This article was originally published in Beauty Independent.
The Lipstick Effect
By now pretty much everyone in the Beauty industry has heard of the “lipstick effect,” a phrase that was coined by Leonard Lauder. It specifically refers to the fact that even in a down economy, people will make small splurges on treats, and a $15 (or even $35) lipstick is a very accessible treat for many. More broadly, the lipstick effect refers to the general resilience of the Beauty & Personal Care industry – in good times people want to look and feel their best and the same holds true for bad times and save for some uber-luxury brands, our products are generally approachable regardless of the state of the economy.
But What About Inflationary Times?
The last really inflationary period in the US was the 70’s and early 80’s and as a result, the vast majority of us have never had to deal with it in our careers. What is a beauty entrepreneur to do? Costs are certainly rising for many inputs like ingredients and packaging, not to mention shipping. Should you pass these costs on to your consumers in the form of price increases? Or should you ‘eat’ these price rises in the form of reduced margins for your company?
An Inflationary Pricing Framework
This article will lay out a framework for how to think about pricing strategy in today’s inflationary environment. Each of us needs to answer these questions in our own way for our unique businesses, but hopefully this will at least provide a thoughtful and comprehensive approach.
Here’s how we’ve been thinking about it at Rare Beauty Brands:
- Structural or Transitory? The first judgment you need to make is whether you believe inflation is here to stay for an extended period of time (e.g., it is becoming entrenched or structural) or whether the underlying causes are temporary. Some say it is becoming permanent while others are still on ‘team transitory’ despite the fact that inflation has remained stubbornly high for longer than many had thought. Personally, I think that the underlying factors that have caused the current bout of inflation will work through the economy by the second half of 2022, so I’m not leaning towards price increases for our brands. But I fully admit that I was wrong about this 6-8 months ago (I figured inflation would have come down by now) and I could be wrong again. An important consideration here is something called “entrenched expectations.” This is the notion that even if we are correct that the effect of supply chain snarls, labor shortages and government stimulus money will wane relatively quickly, inflation may persist simply because everyone expects that it will. As each day passes with persistently high inflation numbers, especially in hallmark things like gasoline, the risk of entrenched inflation expectations gets higher.
- Survival or Gluttony? The second consideration is whether you need to take pricing in order for your business to survive, in which case it is a no brainer, or whether you are being opportunistic and grabbing a bunch of profit, just because you can. Related to the second point, if you are being too gluttonous, does this fit with your brand and personal values? There is an old piece of advice to not do anything that will get your boss on the front page of the Wall Street Journal. In this time of social media that applies to each of us even more.
- Volume or Profit? Survival and gluttony are admittedly at the extreme end of the distribution curve. A more common and subtle trade-off that each of us faces every day in building our brands is the one between volume (or revenue or market share) and profit. Many indie brands are focused on scaling revenue, betting that we will be rewarded more for growth than profitability today. Fewer are focused on profitable growth, but if that is your strategy and you can justify price increases that aren’t gluttonous, then you are within your right to take that approach.
- WWJD – What would John Von Neumann Do? OK, I didn’t know who he was either before I started writing this, but apparently he is one of the inventors of game theory. If you’re not familiar with game theory, it is a set of concepts and tools that helps strategists analyze situations in which players make decisions that are interdependent and this interdependence causes each player to consider the other player’s possible decisions, or strategies, in formulating strategy. If you take price up and your competitors don’t, will you lose market share and how much? A quick review of recent earnings reports reveals that some of the majors such as P&G and Estee Lauder are taking price up more than normal in response to current inflation, and this is driving record profits. As for indie brands, Beauty Independent recently published a great story on how entrepreneurs are thinking about passing along supply chain cost increases in the form of higher prices: about a third were taking prices up, but only half of those due to inflation, while the other half were taking price up like they always do. The other two thirds were looking for creative ways to cut costs or were willing to reduce profits in the short term because they didn’t believe inflation was here to stay or they felt better about providing their loyal consumers with extra value.
Our Approach at Rare Beauty Brands
Like all beauty brands, we’ve grappled with these issues over the past several quarters and ultimately we’ve decided not to change prices. Using the above framework, 1) our sense is that inflation is more temporary than structural, 2) we are committed to offering our loyal consumers fair value, 3) we are leaning into rapid growth but we are also already profitable and have solid gross margins which enables us to weather the temporary storm, and 4) we believe most beauty brands will stand pat on pricing at least for now. The one caveat is that we are closely monitoring inflation expectations and if those expectations rise, then we may reconsider our position.
If you believe inflation is here to stay, you need to take price up in order to have a healthy business, and/or you think competitors are doing it too, maybe you lean that way. And if you believe your business can thrive with a slightly reduced gross margin for a short period of time (e.g. if inflation is transitory) and/or you are prioritizing growth over profit, then maybe you stand pat. There is no single “right” answer, but hopefully this framework will help you make decisions about how to react to this new environment.