What does cognitive switching have to do with Hermes?

Sellers are the key to unlocking growth in the luxury resale market.

Everyone has heard the rumors that we are headed for a “Richcession.” The already hot luxury resale market is primed to take on a new influx of customers on popular platforms like The RealReal.

Luxury resale is growing faster than the primary market, or market for ‘new goods’, and up over 50% from 2018 to 2022 compared with 35% for the primary.

While these numbers are impressive, the resale market still has a long way to grow. The resale market currently has a market cap of $36 billion versus the primary market at $382 billion. However, with a CAGR of 10%, it’s not hard to imagine a swift economic shift away from the purchase of new goods to used or vintage goods.

The RealReal’s gross merchandise value for example reached $1.8 billion in 2022, up 23% year over year, and the company’s total revenue increased 29% from last year to $603 million. Yowzah!

TRR’s success is perhaps due in part to the rising costs for new luxury goods and what Stephen Rogers, director of the Deloitte Insights Consumer Industry Center, refers to as cognitive switching. Cognitive switching occurs when the price of a good exceeds the acceptable limits that Roger’s believes we all psychologically set for ourselves. Consumers mentally make these trade- offs all the time- should you pay full price for that new Hermes bag or look for a like-new Hermes bag at a lower price point? If enough consumers weren’t switching to the later, the resale market wouldn’t be surpassing growth projections.

The RealReal is complicated because it involves both the customers who buy and the consignors who supply the products to sell.

The Real Real’s continued success in this space hinges on attracting the right product and that means cultivating its sellers’ market.

“We are a supply-constrained business,” TRR CEO and entrepreneur Julian Wainwright said. “It’s a very unique business model in that regard. This company has never had a demand problem. The competition is all on the supply side.”

The Real Real has now launched a dedicated consignor concierge service, called RealService, with the goal of “supporting every consignor through the entire process personally.”

“By prioritizing, investing in and providing a dedicated concierge team to each and every consignor, we can continue to provide the luxury service that we deliver. We are giving them the education and opportunity to make even more informed shopping decisions, in both the primary and secondary markets,” Levesque the Real Reals President explained.

This attention to serving the consignor is critical to paving the company’s path to profitability. It is intended to ensure that a steady supply of the most in-demand, high-value offerings are always available.

For The Real Real, their success hinges on their ability to understand the intricacies of operating in a luxury marketplace business limited by available supply, unlike a traditional retail business where growing demand is the priority.

“The natural reaction for anybody who’s worked in retail is to focus on the demand side. We operate in an alternative retail universe where the only limit to our demand is supply,” she concluded.

This is exactly the problem Barker is working on solving, in order to keep pace with the ever growing demand for luxury resale, there has to be a match of supply. Barker supports consignors and sellers by offering price transparency and a backstop when bringing their assets to market.

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