Welcome to the opening of a series of articles in which I will explore the impact of Web3 on different segments of the luxury industry.
In this post, I will touch upon what I see as the most crucial aspects of these new technologies and the risks and benefits for brands and customers across the luxury industry. We will explore the various definitions and buzzwords that make up Web3 and highlight key elements that will shape what many believe will be the next generation of the internet.
Once we have established a thorough understanding, I will follow up with articles focusing on specific industries and explore how companies can use those tools to extract the best value.
What is Web3, and how does it affect the Luxury Industry?
Web3, also known as the decentralized web, is considered the next generation of the Internet. But contrary to general belief, Web3 consists of more than just blockchain, cryptocurrencies, and NFTs.
Although there is no universally accepted definition of Web3, I will try to visualize its components. Only then can we understand the true impact of Web3 on the luxury markets.
As mentioned in my previous articles, we’re experiencing a technical evolution rather than a revolution. This is important since evolution means slow-moving change, hybrid solutions, and non-linear development of different segments.
From a consumer and brand perspective, and with the risk of upsetting some tech people, I would argue that there is a stark contrast between the “academic” definition of Web3 and what we will likely experience soon.
The customer almost always defines luxury. The Oxford dictionary defines luxury as “…the fact of enjoying special and expensive things, particularly food and drink, clothes and places.”
The question really is; how does the luxury industry use these new and emerging technologies to create experiences that their customers require?
AI and NFTs have been on the headlines everywhere, but Web3 is so much more than that!
So let's dive into some of the aspects of Web3 and look at how companies can turn these buzzwords into action to enhance operations, create new revenue streams, and deliver better customer experiences. However, we must also consider the risks and challenges along the way.
The Benefits of Web3 Components for the Luxury Industry
The Semantic Web
Tim Berners-Lee, the alleged inventor of the Internet, originally coined the term Semantic Web as a web of data that machines can process.
I have a dream for the Web [in which computers] become capable of analyzing all the data on the Web – the content, links, and transactions between people and computers. A "Semantic Web," which makes this possible, has yet to emerge, but when it does, the day-to-day mechanisms of trade, bureaucracy, and our daily lives will be handled by machines talking to machines. The "intelligent agents" people have touted for ages will finally materialize. - Tim Berners-Lee
This means that machines understand the actual meaning of content rather than purely written expression. Like humans, computers will understand, based on tonality, mimics, and haptics, what a message is trying to convey.
For companies, this opens up an entirely new way of digitally interacting with their customers. Luxury companies can measure how their products are received more accurately, opening doors to highly individualized customer engagement.
As for now, semantic concepts are in their infancy and are primarily theoretical concepts. However, with the emergence of Artificial Intelligence and Machine Learning, this technology might take over sooner than we think.
Artificial Intelligence and Machine Learning
AI and ML are crucial components in managing and processing an ever-increasing amount of data. In an industry where consumer sentiment and product perception are decisive over success and failure, the correct interpretation of data is a crucial key component.
Companies can drastically increase data processing efficiency using AI and ML, improving every step from R&D to supply chains and customer satisfaction.
AI and AL have taken hold in B2B, finding widespread use in the luxury industry. Various companies use this technology to analyze sales trends, track brand engagement, and provide customer support through chatbots.
Some real-life examples of the use of Artificial Intelligence in the luxury industry;
- Burberry uses artificial intelligence to identify fakes and counterfeit products.
- Prada makes use of sophisticated artificial intelligence solutions to support its marketing.
- Various Yacht Design studios experiment with AI to improve their concepts
Augmented and Virtual Reality
The most compelling argument for Augmented Reality (AR) and Virtual Reality (VR) is to allow customers to interact with products before they exist and to experience them in a non-physical format. This is particularly interesting for products that have a high cost of production or are highly individualized.
Using AR and VR to facilitate the buying journey and let clients experience what they can expect when purchasing an item not only reaches a broader range of potential customers but can emotionally bind them to the product from the get-go.
While 3D rendering is nothing new, bringing in an interactive component is a game changer. Clients can look at objects but can also interact. Going forward, augmented and virtual reality blur the line between physical and digital interaction. Being able to interact with their customers globally, 24/7, while at the same time remaining personal and immersive, creates an entirely new value proposition.
Especially the luxury industry faces an increased demand for transparency from supply chain management to proof of origination or simply as a marketing tool. Decentralized Ledger Technology (DLT), commonly known as Blockchain, provides companies with a temper proof way of storing and processing data. Luxury brands can use blockchain to track the entire supply chain, from raw materials to finished products, helping to reduce counterfeiting and fraud, a significant concern for the luxury industry.
Blockchain-based concepts such as NFTs open new ways of communication and engagement with customers and markets, creating a sense of belonging and community. Luxury brands can use NFTs to create limited-edition products, which can sell at a premium to collectors. Brands can develop NFTs representing exclusive experiences, such as VIP access to events or private appointments.
Most luxury companies and sectors are experimenting with blockchain technology. Fashion brands mostly use NFTs as a new way to engage customers. Real estate and aviation work on supply chain solutions. In yachting, the impact of cryptocurrency on charter and sales is gaining traction.
Digitizing (Real-World) Assets
Luxury assets are notoriously prone to counterfeiting, theft, and other risk events. Digitizing, through blockchain or otherwise, adds a layer of security. Remember, NFTs are not the only way to digitize an asset.
While transacting digital assets and fractional ownership are still regulatory minefields, other benefits, such as proof of ownership and traceability, are clearer use cases.
Luxury assets often derive a large part of the resale value from the quality of their documentation. Through digital certificates, asset management can be facilitated, and companies can have near real-time insight into the lifecycle of their products.
Many would agree that luxury is attached to the special feeling of having something truly unique, and brands are on a constant mission to deliver this promise. By combining existing and emerging technologies, luxury companies are optimizing their customer engagement to a new level.
While one could argue that individualized engagement is rather an outcome than a component of Web3, it remains undoubtedly a key component of Web3. While Web2 allowed a more specific approach to customer groups and segments, Web3 will allow for a truly individualized approach. This is particularly interesting in the top-end luxury industry, where products are highly bespoke and tailored to each customer.
Think of your Saville Row tailor proactively providing clients with ideas for new clothing entirely based on your lifestyle and personal taste to stay at the forefront of fashion trends. Luxury real estate agents can target potential customers much more efficiently, reducing time spent on market research and covering a global network of customers, reducing time to market and increasing the probability of transactions.
User Controlled Data Ownership
Companies and brands often fear this buzzword, and this fear may not be entirely unsubstantiated. However, user-controlled data ownership can also have significant benefits for companies. Think of protecting a company's intellectual property; companies often rely on third parties to manage and steward their most valuable asset.
Data ownership can be a sensitive topic in the luxury industry, especially when working with high-profile clients that value privacy. On the other, brands often rely on their intellectual property to gain a competitive advantage.
Web3 can help increase data security, provide a transparent ownership structure, and protect the rights of companies and their clients. Clarity about data rights enhances trust and helps build deep and long-lasting relationships with suppliers and clients.
Interoperability & Connectivity
If the technology is the bricks, interoperability and connectivity are the mortar that holds the entire structure of Web3 together. As the name suggests, the next stage of the internet is highly dependent on the combination of its components. Interoperability refers to the essential ability of different computerized products or systems to readily connect and exchange information without any restrictions.
To derive maximum value from Web3, the luxury industry must develop a holistic view of all components it interacts with. Imagine the competitive advantage of companies whose IT systems can seamlessly communicate, from its supply chain to production, CRM, marketing, and ultimately the customer experience.
Since 2021 many companies have experimented with the Metaverse for brand positioning, creating digital experiences for clients. While most attempts arguably feel surreal, certain components provide great potential.
Imagine a real estate developer that uses a 3D-rendered model of an upcoming project. By using AR, they can visualize the property well ahead of breaking ground, drumming up the interest of potential buyers. In addition, by connecting their suppliers and products into the simulation, prospective customers can spec their future homes in real-time. For the developer, this interconnected approach reduces time to market, shortens supply lines, and provides an entirely individualized customer experience, not a product.
The Risks of Web3 for the Luxury Industry
While Web3 technology offers many benefits to the luxury industry, some risks must be considered. For example, one of the most significant risks is the potential for bias in AI algorithms. If the data used to train the algorithms is biased, the results will also be biased, leading to potential discrimination and unfair treatment of customers.
Another risk is the potential for hacking and data breaches. If a luxury brand's blockchain network is compromised, it could lead to the loss of sensitive data and damage the brand's reputation. NFTs are a new and emerging technology, and no widely accepted regulatory framework exists to protect consumers.
Many components of what will be Web3 still need to be studied and are largely untested. This also means there are still few rules, fragmented regulations, and often no protection in the case of a mishap for companies and consumers.
Finally, we must acknowledge that the luxury industry is not all about efficiency but carries a sizeable irrational component, human emotion. Luxury companies must remember that the end of their product is targeted at a living being. Most customers in luxury are looking for an experience.
Despite these risks, Web3 technology provides the luxury industry with significant growth and innovation opportunities. By leveraging the benefits of these technologies, luxury brands can create more transparent and secure supply chains, deliver personalized customer experiences, and create new revenue streams through unique digital products and experiences.
Web3 is not a “thing” but an ever-evolving combination of different technologies and approaches. The luxury industry has always been at the forefront of technological advancement, and with Web3, there is a unique opportunity to create new value for customers. By staying ahead of the curve and embracing the latest technology, luxury brands can differentiate themselves from competitors and provide unique customer experiences. While there are risks associated with Web3 technology, the benefits are significant, and the luxury industry is poised for growth.
I believe, Web3 is a toolbox for the luxury industry to unlock efficiency, create products and deliver content. If we miss addressing the human element and emotions, it will remain just that, a tool. But if done right, brands can create an experience, and experiences sell.
Now that we understand what drivers for the luxury industry in the Web3 space are, we can start diving into different sectors and explore how brands can position themselves best to be at the forefront of this evolution and create true value.
“This survival of the fittest, which I have here sought to express in mechanical terms, is that which Mr. Darwin has called “natural selection,” or the preservation of favored races in the struggle for life." - Herbert Spencer, Principles of Biology (1864)
Disclaimer: Any information in this article is based on personal experience, written out of personal interest, and to the best knowledge and ability. This article has no promotional purpose and does not represent investment or sales advice. Any names, brands, and tickers mentioned in this article are illustrative. Use any of the associated links with care and at your own risk.