Every product needs to be sold at a markup so that the seller can earn a profit from it. However, these markups vary product-wise. Manufacturers, Wholesalers, Farmers, and Retailers all enjoy a different range of markups. The consumer industry, which gets very much less attention regarding its investment opportunities and growth potential, is highly underrated. Investors tend to have a perception that consumer markets offer low markups. These assumptions cannot be more wrong. More specifically to the personal care and cosmetic industry, it is overflowing with high markup products. The high markups of the cosmetic products are usually very high as relative to other consumer products. It is because of various reasons. The reason for some products can be the strong brand loyalties, High purchase frequency, demand for high-quality products, etc. The in-depth analysis is conducted below to verify the industry dynamics and its pricing strategies.
Industry | Cosmetic
The global cosmetic industry is expected to earn more than $429.8 billion by the year 2022 which shows the CAGR of 4.3% for the forecasted period of 2016 to 2022. Cosmetic products are chemically generated products aimed at enhancing the appearance and odor of the human features and body. These cosmetic products include products like deodorants, color cosmetics, makeup, hair care, skin care, fragrances, and sun care. Retail stores, exclusive outlets, supermarkets, and specialty stores are some of the major players of the distribution channels while on the other hand online channels are also being used by the customers as well (Myers, 2010). With the rise in disposable income all over the world, the growth in the global economies and rising demand for high-quality products as per the changing lifestyle norms has boosted the cosmetic industry as well. The shift in cosmetic products towards natural, organic, and sustainable beauty products, more specifically in European countries and the US has also boosted the growth of cosmetic products. The demand for natural and herbal beauty products provides potential opportunities for the companies to innovate and further develop products as per the preferences of the consumers (Allied Market Research, 2014).
Industry Markups and Contribution Margin
Looking at the markups in the cosmetic industry, it has been found that high gross margins are normal in this industry. Hair care and Skincare products usually have more than 60% gross margins. It shows that 40% of the product pricing is based on the cost of the products. However, there are many other operating expenses which need to be managed as well after deducting the cost of goods as well. And these operating expenses are usually high for the cosmetic industry as it is heavily involved in advertising and marketing promotions. Even then it has enough room to invest its capital in its operations or distribute among the shareholders. In the US cosmetic industry generates around $50 billion in its revenues every year. The pricing of skin and cosmetic products is majorly driven by marketing and advertising (Sameer, 2005).
The cosmetic products are more of an impulse purchase which shows that the consumers are willing to pay more as its price. The retail markup on average for cosmetic products is about 50 to 60 percent. Even though one would find a cheaper product as an alternative, the markups remain high because of its strong brand loyalty. It is evident no company uses any such ingredients which can warrant the use of such high markups. However, it is essentially the reflection of the brand. Their premium prices reflect premium brands. Most of the markup costs are due to the expensive packaging or the marketing costs, which are paid by the cosmetic markups (Burnett, 2016).
There can be many factors which become the cause of the impact on the profit margins and markups of the company products. There are many economic factors and social dynamics as well. Social factors like the normative beliefs of society, social trends, and cultural norms affect the pricing strategies of the company. The cosmetic industry has conspired to convince the women that their fate depends on their looks which consequently depend on how much they are spending. The societal belief that the “ugliness” can be cured like any disease is based on the foundation of the cosmetic industry. Other than this, one could not find such consumers who are so much devoted to their brands (Burnett, 2016). People tend to stick to their experience of using skin care products and do not switch easily. Cosmetic industry stability can be judged from this fact that even during the deepest dip in the 2008 financial recession, the sales of the cosmetic products had grown by 21%. The strong brand loyalty originates from the experience with the formula, relevance of the product for each but more from the brand itself (Caldbeck, 2014).
Supporting Prices and Margins
Price determination is one of the decisions which can be crucial for any business. It depends on some factors like cost, competition, demand, and value. The strategies for pricing the product is an art. However, there are some strategies which can be followed for effective results. These strategies range from cost-oriented pricing, demand-oriented pricing, break-even pricing, and target rates of return to value-based pricing. Companies are required to decide on how much inventory they are going to stock and how they are going to price this inventory (Kumar, 2006).
The businesses are not needed to price their products at the same level of profit margins. It depends on the cost-effectiveness of the business operations, the productivity of the labor, and on the competitive landscape. It also depends on the customer’s income level as they have to pay for the product ultimately. Knowing which products are the ones that provide the biggest profit margins and which ones are the ones that offer the highest sales (Burnett, 2016). Businesses work hard at satisfying their customers. However, there are many factors which affect the ability of the business to satisfy their consumers. The fluctuating prices of raw materials, the economic conditions, and the disposable income of the consumer affect the purchasing power for cosmetic products. Consumer perception and satisfaction also plays an important role. The strategies which not only cater to the customer perception and their needs, but also to the various environmental and economic factors tend to be the best strategy (Mincey, 2018).
Conclusion
It can be concluded that the cosmetic industry uses relatively higher markups and consequently earn higher gross margins as well. These high markups tend to be influenced by strong brand loyalty, brand name, consumer rising disposable income, social and cultural norms requiring beautification and high marketing costs. These all tend to cause high markups in cosmetic products and higher margins as well. The cosmetic products usually have more than 40% of gross margins, which means that their products are marked up thrice the cost it incurs. The high marketing costs, promotions, and advertising expenses, however, leave a lesser amount as profit margin. The conspiracy of convincing consumers to use its products to make them look beautiful has led to it as well. The ingredients used are never that expensive, it is the brand itself which costs this much.
References
Allied Market Research. (2014). Cosmetics Industry Overview. Retrieved from https://www.alliedmarketresearch.com/cosmetics-market
Burnett, J. (2016, May 13). Alternative Approaches to Determining Price. Retrieved from http://www.opentextbooks.org.hk/ditatopic/40310
Caldbeck, R. (2014, February 6). Why You Should Think About Investing in Beauty Instead of Bitcoin. Retrieved from https://www.forbes.com/sites/ryancaldbeck/2014/02/06/why-you-should-think-about-investing-in-beauty-instead-of-bitcoin/#cf4aa1b6f841
Kumar, N. (2006). Strategies to Fight Low-Cost Rivals. Harvard Business Review, 84(12), 104-112.
Mincey, J. (2018). It’s Not Always Your Fault. . .Measuring the Impact of Economic Factors on Consumer Satisfaction and Pricing Perceptions. Retrieved from https://www.decisionanalyst.com/whitepapers/pricing/
Myers, R. (2010, April 30). Know Your Sales Margins. Retrieved from https://www.entrepreneur.com/article/206390
Sameer, K. (2005). Exploratory analysis of global cosmetic industry: major players, technology, and market trends. Technovation, 25(11), 1263-1272.
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