Why people buy expensive things during recession? : The Lipstick Effect

Have you bought something expensive during this lockdown when the economy was undergoing a financial crisis?

Why does the demand for certain luxurious products go up during a crisis instead of going down?

Isn't it normal for the demand for luxurious products to go down during depression or during times of crisis?

Well, there is a term for this behavior. It is called ‘the lipstick effect’

The lipstick effect states that people tend to buy certain premium quality products even when the economy is undergoing a crisis. This can be reframed as people remaining ‘loyal’ to the brands. It is all about priority. Some brands have been successful in getting connected directly with the customers’ hearts. The products, even though are expensive, will be bought because they are what the customers have become accustomed to. They are what makes the customers happy.

Why is this effect called ‘the lipstick effect’ and not any other ‘brand / product effect’?

Just like any great invention is named after its discoverer or the era it was discovered in, this effect is named the way it is because: This behavior was observed for the first time in the American economy during the Great Depression when a reduction in industrial production by half and even more was witnessed but the cosmetics industry reported a 25% increase in sales. This rise in sales occurred during the recession of 2008, cosmetics behemoth L’Oréal experienced a sales growth of 5.3% during the first half of the year.

Credit: Loreal Finance

Following the 9/11 terror attacks, when the American economy was harmed notably, the sector which showed growth was the cosmetics brands. Makeup company, Estee Lauder’s Chairman Leonard Lauder claimed that the sales of his brand’s lipsticks were inversely related to the general health of the economy because his company sold more lipsticks than usual — not double, but significantly more.

This phenomenon was therefore dubbed the name of the ‘lipstick effect’.

What does it mean for the brands and economy?

There are claims that the lipstick effect has helped brands to survive the crisis and the economy to trigger growth when all hopes were lost. Lipstick is said to be a significant economic barometer that can indicate how the customers might behave in a wounded economy.

This phenomenon not only challenges the brands' image but also the marketers on how they succeed in getting cash out of the customer’s hands when they are very low on cash. This includes the subject of customer loyalty and trustworthiness of brands. The more the brands’ products are closer to the customers' hearts, the more loyal the customers will be.

E.g. There is the chocolate ice cream of Amul and then there is the vanilla ice cream of Amul. We are in a situation where we are low on cash. But then we have a birthday party coming up. What we think is: the vanilla ice cream comes for ₹ 120r per family pack but the chocolate ice cream which is for ₹ 200 per family pack is tastier. We have managed to spare those ₹ 200 to buy the chocolate ice cream instead of buying the vanilla ice cream.

Experts have called this term as certain products being more enjoyable to the customers. They get more happiness in consuming those products so they are ready to spend more irrespective of the economic situation.

The challenges which this effect poses on the brands are: creating products that emotionally connect to the customers- in a way that the products lift the customer’s mood, their confidence and fills them with happiness.

But of course, we are FinBus and not Markbus. Our discussion, every time, ends at finance.

The finance associated with this economic effect

This effect has in the picture, behavioral finance. And the behavior of the people can be due to the “mental calculating” that they do. As behavioral finance explains, people who have a household budget for food, tend to eat lobster and shrimp-like expensive foods at a restaurant and cheaper food like fish at home. If they ate the expensive foods at home and the cheaper foods like fish at the restaurant, they could save more. This occurs because they are thinking separately about restaurant meals and food at home and so, they choose to limit their food at home.

For every purchase, there is a substitute that is given up (opportunity cost or the substitute products)

Where does the money flow during a recession except for cosmetics?

The results of a few pieces of research suggest that outdoor cultural consumption, being a deferrable need, is not necessarily abandoned in times of economic downturns.

On the contrary, it may be sustained or even enhanced during recession periods. Primary research identified a positive shift in consumer behavior of non-attendees and occasional arts participants towards more intensive outdoor cultural consumption during the economic crisis, while the behavior of regular arts attendees remained unchanged.

This is consistent with a general belief that people tend to seek entertainment and cultural activities as a part of the therapy in recession periods. It reflects the predominance of psychological aspects over economic factors within outdoor cultural consumption and highlights the importance of emotional drivers for attending arts events.

It has been revealed that although people did not reduce their arts participation, they declared a decrease in individual spending on outdoor culture in the recession period. This finding suggests a shift in consumption patterns towards a more intensive arts attendance, however, at less expensive or free-of-charge cultural events during the crisis.

This content piece was prepared by Vidhi, Udit and Ashutosh.

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