Cosmetic & Fragrance is the fastest growing segments for luxury brands

A fragrance can be just scented plain water, but why is it commanding a high price and in fact, it is one of the highest profit margin businesses.

A bottle of fragrance is a must-have for every ladies, and often the perfume must be of prestige brands, so what is it behind this norm?

A fragrance can be just scented plain water, but with branding efforts, it can be a luxury item for every woman. To further elaborate, let's start off by looking into the cost of a bottle of fragrance. For a perfume selling at USD 100, the major cost goes to operating cost retails at USD 25; sales & marketing efforts cost USD 14; production cost of USD 15; glass bottle itself costs USD 6; packaging costs USD 4; licensing fee of USD 4.

It is noteworthy that, the costs, however, are not the major factors contributing to the high price of perfume. It is the brand equity that drives the selling price, and this explains why customers are willing to spend on it. In fact, people buy even though they have a limited understanding of the raw material, underlying tone, stories, or creator of the perfume.

So what's driving this consumer behavior?

1) Fragrances are just one of the series of products from luxury fashion houses such as LV, Gucci, Prada, etc. These brands have had already established brand presence in clothing, handbags to cosmetics and fragrances. And fragrances that come at a fraction of price set a stage for brand extension, consumers may be nurtured to be the brand's loyal customers.

2) In light of the mounting economic situation, the fragrance business becomes the most defensive business segment for the fashion house. The low entry barriers for consumers fare better than those luxurious pricey products, and of course, the profit margin speaks itself. Perfumes have one of the highest profit markups of any global industry.

The scenario also explains the venture of fashion houses into the color cosmetics segment in recent years. Lipstick, especially, drove a boom in the color cosmetic segment, it is very common to see ladies have more than one lipstick of the same color tone, of the same brands. The cosmetics & fragrance segment topped the sales growth of luxury goods.

-- With just a fraction of the price, you get a slice of Gucci, D&G, and Burberry.

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