In times of economic uncertainty, individuals often adjust their spending habits and become budget-conscious. One intriguing phenomenon is the "lipstick effect." Coined by Leonard Lauder, former chairman of Estée Lauder, this term refers to the tendency of consumers to rein in big spending – instead, spending modest amounts on small indulgences like lipstick and other affordable luxury items during an economic downturn. Thus, companies that benefit from this phenomenon tend to be resilient even during economic recessions.
Psychological factor
During tough times, consumers gravitate towards small indulgences to uplift their spirits. This is attributed to the psychological need for normalcy, resulting in increased spending on small luxury products, especially beauty-related ones. The desire to treat oneself does not disappear during periods of uncertainty; instead, it takes on a more affordable form to provide comfort and pleasure. Items like lipstick are less costly but still provide that same sense of indulgence and self-care, thus alleviating anxiety and stress.
The lipstick effect as an economic indicator
Sales of small luxury items can be used as an indicator of economic recessions based on the lipstick effect. Purchases of these affordable luxury goods are inversely correlated with the health of the economy and can be used as an indicator of economic recessions. Conversely, the lipstick effect is less pronounced during economic recovery. When consumer confidence is higher due to their financial stability, the tendency to invest in higher-ticket items or luxury goods is increased.
Sales of cosmetics peaked in the 2008 recession despite a steep rise in unemployment and a drop in GDP
Pros of the lipstick effect as an indicator:
Provide insights into consumer sentiment and behavior during economic downturns. It indicates how consumers adapt their spending habits and prioritize certain products to maintain a sense of normalcy or indulgence.
Few academic studies of the lipstick effect exist, but they all find evidence in support of it and have been proven true during periods such as the 2008 recession and COVID-19.
Cons of the lipstick effect as an indicator:
It is difficult for the public to access sales data on lipstick and similar products in general and at regular intervals, thus limiting the usefulness of the lipstick effect to predict economic downturns for the average consumer.
If an economic recession is severe and sustained, and incomes continue to fall, consumers may eschew even small indulgences. Theoretically, at least, affordable luxury goods will fail to be predictive when sales of essentially everything contract at the same time.
Reference List
Firstpost (2024). Lipstick Effect: Economic Slowdown Boosts Market For ‘Little Luxuries’ | Vantage with Palki Sharma. YouTube. Available at: https://www.youtube.com/watch?v=XZi0ULpePHQ&ab_channel=Firstpost [Accessed 15 Jun. 2024].
Learn Oikonomia (2022). Learn Why Lipstick Effect is on the Rise. YouTube. Available at: https://www.youtube.com/watch?v=Yb4pKO7M1SU&ab_channel=LearnOikonomia [Accessed 15 Jun. 2024].
Investopedia. (2024). Lipstick Effect: Definition, Theory, Value as Economic Indicator. [online] Available at: https://www.investopedia.com/terms/l/lipstick-effect.asp [Accessed 15 Jun. 2024]
Mailchimp. (2023). Psychology of Spending: The Lipstick Effect Decoded | Mailchimp. [online] Available at: https://mailchimp.com/resources/lipstick-effect/ [Accessed 15 Jun. 2024].
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