For my last post of 2024, I wanted to write about a fun topic. I came across the 60 Minutes segment on Hermès recently and it reminded me of this WSJ article. I’ve always considered high luxury a terrible waste of resources and the ultimate symbol of decadence. I grew up close to South Coast Plaza in Costa Mesa and there was an entire section of high end luxury that we dared not even enter. It was an idea that was beyond comprehension or attainment. But after studying LVMH and Hermès (thanks to the Acquired podcast!), I’m fascinated by the economics and psychology of luxury. Let’s consider the Birkin bag by Hermes.
A standard black Birkin 25 retails for $11,400 at Hermès. A buyer can flip it immediately for up to $23,000—and resellers often turn around and sell it the same day for as high as $32,000. Analysts estimate it costs Hermès only about $1,000 to manufacture.
Unlike normal retail, the customer has to woo the store. Buyers make extra purchases or shower sales associates with gifts—ranging from cookies to private-jet invitations—to qualify for a Birkin.
Because Hermès makes Birkins hard to get, resellers thrive. VIP customers often purchase any Birkin they’re offered—even if it’s the wrong color—knowing they can flip it and keep a good relationship with the boutique.
Collectors report that Hermès expects customers to spend tens of thousands of dollars on other product lines (e.g., watches, jewelry, even canoes) before offering a bag—though Hermès denies imposing such a rule.
Hermès could ramp up production to meet demand, but it doesn’t. The artificially tight supply drives exclusivity and fuels a lively secondary market.
Hermès commits only 4% of its sales revenue to marketing, relying on pop-culture clout and celebrity social media to do the advertising. Restricting access effectively turns the Birkin into a global status symbol.
The Upside Down Economics of Luxury
1. Scarcity > Scale
In most retail segments, if a product is popular, the brand ramps up production. This meets demand and prevents a shortage. Luxury houses like Hermès, however, restrict supply to sustain desirability and high prices. By producing fewer Birkins, they make the bag even more sought after, allowing resellers to charge a steep premium.
2. The Customer “Works” for the Brand
Typically, stores compete to please customers—sales, discounts, loyalty programs, and so forth. For a Birkin, it’s the opposite. Buyers cultivate relationships with sales associates, buy other Hermès products, and even bring gifts just to be considered “worthy” of purchasing the bag.
3. Branding Over Function
Most retail consumers care about price-to-value ratios: how well a product’s functionality and quality match its cost. With the Birkin, the mythos—the storied design, celebrity endorsements, the narrative of exclusivity—elevates the bag above normal price or manufacturing considerations. The emotional status tied to owning a Birkin outweighs traditional utility.
4. Manufactured Perpetual Demand
Conventional economics suggests a product is subject to diminishing returns—overexposure leads to market saturation. Hermès resists this by tightly controlling who can buy, effectively curbing saturation. The result: A continuous, pent-up demand that keeps Birkins at the center of a heated resale market.
5. Market Price Set by Brand Identity
Unlike typical goods, where the market price is based primarily on cost, competition, or consumer willingness to pay, the Birkin’s pricing revolves around Hermès’s brand identity. Even more than the “luxury” label, it’s about symbolic capital: you’re effectively buying membership in an elite club.
6. Profit for Everyone, Except the Average Consumer
Flippers, VIPs, and Hermès itself all benefit from the bag’s exclusivity. Yet the everyday shopper faces sky-high markups or a huge “prespend” requirement. Even collectors who view Birkins as an “investment” often discover better returns in other asset classes—once the total spend is factored in.
Luxury brands like Hermès effectively demonstrate that the value of a product can hinge more on symbolism, scarcity, and brand narrative than actual utility. This “upside-down” economics flips the usual laws of supply and demand, proving that in high-luxury markets, it’s the story—and the status—that people are truly buying.
