save just to afford that S$398++ champagne brunch with free-flow Dom Perignon, giddily gushing about how luxurious it all is over Insta. 

Now, your investment banker friend drops a pithy comment on your post: “Oh oh, who’s gonna tell her?” Or, “You should try so-and-so place if you really want luxury”. Doesn’t feel too good, right?

Branded or not, financial prudence trumps all

Yes, this all really is a storm in a teacup sparked off by some thoughtless comments that demonstrate Singaporeans really still have some ways to go when it comes to kindness and etiquette. Why must we tear others down, instead of just being happy for them?

But there’s another point to be made here. No matter whether you buy luxury goods or spend your money on mass market brands, financial prudence is key. 

It’s foolish taking on debt just so you can show off that latest Hermes, and is it just as unwise to spend all your savings on online shopping sprees for cheap stuff you don’t actually need.

No matter how you choose to worship at the altar of consumerism (oh, we all do, and that’s ok), the number one rule is to get your priorities right. 

Invest for retirement, save for emergencies, and prioritise financial goals that really matter. Everything else is just glitter, and not all that glitters is gold. 

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An ex-Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimise happiness and enjoyment in his life.

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