The cosmetics industry over $US17 billion in the USA in 2017. Charles Revson, who created and managed Revlon through five decades, got it exactly right when he said:
“In the factory we make cosmetics, in the store we sell hope.”
In comparison, Julie Fredrickson, founder of Stowaway Cosmetics, has a less positive spin. Fredrickson presided over her company’s 30% month-on-month growth from launch in 2014 until it was acquired by Win Brands Group in 2019. Even after her industry success she is frank about the lack of value offered by cosmetics manufacturers:
“Beauty is the only industry in which I have found that the aphorism ‘you get what you pay for’ isn’t true, and that really bothers me, …Goop in a bottle is cheap” (to make).
A $34 lipstick costs less than $3 to make including packaging
In an interview, Fredrickson exposed the truth about the margins on cosmetics: Retailers mark up products between 100%-130% and this is on top of high manufacturer mark ups. This is difficult to explain with competitive economic frameworks. There are numerous current cosmetics brands all vying for consumers to buy them. Competition is further intensified by ‘dupes’ (products designed to closely mimic expensive, popular favorites). Manufacturers don’t tend to patent cosmetic formulations because this releases composition information making it easier to copy. On top of this, the industry is saturated with new entrants trying to establish brands every year. Proof of this is 99designs’ blog post devoted to working out the design aesthetics for new cosmetics packaging. Apparently it turns out the make-up often costs less to make than the box it comes in!
It’s easier to understand how the industry sustains such high margins from a consumer psychology perspective. And this brings us all the way back to Revson’s quote. Consumers are paying for the emotional experience associated with the cosmetics brand they buy into. Simply put, they are overpaying because it makes them feel better about themselves. In some cases this is about emotionally moving away from a poor body self image. It can also be because a more healthy aspiration to maximise your natural gifts.
Either way there is a very wide range between how different cosmetics products deliver on their effectiveness claims. Lipsticks change the colour of your lips quite effectively. A tasteful lipstick can enhance your appearance (more commonly for women than men). Anti-wrinkle serums on the other hand totally fail to deliver on their promises of effectiveness. They add a layer of perfumed grease to your skin without having any ‘real’ anti-wrinkle effect. Moisturisers do have a cosmetic effect. They make your skin feel different and this changes your subjective perception about your skin’s condition. But they don’t work to reduce wrinkles.
The reason moisturisers cannot work is because it would be illegal! If they did reduce wrinkles then they would be classed as a drug. This would require proper testing in phased clinical trials to validate therapeutic effectiveness. This is like the difference between Deep Heat and Voltaren Emugel. According to WebMD, Deep Heat has only a cosmetic effect due to menthol and methyl salicylate, but Voltaren is a medication containing the drug Diclofenac.
Deep Heat: This product is used to treat minor aches and pains of the muscles/joints (e.g., arthritis, backache, sprains). Menthol and methyl salicylate are known as counterirritants. They work by causing the skin to feel cool and then warm. These feelings on the skin distract you from feeling the aches/pains deeper in your muscles, joints, and tendons.
Voltaren Gel: This medication is used to relieve joint pain from arthritis. Diclofenac belongs to a class of drugs known as nonsteroidal anti-inflammatory drugs (NSAIDs). If you are treating a chronic condition such as arthritis, ask your doctor about non-drug treatments and/or using other medications to treat your pain.
Moisturisers are to wrinkles what Deep Heat is to joint pain. So people who buy moisturisers are doing so for subjective and perceptual benefits, not for any objective effects. They may be the victim of a con, or they may be conning themselves. It is fascinating how the cosmetics industry has been built on not much more than hope. Cosmetics marketers fundamentally take a promotional marketing orientation rather than an economic value orientation because they have no choice. And this disconnect between function and value is getting more extreme.
Estee Lauder will pay NASA $US17,500 per hour hour to get pictures of its new night serum product on the International Space Station (ISS). The photos are only for social media, not print or TV ads. No astronauts will be shown using the products. Apparently the point of the shots is something other than how useful the product is. NASA must be laughing all the way to the bank because running the ISS is not cheap. It does seem to trivialise the ISS however. Cosmetics in space turns out to not be the final frontier.
The latest trend in the industry is about getting to the next level of retail customer experience in a COVID battered environment. Major manufacturers like L'Oreal are beginning to incorporate more technology into their online and offline retail experiences to increase the interaction they can have with consumers. This makes perfect sense when you think about enormity of the challenge to stand out in such a crowded market. Because tech plays are capital intensive exercises, they create an attractive strategy for large incumbents to stifle new entrants from getting cut-through and brand traction.
Here is me experimenting with different hair colours on the L’Oreal website with their Modiface tool.
Cosmetics retailers are not limiting interactivity into their online customer experiences. ModiFace will be available in the new Lancôme and YSL Beauté Cafés being installed at the Hamad International Airport. One advantage is this offers a COVID-safe make-up experience. However they have been beaten to the punch by B+ Tube Cosmetic in Changsha, China. The store offers high tech interactivity inside an almost surreal physical retail environment. Interactive elements include product information areas, interactive advertisements and product testing stations that blend physical displays with digitized video screens. You can get a sense of this place from clicking on the interactive image below.
Interactivity is a very clever strategy for an industry focused mostly on style rather than substance. Creating interactive experiences offers a very cost effective and scalable way for cosmetics companies to provide the virtual equivalent of samples. There is a large amount of academic and commercial research validating sampling as a strategy to increase sales. It is also a more customer-centric than investing in promotional campaigns designed to promise results cosmetics can never really deliver. Hope is not a strategy, but it can be effective.
Robert Dew is a Founding Partner at CapFeather Global with more than 2o years of corporate consulting and university lecturing in Innovation, Customer Strategy and Customer Experience. His PhD related to improving creativity in strong corporate governance environments. He is a staunch activist against moisturiser because it seems to be much more addictive than crack cocaine or heroine. He knows of no victims of moisturiser addiction who have made it successfully into recovery. Most deny they even have a problem. Despite this stance, he is deeply impressed with the margins raked in by the cosmetics industry.