How much does that fancy $100-a-bottle department store perfume you wear really cost to make? The answer is one of the retail industry's dirty little secrets -- with good reason. If shoppers got a whiff of the how little is spent on making "the juice," it would be like Toto pulling back the curtain in The Wizard of Oz.
Here's the lowdown: Despite all the flamboyant marketing-speak behind prestige fragrances -- all that talk of floral formulas and gourmand notes -- the value of the actual liquid is roughly equivalent to a large cup of regular coffee. Yep, not even a cappuccino.
And perfume is no outlier in the cosmetics department: When it comes to a host of beauty products, "There's an enormous disparity between the cost of the product and the cost to the consumer, more so than anything else," a former department store CEO told DailyFinance.
"If you bought a laptop that costs $1,000, the laptop might cost $600 to $700 to manufacture, but if you bought a lipstick for $25, it might cost 25 cents to manufacture," he said. "The same holds true for fragrances."
Scent Sells
Fragrances are a big -- and growing -- business.
From January to March alone, department store fragrances generated $501.2 million in sales, up 7% from , with nearly 8.0 million units sold, according to market research firm the NPD Group.
The ex-retail CEO offered DailyFinance a rare glimpse into the breakdown of the costs built into department store prestige fragrances, using an average $100, 3.5 ounce bottle of a "celebrity" perfume as an example. As the cost breakdown is a closely-guarded trade secret (rather like Colonel Sanders' fried chicken recipe), he would only speak on the condition of anonymity.
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Bottle: $6
The perfume bottle itself is a meaningful contributor to the cost of the fragrance, especially as some bottles are veritable sculptures, expensively designed by commissioned artists, the CEO said. Indeed, perfume bottles have a noble history as objets d'art -- to the point that they have been the subject of museum exhibitions.
Packaging: $4
Typically, this includes the bottle's package, as well as collateral material for the department store counter, such as testers and displays "that are all part of an integrated presentation scheme," said the CEO.
Marketing: $8
All the legerdemain that goes into creating a perfume's mystique, particularly for a celebrity-backed fragrance, carries a heavy price tag. The marketing-magic machine includes everything from department store marketing at the point of sale to the media blitz: "scent strips in magazines, outdoor ads on billboards and bus shelters, and TV advertising," the CEO said.
While the retailer and supplier typically split the cost of TV spots, all the other marketing costs are usually paid by the manufacturer.
Sponsored Links
But when marketing a fragrance -- as opposed to fashion or accessories -- seeing isn't always believing, Karen Grant, vice president and senior global industry analyst for the NPD Group, tells DailyFinance.
A shopper might instantly respond to the aesthetics of a handbag she sees in the store or in an ad, for example, which can prompt a sale. But before they'll be convinced to make a perfume purchase, consumers must "encounter the scent" via promotional ploys like testers or scent strips in magazines. And all those things jack up marketing costs, she said.
Sales Commission: $6
The sales people at department store beauty counters work on commission, which also figures into the price of the fragrances they sell. Typically, they are paid by the beauty supplier, as opposed to the retailer.
Licensing Fee: $4
When a perfume is a celebrity label, and so many of them are these days, the star gets a royalty for the use of their name, likeness and participation in promoting the product.
Manufacturer's Overhead: $15
HOW MUCH DOES a perfume really cost? That&#;s everybody&#;s question when they see a $350 price tag on a bottle of Bijan or one for $250 on Joy. Does it really have to cost so much? Nobody who markets perfume will tell you exactly, but by asking the right questions of the right people, you can get an idea.
Consider first the amber liquid that smells--the &#;juice,&#; as it is known in the trade. Without a winning compound, as Giorgio&#;s Michael Gould says, &#;You can have the most beautiful bottle and box in the world and the product won&#;t sell. If the juice isn&#;t right, long term you won&#;t have a franchise.&#;
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So perfume makers rarely spare the expense when formulating a prestige fragrance. If it takes 692 ingredients to make it work, as in Giorgio&#;s new Red, then so be it. But, according to one Los Angeles fragrance expert, even the most expensive ingredients in the world--such as pure jasmine and attar of rose--do not raise the price to three figures. The ingredients in the average bottle of prestige perfume cost about $1.20 to $1.50. The actual liquid in a typical bottle of $150 perfume is less than 1% of the retail cost.
The bottle, box and and display carton typically cost four to six times times more than the fragrance itself. Manufacturers pay premium prices for special stoppers, sometimes as much as for the bottle. They also pay for decorating the bottle and for filling, shipping and packing it. All these extraneous costs might bring the cost of a filled bottle to about $20. Consider shrinkage and product overruns and add 50 cents.
But the costs keep mounting. Those women in the stores who spritz. The salespeople behind the counter. Their salaries are augmented by the fragrance companies. The salespeople get a commission on every bottle they sell. The companies also provide the tester samples.
Then consider the advertising costs. It costs about $31,200 to buy one page of advertising in Vogue magazine. Few prestige perfumes are advertised in only one publication each month. And scented strips increase the production costs of each ad.
During the research and development stages, high-salaried executives work full tilt to formulate the scent, the marketing strategies and the advertising campaigns. Consultants&#; salaries may exceed $100,000. Some of the world&#;s finest bottle designers charge more than $100,000 for their work. Don&#;t forget the support staffs that keep companies rolling. Department stores typically mark up the product from 60% to 100%.
Spoiled&#;s Herb Fink and Lee Bronson say they spent just less than $500,000 to get their perfume into the department stores, even before the first sale. Fragrance marketing experts David Horner and James Roth Jr. recall that less than $300,000 was invested in Giorgio 10 years ago (&#;not counting the party,&#; Horner says, &#;but you really don&#;t need (a pricey launching) party&#;). But that was low budget for a scent that eventually hit $100 million in sales. Industry sources say Elizabeth Taylor&#;s Passion cost about $10 million to $15 million. Estimates are that Calvin Klein spent $4 million to $6 million to advertise his new scent Eternity.
Most experts agree that the profit margin on a $150 bottle of perfume is low, when all costs are taken into consideration. Higher profits come from sales of colognes whose ingredients, bottling and packaging costs is about half as much as those of perfumes. And far more bottles are sold; according to industry sources, cologne accounts for at least 65% of most fragrance firms&#; sales.
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