In the late 1990s, Tiffany & Co.'s silver charm bracelet was a must-have fashion accessory. Teens jammed Tiffany's hushed stores clamoring for the $110 silver bauble. Sales skyrocketed, investors cheered.

Tiffany's managers worried. They knew the bracelet had become a fad, one that could alienate the jewelry firm's older, wealthier, and more conservative clientele. Worse, it could forever damage Tiffany's reputation for luxury.

"The large number of silver customers did represent a fundamental threat -- not just to the business but to the core franchise of our brand," says Tiffany CEO Michael Kowalski.

So in a dramatic gamble, Tiffany decided to kill its golden goose. In 2002, the firm began hiking prices on its fast-growing, highly profitable line of cheaper silver jewelry. It simultaneously introduced pricier jewelry collections, renovated stores and showed off its craftsmanship by highlighting spectacular gems like a $2.5 million pink diamond ring.

Like a growing number of publicly traded luxury-goods makers, Tiffany is attempting to walk a razor-thin line: broadening offerings to the upper-middle-classes while pitching privilege to the truly rich. The dilemma is particularly common these days, as investors clamor for sales growth on one side and fickle luxury buyers demand exclusivity on the other.

Other purveyors of designer wares have stumbled trying to satisfy both groups. Burberry Group PLC, the venerable British fashion house, plastered its iconic tan plaid on everything from dog collars to headbands, only to struggle with the resulting overexposure.

Wealthy consumers aren't as loyal as they used to be. "Even though we're seeing more millionaires than ever, they now have lots of choices on how to spend their money," says Arnold Aronson, a managing director of consulting firm Kurt Salmon Associates and former CEO of Saks Fifth Avenue.

The jury is still out on whether Tiffany's daring move has worked. Although high-end jewelry has replaced silver as its fastest growing business, the company's profit margins and stock price have yet to reach the highs of years past. When Tiffany reports its holiday sales figures today, investors will be looking to see if the company's results are finally on the upswing.

High-end jewelry is expensive to produce and rising commodity prices on gold, silver and platinum pose an added risk. Consumers in Japan have strongly resisted the price increases on silver jewelry, causing business there, about 20% of Tiffany sales, to struggle. In the most recent quarter, sales in Japan stores open at least a year fell 5%, worse than the company had anticipated.

While it was long known for silver household goods, Tiffany for most of its history didn't sell silver jewelry. The firm -- which prides itself on offering a wide array of price points and treating all customers well -- made silver chic in the 1970s, when it introduced a line of bold silver bracelets and necklaces made by jewelry designer Elsa Peretti.

In the go-go years of the late-1990s, Tiffany's managers decided to create cheaper silver jewelry to address the then-emerging trend toward affordable luxury. Middle-class consumers were becoming increasingly brand-conscious. And silver had emerged as the "it" metal.

The 1997 introduction of the silver "Return to Tiffany" collection, which offered jewelry inscribed with the Tiffany name for just over $100, was a huge hit. The charm bracelet was a sensation. Elle Woods, the ditzy law student in the 2001 hit movie "Legally Blonde," accessorized her string bikini with a Tiffany charm bracelet and matching necklace.

Sales Explode

Thanks to Return to Tiffany and other similarly priced silver pieces, Tiffany's sales exploded, rising some 67% during the height of its silver-jewelry boom from 1997 to 2002. Earnings more than doubled over the same period, to $189.9 million from $72.8 million. The stock rose about 500% from late 1998 through the end of 1999, topping $44 by the end of that year. By 2003, silver represented 31% of total U.S. sales.

Before the silver rush, management worried that Tiffany's expansion into smaller cities posed the biggest immediate threat to the Tiffany image. But soon they became more concerned about the crowds in Tiffany's suburban stores, where teens like to shop. In peak holiday shopping periods, some salespeople passed out beepers to alert shoppers when a sales associate became available.

In the winter of 2000, Carolyn Cippoletti headed to a Tiffany's to buy a silver necklace for her 12-year-old daughter. She was surprised by jostling crowds. "There was nobody in the diamond section -- everyone was in the silver jewelry," says the New City, N.Y., resident. "I felt like I was in Macy's."

People inside the company debated the problem for months. "Some people would look at it one way and say, 'If every 16-year-old gets her silver jewelry from Tiffany, they'll eventually want their engagement ring from Tiffany 10 or 20 years later,'" says Mark Aaron, Tiffany's vice president of investor relations. But "what if some of those teenagers fill up their jewelry boxes with Tiffany silver, and as they get older, they perceive Tiffany as where they got their teenage jewelry?"

Everyone knew how beneficial lower-end silver was to Tiffany's bottom line. Any effort to curb it could dramatically slow sales and affect profitability -- and likely upset shareholders.

Ultimately, the company says it relied on focus groups to make the decision. Complaints about crowding were beginning to appear in internal consumer research. The research also flagged concerns that Tiffany's brand was becoming too closely associated with inexpensive silver jewelry. "We didn't want the brand to be defined by any single product," says Mr. Kowalski.

In 2002, Tiffany began aggressively raising prices on the pieces most popular with teenage girls, particularly the Return to Tiffany charm necklace and bracelet.

Customers took the first round in stride. So in 2003, Tiffany tried again. By 2004, the Return to Tiffany bracelet cost $175, up 30% from 2001. The necklace price jumped to $250 in 2004, up 32% from the year before, according to a study by Goldman Sachs. Other silver bracelets, rings and necklaces rose in price by 20% or more.

It wasn't until the second quarter of 2004 that the craze died down, and Tiffany finally noticed a definitive decline in sales of silver jewelry and other pieces under $500. "There was a sort of amazement," says Mr. Aaron. "A lot of people would think that as soon as you raise prices at all, you'll start to see some reaction to that, but it really took a few years."

While Tiffany reported price increases in 2003, it didn't report that the price increases led to a slowdown in silver-jewelry sales until a conference call in 2004 -- some two years after the strategy was implemented.

As expected, not all investors were thrilled. "By becoming less affordable to this aspirational customer, Tiffany risks alienating her when she returns for later milestones," Goldman Sachs analyst Adrianne Shapira wrote in a 2004 research note. "If Tiffany is viewed as too expensive for smaller ticket purchases, then more substantial purchases might be sought elsewhere."

The following year, earnings took a big hit. By 2005, the company's earnings fell 16% to $295 million. Tiffany's stock price -- damaged by lower sales of silver jewelry, especially in Japan -- sunk about 40% from late 2003 to late 2004.

Mr. Aaron says some executives may have been a "little nervous." "I hope we didn't go too far, and at what point will it stabilize?" he says they wondered.

Plunging Ahead

Meanwhile, Tiffany plunged ahead with the other half of its plan: courting upscale shoppers. It renovated stores to better handle both "transactional" purchasers, such as those buying silver jewelry, and "fine jewelry" buyers, who require more of a "relationship."

At the Tiffany store in New Jersey's Mall at Short Hills, the main entrance still leads shoppers to counters housing its jaw-dropping fine jewelry. But just aside, a private viewing room was added with a ready stock of chilled water and champagne. "We wanted to create an environment that was more intimate," says Elisabeth Ames, a Tiffany vice president. A side entrance was also added to lead "transactional" shoppers directly to the counters of Tiffany's silver jewelry. Other Tiffany stores have undergone similar renovations.

Tiffany also rolled out some higher-end collections, including new diamond-ring designs. Targeting a mature audience, it launched new silver lines, including a 2004 collection by longtime Tiffany designer Paloma Picasso and a 2006 collection by architect Frank Gehry. Such higher-priced, more sophisticated launches helped boost the average price of a silver bracelet to $445 in 2004, according to Goldman Sachs.

At its flagship New York store, Tiffany began inviting its best customers to observe artisans creating one-of-a-kind jewelry in its storied seventh-floor workshop, which is closed to the public.

Now, Tiffany can boast that its biggest sales growth in the U.S. came from sales and transactions over $20,000 and over $50,000. In the most recent quarter, sales in stores open at least a year grew 4% over the year before, with the newly renovated New York flagship posting a gain of 13%.

But concerns remain. In its most recent quarter ended Oct. 31, Tiffany posted a 23% increase in earnings to $29 million, but a significant portion of that profit was due to the sale of some investments. And gross profit margin, still sagging from loss of the lower-end jewelry, has declined to 53.6%, compared with 54.1% the year before.

Since hitting a 52-week low in August of $29.63, Tiffany stock has risen about 30%, hovering most recently around $39 dollars a share.

And some high-end shoppers have not yet been lured back into Tiffany stores. Barbara Graffeo has a jewelry box full of Tiffany pieces. But, she says, "I don't wear them anymore because everyone wears them now." The 46-year-old owner of a New York apparel company adds, "You used to aspire to be able to buy something at Tiffany, but now it's not that special anymore."

Tiffany is continuing to aggressively expand into smaller U.S. cities such as Indianapolis and Atlantic City, N.J. The company, which now has 64 U.S. stores and 104 locations in foreign markets, is well aware that too many stores -- particularly those based in malls -- have the potential to dilute the allure of Tiffany as a special destination. So far, sales at Tiffany's branch stores are brisk

1. Identify the key problem facing the company

• The key problem facing Tiffany & Co. is how to maintain its reputation for luxury while also appealing to a broader customer base and increasing sales.

1. Identify the various alternative solutions that the company could potentially pursue

1. Analyze and interpret the information in the case using concepts and frameworks of consumer behavior. This includes interpreting the problem in terms of consumer behavior. For example, is the low market share caused by poor awareness or a negative attitude toward the product?

1. Propose your solution to the problem supported by (iii). In proposing a solution, keep the following points in mind:

   1. Is the proposed solution sensible? Has it been "pulled out of thin air" or does it make sense in light of the material presented in the case and your CB analysis?

   2. Consider both the pros and cons of your solution; do not be one-sided in your analysis, "setting up" your solution.

1. Choose a specific course of action. Does it follow from your analysis? Expand the course action (e.g. specifics of the 4 Ps) and discuss implementation issues (e.g. potential problems/concerns and your contingency plans).