Luxury goods are the notable exception to one of the most basic rules in economics: for almost every other product category, raising the price means selling fewer units. In luxury, the price is part of what makes the product, which is a logic that the industry has capitalized on for more than a century. Recent numbers suggest that logic is reaching its limits.
This article looks at what defines a luxury good in economic terms, the size and shape of the global luxury goods industry today, the pricing mechanism that propelled its growth, the trends that are now reshaping its economics, and how the industry is responding.
In economics, luxury goods are goods with an income elasticity of demand above one, which means that the demand for them grows faster with rising income and contracts faster when income falls. A subset of luxury goods, known as Veblen goods, see rising demand when their price rises.
Economists classify goods by how demand responds to income. Necessities such as bread, salt, and electricity have low income elasticity, since a household whose earnings double does not double its spending on these products.
Luxury goods behave the opposite way, and this sensitivity to income is why luxury is usually described as a cyclical category of goods. When incomes rise, spending on luxury rises even faster, but when incomes fall, aspirational consumers are typically the first to pull back, while the wealthiest clients tend to keep spending.
A Veblen good is a product whose demand increases as its price increases, because the high price itself signals the exclusivity the buyer is looking for.
The term is named after the economist Thorstein Veblen, who introduced the idea of conspicuous consumption in The Theory of the Leisure Class (1899). For Veblen goods, the demand curve we remember from economics class slopes the 'wrong' way, upward rather than downward, at least over part of the price range.
Luxury goods have a dual character. A bag or a watch has functional value as a bag or a watch, but it also has positional value, which is what the object at hand signals about the owner relative to everyone else. Positional value is entirely bound to the market’s perceived value of what’s ‘in’.
According to Bain and Company, the meaning of luxury is changing from social validation (the desire to be admired by others) to self-actualization (the pursuit of personal fulfillment). If this shift continues, it would weaken the positional value of luxury goods, and their corresponding pricing power would be impacted.
Global luxury spending across all segments reached an estimated €1.44 trillion in 2025, which is a marginal decline of 1–3% from 2024 at current exchange rates, according to the Bain-Altagamma Luxury Goods Worldwide Market Study. Personal luxury goods (handbags, apparel, jewelry, watches and beauty) accounted for €358 billion of that total.
Despite a slight slowdown in the category in recent years, Bain forecasts that personal luxury goods spending will reach between €525 and €625 billion by 2035, and total luxury spending between €2.2 and €2.7 trillion.
While the market looks stable based on the numbers, there have been some interesting fluctuations underneath the surface. The luxury consumer base has shrunk from 400 million in 2022 to around 340 million in 2025, meaning that the industry has lost 60 million customers. Revenue stayed more or less the same, which shows that the spend was concentrated in fewer consumers.
In addition to the shrinking luxury consumer base, profitability has also taken a hit. After peaking at 23% in 2012, the EBIT margins of personal luxury goods brands came down to around 15% in 2025, which is a level that was last seen in 2009. This decline has cost the industry an estimated €100 billion in enterprise value over the past twelve months alone.
Luxury pricing works as a self-reinforcing loop where a higher price signals exclusivity, exclusivity raises desirability, and desirability supports the higher price. Between 2019 and 2024, the industry put unusual weight on this lever, as the average price of personal luxury goods in Europe rose by 52% compared to 2019, according to HSBC.
The price increases were even higher with some individual hero products, which are brands’ signature items that embody a brand’s identity and attract customers to the wider product range.
The strong increases in pricing without a corresponding rise in quality have resulted in a broken price-value equation. Luxury brands now need to renew trust with their consumer base, as inflating positional value is only possible as long as buyers can accept the premise of the product’s value.
Three trends are reshaping the economics of luxury goods: consumers are shifting spending from objects to experiences, status signaling has moved beyond luxury products, and brands are turning to storytelling and world building to rebuild positional value.
An apparent structural shift has taken place in consumption in general, and the effect is especially apparent in luxury spending. According to BCG data, luxury consumers are moving away from investment in personal luxury goods to lifestyle-related and experiential consumption à la the experience economy.
The study identifies especially wellness and longevity as categories that have gained a lot of momentum, and the effect is not only true for the affluent but can be seen in the entire consumer pyramid.
As opposed to luxury goods, experiential consumption cannot be counterfeited or put on the resale market, which insulates it from the pressures that are currently putting strain on the object market. Luxury experiences have become the newest signal of status culture that now more so rewards where you have been as opposed to what you own and the displays of those possessions.
Interestingly, signaling has in many ways moved out from the luxury category.
BCG and Altagamma’s True-Luxury Global Consumer Insights 2026 shows that status and the desire to be seen have lost relevance as definitions of luxury, while values such as time, health and longevity have taken their place.
Quality has remained a stable and important part of how consumers define luxury. Logo visibility, on the other hand, has now become one of the weakest drivers behind a luxury purchase, and is no longer viewed as a reliable proxy for status.
Positional value is still alive and well, however, but it is no longer only tied to luxury goods. According to Highsnobiety, we currently find ourselves in a ‘status economy’, where worn suitcases with travel stickers and eating at a restaurant where reservations are coveted have become the pinnacle of status. Ten years ago, that pinnacle could have been a specific designer item.
The luxury goods industry has had a near-monopoly when it comes to positional value, because signaling status required the ownership of objects that were expensive, scarce, visibly branded, and recognizable. Now this is no longer the case, as status is more tied to demonstrated knowledge of what’s en vogue. This effect is especially prominent with Gen Z consumers.
Price alone is not (or at least no longer is) a strong enough generator of positional value, but something that can co-create it is strong branding. The luxury goods industry has started to heavily invest in narrative and immersive environments, often also talked about as world building.
Business of Fashion defines world building as constructing “immersive universes that consumers can participate in, develop emotional attachments to and buy their own piece of when they make a purchase”.
A clear expression of this strategy is how luxury houses have started to enter hospitality, where the brand can become inhabited and experienced in a completely different capacity. Examples include LVMH, which operates Cheval Blanc and Bulgari Hotels, and has partnered with Accor to revive Orient Express by both rail and sea. Prada operates restaurant Torre in Milan, whereas Gucci has Michelin-starred restaurant Gucci Osteria with chef Massimo Bottura.
A restaurant or a hotel experience as a brand extension extends the duration of the touchpoint from a transaction to something more relational. World building creates more retention in the customer base, but it is also expensive and slow to pay back dividends, and especially difficult to attribute on a quarterly basis.
At the same time, it is the one form of differentiation that can still create significant positional value around luxury goods when price increases are off the table.
The economics of luxury goods still work, but the industry has reached the limits of its main growth lever, which is raising prices to inflate positional value. The route back to pricing power for luxury goods can be found in craftsmanship, narrative, and customer relationships, all of which require significant investment that may take years to pay back.
Price can only inflate positional value as long as buyers accept the premise, and the past few years suggest that acceptance has worn thin. The customer base is shrinking and so are margins.
Positional value still exists, but it has moved elsewhere as status is increasingly expressed through experiences and cultural knowledge. For luxury houses, this means that positional value now has to be earned through having real substance behind the product through quality and craftsmanship, and creating a compelling world around it.