The Broken Business Model of Luxury: 40% Sold at Discount as Margins Hit 15-Year Lows

Up to 40% of luxury goods were sold at a discount in 2025—up at least five percentage points from a decade ago. Industry margins have fallen to 15-year lows (excluding Covid), dropping from 23% peak in 2012 to roughly 15-16% now. The luxury business model is breaking in real-time.

The Price-Value Equation Broke

Years of aggressive price increases have destroyed the value equation. Products cost 1.5 to 1.7 times their 2019 prices, but the pipeline of hit products has dwindled. Consumers are rejecting full price—more shoppers are turning to outlets rather than boutiques.

“When consumers step back from paying full price, it is less a sign of frugality and more a clear message that the price-to-value equation has drifted out of balance,” says Bain’s luxury head.

The Shift to Emerging Designers

Department store buyers report moving budget toward contemporary brands and emerging designers where “fashion content is high but the price point is lower than big luxury names.” The majors’ pricing power is eroding to upstarts with genuine creative energy.

The Majors Are Cutting

The response reveals the severity:

• LVMH: Reduced marketing spend, travel budgets, and closed underperforming stores in China
• Chanel: Slowed hiring and marketing in China
• Kering: Undertaking portfolio review and scaling back retail

Cost-cutting in luxury is a dangerous signal—it typically accelerates the brand equity erosion that discounting already triggers.

Experiences Over Products

“After the shopping spree era, experiences and emotions have become the true engine of luxury growth.” Jewelry and travel have stayed relatively strong while handbags and shoes struggle. The second-order effect of post-Covid excess is consumers reconsidering what luxury means.

No Easy Fix

Luxury’s post-Covid pricing strategy—raising prices 50-70% while innovation stagnated—has backfired. Discounting erodes brand equity and margins simultaneously, creating a doom loop.

The sector needs either genuine product innovation to justify prices or a reset of the value equation. Neither is quick or easy. New creative directors at Gucci, Chanel, and Dior offer hope, but rebuilding hero product pipelines takes years while margin pressure compounds quarterly.

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How AI Is Reshaping This Business Model

AI is fundamentally reshaping how luxury brands approach their broken discount-dependent model through three critical interventions. Advanced algorithms now enable dynamic pricing strategies that can adjust in real-time based on demand signals, potentially reducing the need for traditional seasonal markdowns that have pushed discount rates to 40%. Brands like Gucci and Louis Vuitton are experimenting with AI-powered inventory forecasting that better matches production to actual demand, rather than overproducing and dumping excess stock at outlets. Personalization engines are helping luxury companies rebuild the price-value equation by creating bespoke experiences that justify premium pricing. AI-driven customer segmentation allows brands to offer exclusive, limited-edition products to high-value clients while steering price-sensitive customers toward full-price core collections. Early adopters report 8-12% improvements in full-price sell-through rates. Perhaps most significantly, AI is enabling direct-to-consumer models that bypass traditional wholesale relationships responsible for much of the discount flooding. Virtual try-on technology and AI styling assistants reduce return rates while maintaining the personal service luxury customers expect. As these technologies mature over the next three years, luxury brands that successfully integrate AI into their pricing and distribution strategies will likely see margins recover toward the 20%+ levels of the previous decade.

For a deeper analysis of how AI is restructuring business models across industries, read From SaaS to AgaaS on The Business Engineer.