Brand Extension is becoming a reality also within luxury, due to the important changes thatthis sector has undertaken. Studies within this area of research have focused mostly onconsumer goods. The purpose of this work is to explore Brand Extension within the luxurycontext. The objective is to define what are the rules that a luxury brand should follow whenextending in new territories, delineating the differences between functional and prestigegoods. The work focuses on a specific area of extension that is the dilution of brand image. Conclusions are the result of an empirical research carried out in the form of an experiment.As for functional goods the beliefs about a parent brand will be diluted when an extension isperceived as inconsistent with the original family brand beliefs. The notion of consistencyvaries between functional and luxury goods. As a consequence there is a greater extendibility, among product classes, for luxury goods. The context around the luxury brand is very important in affecting how the extension is perceived, for incoherent product lines, an extension will have a smaller impact if it is positioned within a context that connects it to it.