Company Case Lululemon: Indulging Customers at a Premium Price

It’s a warm summer evening in Brooklyn’s Prospect Park. Hundreds of yoga practitioners—commonly known as yogis—have turned out for a free class, arranged on the turf in a perfect grid, mats on the ground. Following the instructions of the class leader, it’s one long set of downward-facing dogs, half-moons, and warrior Is, IIs, and IIIs. While these New Yorkers come from various walks of life, most of them have one thing in common. They’re wearing outfits by Lululemon—the hottest yoga apparel brand this side of India. The brand’s dominance among attendees shouldn’t come as a surprise as Lululemon sponsors this free weekly event, providing yoga-appropriate music and teachers from local studios with names like Bend & Bloom, Prana Power Yoga, and Tangerine Hot Yoga. But these Lululemon loyalists have one other thing in common. They paid a premium price for their outfits—and they couldn’t be happier.

Vancouver-based Lululemon has quickly risen to the top of a bustling market that it has played a major role in defining. With approximately 400 stores around the world, Lululemon peddles its own brand of yoga-inspired apparel with its instantly recognizable logo—an iridescent lowercase a that resembles an omega. But far more than clothing, this brand perpetuates an image and a lifestyle. The company exudes the philosophy capture by its manifesto: “We are passionate about sweating every day and we want the world to know it. Breathing deeply, drinking water and getting outside also top the list of things we can’t live without.” In other words, this brand is active, healthy, and back-to-nature and isn’t shy about saying so. It’s that image complimented by a “no discounts” credo that has a fanatically loyal customer base willing to buy everything Lululemon and not even blink at paying full premium prices.

Riding the Wave

While yoga has been practiced in the United States since the 1960s, over the past 20 years, it has emerged from a niche activity practiced by devout New Agers to become part of the cultural mainstream. Yoga is all the rage now with everyone from students to stressed-out young professionals to retirees among the devotees of this 5,000-year-old practice. Over the past four years in the United States alone, the largely female population of yogis has increased by 50 percent to more than 36 million. More than twice that many say they want to try it for the first time in the next 12 months. They won’t need to go far—there are more than a dozen different types of yoga being taught and practiced through classes in commercial studios, including hatha yoga, acro yoga, iyengar yoga, power yoga, hot yoga, prenatal yoga, and restorative yoga. Spending on classes, clothing, and equipment has also shot up in the past four years, increasing 60 percent to a whopping $16 billion.

As this fitness explosion began to take shape, Lululemon founder Chip Wilson took notice. Having developed a passion for technical athletic fabrics through 20 years in the surf, skate, and snowboarding business, Wilson was no stranger to the apparel industry. But after taking his first yoga class in the mid-1990s, he was hooked. Convinced yoga’s time had come, he put his efforts into developing alternatives to the standard cotton yoga clothing of the time—a material that to him seemed completely inappropriate for sweaty, stretchy power yoga.

After establishing the company in 1998, Wilson began selling Lululemon clothing through yoga instructors. In November 2000, the first Lululemon store opened for business in a beach town near Vancouver. The original concept was for the store to sell clothing while also serving as a community hub where the mental and spiritual aspects of living a healthy and powerful life could be taught and discussed. But the popularity of Lululemon’s clothing made it impossible for employees to focus on anything other than selling clothing. People were drawn to the fabric, a four-way stretch blend of nylon and lycra. Sub-branded “Luon,” the “sweat-wicking and cottony-soft” material is the company’s signature fabric.

Since its first products, Lululemon has focused on innovative fabrics for every application, including Luxtreme, a version of Luon designed for the most hardcore workouts; Swift, a strong and lightweight fabric designed for freedom of movement; Boolux, a blend of natural fibers designed for warmth and breathability; Nulu, a buttery-soft and superlight version of Luon designed for a “naked” feel; and Vitasea, an ultrasoft blend of cotton, spandex, and seaweed—yes, seaweed.

In addition to developing fabrics to enhance yoga workouts, Lululemon also focused on style. With unique cuts and colors, Lululemon developed a full line of yoga apparel including full-length and crop pants, tanks, sports bras, underwear, and headbands. Women couldn’t get enough of Lululemon, and the brand became a big driver of “athleisure”—a fashion trend that takes workout-designed clothing outside the workout into casual and social occasions and even into the workplace. Lululemon has ridden this wave, developing lines for running, swimming, and training as well as clothing and accessories for getting to and from “the workout.” With a full line for men as well, Lululemon has done a superb job of giving devotees something for every occasion.

Where Price Is No Object

As the brand’s popularity skyrocketed, it quickly became a symbol of status and cultural capital as a fixture in the wealthiest counties of the country. Said one Westchester local to a new move-in, “It’s fine if you like Lululemon, because that’s all women wear up here.” A Lululemon employee at its Boulder, Colorado, store reported, “Women would come down from Aspen and Vail in SUV-loads. They would drop $2,000 easy, [saying] ‘I like that top, I’ll take one in every color.’” And it isn’t just the clothes. The company’s reusable shopping bags—plastered with self-improvement quotes like “Do one thing a day that scares you”—are used by women for all kinds of tasks, carried with pride as though they were Gucci. With the brand on display, Luluheads—as they’ve come to be called and call themselves—are letting people know they are spiritual, healthy, and very flexible and can afford to pay $68 for their T-shirts.

Premium price is typically a hallmark of status brands, and it’s no different with Lululemon. Its signature article is the Groove Pant, priced at $98. While all the top athletic apparel brands have now jumped on board with their own lines of yogawear, Lululemon is priced at the top of the heap. Nike sells its most comparable version for $90, while Athleta (Gap), Under Armour, and Reebok sell theirs at $79, $60, and $50, respectively. Pricing for Lululemon’s other apparel items compares to competitive offerings in a similar manner. Widening the price gap between Lululemon and the competition even further is the brand’s aversion to discounts. Products are rarely marked down in stores. Instead, the company sells unsold inventory at modest discounts through only 10 outlet stores or through the company website under the section “We made too much.” The fine print stipulates, “No returns, no exchanges.”

Expensive—but Worth It

The big question is are Lululemon’s products worth the premium price? As with any premium-priced product, numerous individuals have made their own comparisons and have broadcast their opinions via social media. More official inquiries have been made by the business and fashion press. These comparisons reveal differences across the brands. Fabric blends vary a bit, as do styles, fit, and features. But as with most apparel items, perceptions of quality come down to personal preference. Ask Luluheads and they will tell you with conviction that Lululemon’s products fit better, feel nicer, last longer, and are more flattering than any competing goods.

On top of perceptions of product quality, the Lulu faithful also point to the shopping experience. Like buying coffee at Starbucks, customers are drawn to the ambience that—when it comes to buying athletic apparel—can only be found in a Lululemon store. Stores are designed to be all at once warm, inviting, eclectic, and accessible. Customers are pampered by “educators” and “key leaders”—Lulu-speak for “sales associates” and “supervisors.” And Wilson’s original retail vision has come to fruition as community ambassadors—local experts who get a 30 percent discount on Lulu merchandise and exposure for their own businesses—provide in-store workshops and classes on various aspects of healthy living. More Victoria’s Secret than Under Armour, Lululemon has full control over its retail experience as the only vertically integrated retailer of athletic wear for women. As one investment banker puts it, “You can go to Sports Authority to get stuff made by Nike for women, but you just don’t feel indulgent there.”

There are many who have pointed out the irony of a brand that has become an icon of materialism based on selling clothing for yoga—a practice rooted in the philosophy of avoiding all forms of self-indulgence. But the Lululemon faithful either don’t get the irony or don’t care. Over the past four years, Lululemon’s revenues have doubled from $1 billion to $2 billion as it maintains a healthy 13 percent profit margin. And while the company’s stock price took a dive a couple of years ago amid various controversies, it has averted the lasting effects of such as the value of its stock has recovered to nearly $10 billion. The company certainly faces challenges as it fends off more and more competition in an already crowded field. Claiming it doesn’t want to build more than 400 stores, it may also be reaching its peak. But so long as Luluheads abound, Lululemon will be doing upward-facing dogs all the way to the bank.

Questions for Discussion

1. 11-18 Relative to customer value, explain customers’ willingness to pay premium prices for Lululemon’s products.2. 11-19 Based on principles from the chapter, explain how price affects customer perceptions of the Lululemon brand.3. 11-20 Could Lululemon have achieved the same level of success had it executed an alternative pricing strategy?4. 11-21 Can Lululemon continue to succeed by employing the same premium-pricing strategy? Explain.