The lipstick effect is a well-documented phenomenon that was first noted in the early 2000s. It refers to women's propensity to spend more on luxury goods (such as cosmetics, perfumes, and designer clothing) during economic recession or uncertainty. This counterintuitive trend has been observed in several countries in response to various socioeconomic stressors such as war, financial market volatility, natural disasters, pandemics, and political instability. This article explores the origins and implications of the lipstick effect in economics. Its scope is limited to analysis from an academic perspective with minimal reference to related industries or brands.
The lipstick effect is when consumers buy more luxury goods (that is, goods associated with high spending) during periods of economic uncertainty or recession. The name is derived from the idea that the more consumers worry about in their daily lives, the more they are inclined to make frivolous purchases, such as cosmetics. To some extent, this is true because people may use these products to relieve stress. However, research shows that consumers don't just buy more luxury goods during hard times—they buy different goods.
When the global recession began in 2008, most men lost their jobs. Construction workers, auto mechanics, and other male-dominated professions suffered as companies cut back on spending and expenses. What's more, these job losses continued for years afterward. But while men took the biggest hit in employment, women have had a lasting impact on the economy—not just because they now account for almost half of all paid work (up from about a third in 1990), but also because of their purchasing power is growing. These changes are often referred to as The Lipstick Effect. While its origins are unclear, economists first used the term to describe how women spend more money on lipstick during recessions. It's no joke: Surveys have found that men and women tend to splurge on luxury goods like vacations, electronics, and jewelry when they feel poor. Men might buy less beer when tough times, but women will buy less food.
There are three main reasons why consumers buy luxury goods during periods of economic uncertainty. When people experience a significant increase in their standard of living, they get used to the new level of comfort more quickly than you might expect. Therefore, if their income decreases, they are more likely to feel the impact because they are used to a higher standard of living. Consumers may purchase luxury goods as a form of hedonic substitution because these items are more likely to provide immediate satisfaction than basic necessities such as food and shelter. Consumers may choose to buy luxury goods because basic necessities are more expensive. For example, food prices may rise due to a bad harvest or an increase in demand for organic products. This could make basic groceries more expensive, prompting consumers to buy higher-priced luxury goods.
Another example is when people are expecting a decrease in their income. To make ends meet, they might decide to purchase luxury goods. Consumers are more likely to buy luxury goods during economic uncertainty because they are trying to signal their social status. They may think others are less likely to associate them with financial hardship because they purchase expensive products.
The lipstick effect is not an accurate economic indicator. This is because it has the potential to be misleading, and it does not apply to all consumers. For example, the lipstick effect may not apply to consumers with a higher debt tolerance than others. When the economy grows, and interest rates are relatively low, borrowers have a lower monthly payment. More people are willing to take on additional debt during these times, which boosts the luxury goods market. However, when the economy slows down, some of these consumers cannot repay their debt, triggering a rise in bankruptcies. Consequently, this could cause the amount spent on luxury goods to decrease and the lipstick effect to disappear.
The lipstick effect will likely benefit marketing firms that work with luxury goods. When the economy enters a recession, there is less money to be spent on nonessential items such as food, gas, and clothing. In these situations, consumers are likely to make significant cuts to their budgets, including the amount they spend on luxury goods. However, during economic uncertainty, people are more likely to spend money on items that are not as essential, like luxury goods. Therefore, marketers of these goods should be able to increase their sales. In fact, according to one study, the lipstick effect has been linked to an increase in luxury goods spending.
The lipstick effect could be applied to consumers in any country experiencing economic uncertainty. However, the extent it occurs will likely vary depending on each culture. In some cultures, consumers are more willing to spend money on luxury goods than in others. For example, researchers have found that consumers in countries like Japan and China are more likely to spend money on luxury goods than consumers in countries like the U.S. and the U.K. Additionally, when consumers are experiencing financial hardship, they are more likely to buy affordable luxury goods. Therefore, luxury goods could help to alleviate stress by providing satisfaction without breaking the bank.
Women now control a large portion of household spending, up from just 44% in 1990. A 2019 American Express Spending and Saving Tracker survey found that women were "significantly more likely" to be in control of spending for essentials like groceries and utilities. Conversely, men were more likely to control spending for luxuries like eating out and vacations. This trend is especially notable since it runs against the common assumption that men are primarily responsible for household expenses. Although these are survey results, they suggest that women are making important financial decisions in households across America. And these decisions have a direct impact on the economy.
The Lipstick Effect is a phenomenon in which women spend more money during economic downturns, perhaps to make themselves feel better. This spending can positively impact the economy since it encourages consumption and creates jobs. The increased spending power of women since the 1990s is one of the reasons this effect has become more common in recent years. Overall, the lipstick effect is a well-documented phenomenon observed in several countries in response to various socioeconomic stressors. Consumers who buy luxury goods during periods of economic uncertainty are relatively straightforward. These include hedonic adaptation, substitution effect, and signaling effect. However, the lipstick effect is not an accurate economic indicator because it has the potential to be misleading. Moreover, the extent to which it occurs will likely vary depending on each culture.