Lipstick Effect - Explained
What is the Lipstick Effect?
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What is the Lipstick Effect?
Lipstick effect is a term used to refer to a situation where consumers still manage to buy a luxury product like lipstick, amid an economic crisis. When there is a recession, consumers are expected to focus their purchase on goods that don't impact their already limited income. However, some consumers still have the cash to buy luxury items like premium lipstick.
Back to:ECONOMIC ANALYSIS & MONETARY POLICY
How does the Lipstick Effect Apply?
The reason why fast-food restaurants, including movie complexes, perform well during a recession is lipstick effect. Cash-strapped consumers would want to reward themselves with something that helps them to forget their financial problems. People may not afford a holiday in exclusive places, but they can still manage a night out at an affordable place.
The Psychology Behind Lipstick Effect
The psychology behind the lipstick effect is that amid the economic crisis, most consumers will still afford luxury goods. They are able to fulfill their luxurious needs without straining financially.
In the cosmetic market, women would still afford to buy premium lipstick. Other markets like the alcohol market also sell their most expensive drinks during a recession.
Origins of the Lipstick Effect
The term lipstick effect was coined by Leonard Lauder a former Estée Lauder chairman, following the bursting of the dot-com bubble which sent the U.S. economy into recession in 2000. During the Terrorism attack of 2001 in the United States, Lauder noticed that his company still managed to sell lipstick more than usual. He realized that women resolved to buy products like lipstick in the place of other costlier luxury items. Lauder then concluded that lipstick is a contrary indicator of an economy.
Pros of the Lipstick Effect
Compared to other economic indicators, the lipstick effect makes sense as it has its basis on economic theory. Lipstick, as well as other small beauty items, is not lesser products. Nonetheless, to consumers, such items are little luxuries they use as a substitute for big luxurious items.
Cons of Lipstick Effect
One major disadvantage of the lipstick indicator is that lipstick sales data, including sales for similar products, are not easy for the public to access. For this reason, it is not practically useful to regular investors not unless they are able to track sales from lipstick. In theory, lipstick sales may be difficult to predict, especially when sales of every item contract simultaneously.
Lipstick Effect Criticism
A lipstick effect testing was done by economists in 2009 using statistical analysis. A conclusion reached, based on the data collected by Kline & Company, the effect was overestimated. According to Mintel, a marketing research company, the lip products fell by 3% during the great recession.
Some economic experts project that the popularity of other products in the cosmetic market is bound to reduce lipstick sales. Amid this shift in the beauty products, the lipstick effect as an economic indicator is slowly losing its relevance.
- Total utility
- Marginal Utility
- Diminishing Marginal Utility
- Marginal Utility per Dollar
- Rule of Maximizing Utility
- Consumer Goods
- Changes in Income Affect Consumer Choices
- Changes in Price Affect Consumer Choices
- Substitution Effect
- Income Effect
- Budget Constraints Create Demand Curves
- Lifecycle Model of Consumption
- Autonomous Consumption
- Permanent Income Hypothesis
- Lipstick Effect
- Engel's Law
- Paradox of Thrift
- Ricardo Barro Effect
- Consumer Confidence Index
- The Wealth Effect
- Behavioral Economics