Why luxury brands must be strategic with NFTs in the metaverse

NFTs have seen explosive growth over the last couple of years and their sheer ubiquitous appearances make it easy to forget that the first NFT was only created in 2014. In less than a decade, NFTs now account between 16 and 20 percent of the art market. The disruptive shift towards digital art is so profound that it’s very likely that many traditional art galleries will disappear by 2030. Moreover, I predict by then that 50-70 percent of the art market will be NFTs.

The traditional proximity between luxury and art, creating culturally relevant objects and services of desire, have made NFTs and luxury a logical fit. Consequently, a plethora of brands have started, or are working on, NFT projects, many of which also combine physical products and services with its digital twin. It’s one of the dimensions in which the metaverse takes shape and starts influencing the total luxury brand experience

Take Hennessy 8. It’s a limited edition of 250 bottles that celebrates eight generations of master blenders, bringing more than 250 years of cognac expertise into a single bottle. The first and last bottle of the collection were auctioned for more than $250,000 and came with an accompanying NFT.  

Owners of the Hennessy 8 NFT could redeem physical bottles and were invited to visit Hennessy’s estate in France. Photo: Hennessy

Meanwhile, Prada and adidas launched the Prada Re-Nylon collection, which included the adidas for Prada Re-source project. It’s an NFT collection curated by the digital artist Zach Lieberman, which includes photographs that brand enthusiasts submitted. The final piece was sold for almost $100,000.

On OpenSea, Gucci and Superplastic are offering the SUPERGUCCI collection. It’s a three-part series of 500 NFTs that were co-created by Gucci’s Creative Director Alessandro Michele and the synthetic artists Janky & Guggimon. All featured elements of Gucci’s Aria collection. Each piece also comes with an exclusive 8-inch-tall white ceramic SUPERGUCCI SuperJanky sculpture, hand-crafted by ceramicists in Italy. Most of them are currently traded between 3 and 7 ETH, between $10,000 and $20,000.

SUPERGUCCI NFTs incorporate House codes found in the Gucci Aria collection and come with an exclusive ceramic sculpture. Photo: Gucci

These examples show how much value luxury brands can create with metaverse-based digital products. However, there is a caveat. The pricing mechanics of NFTs are often not understood sufficiently. NFTs are sold using crypto. And crypto is — psychologically — often not seen as “money” by users but rather as something similar to a chip in a casino where the notion of its dollar value is blurred. The use of crypto wipes away traditional guardrails buyers would have in terms of reference prices and pricing anchors.

This dramatically increases the willingness to pay. Additionally, the auction character of marketplaces like OpenSea puts the pricing mechanism on steroids. Auctions trigger the feeling of “virtual ownership” even if we don’t own the object yet. For example, while the auction is taking place, if we currently have the highest bid we already “feel virtually” as if we were the owner. To avoid losses, we will now be willing to defend the virtual ownership significantly more than if the objects were sold without an auction. Both effects combined increase dramatically how much someone will pay for and NFT.

Hence, there is a significant risk that the price paid for an NFT exceeds the perceived value if a traditional currency would be used. In fact, in a recent discussion with affluent luxury NFT collectors, the participants told me that buying NFTs feels like a computer game, like being in a casino, or just something fun to do. One said that he would “never buy NFTs with money, but crypto to him does not feel like money.”

As long as the category is hyped and exciting new projects and collaborations emerge, there is a chance that many NFTs will continue fetching significant prices. There is certainly an element of FOMO currently. However, as more and more initiatives hit the market and the user base matures, there will be a substantial shift towards those that are truly exceptional and have a great story to tell. These will further increase in value, while many of today’s NFTs may lose significant value over time, especially if their storytelling or differentiation is lacking.

We are already seeing a lot of projects that don’t seem intentional but where brands just launch an NFT to experiment or simply to have one. What many brands underestimate is that a digital product has the same impact on the overall brand image as a physical product. Hence, if a luxury brand launches NFTs that lose significant value over time, its total brand equity will tank, too.

The metaverse offers brands exciting opportunities. It’s critical, however, to be extremely strategic and play to win instead of just playing to be part of it. The NFT market will consolidate at some point and brands that were too fast or not strategic, differentiated, and daring enough in their NFT initiatives may pay a high price later.

I have often call promotions the “easy growth trap.” NFTs can become the same trap for luxury brands, when taken too lightly. Brands need to master the art of luxury storytelling when it comes to this new category. Importantly, like in the physical world, brands need to obsess what kind of value they create for their clients. Only then will NFTs become long-term value creators. An exciting new world that requires utmost precision and focus to be successful.

Daniel Langer is the CEO of the luxury, lifestyle and consumer brand strategy firm Équité, and the executive professor of luxury strategy and pricing at Pepperdine University in Malibu, California.