Cosmetic Industry Porter’s Analysis

PORTER’S ANALYSIS

Threat of new entrants

The cosmetic industry has a low threat of new entrants. Why? Because it has a huge cost of entry. In order to develop a competent cosmetic product, you have to invest great amount of resources. Starting from the research and development up to brand positioning. A small shop starting out would be needing expertise and incur costs of formula development of about $6,000. Of course you have to make sure that your product are safe and effective to use, so you would need to do preservative efficacy testing and sensitivity testing especially if the product is going to be applied near the eyes. And take note, this we’re still only talking about research and development costs. There are still business, licensing, insurance, marketing, and sales costs. Huge competition also discourages market entry, for this reduces the overall profitability of firms in the industry. Huge competitors such as Avon, Revlon, Clinque, Estee Lauder, LR, Mac, and Unilever have a large market share plus the fact that there are also small scale competitors.

Threat of substitutes

As mentioned above, presence of many huge and small scale competitors would indicate a high threat of substitutes. If manufacturers increase the price of their products, consumers can easily find a substitute seller. Same as if the products have low quality. Hence, it is very important for the market players to be innovative if they want to reduce the threat of substitute.

Bargaining power of customers (buyers)

Since consumers have a lot of choices as to where they can buy cosmetic products, we can say that they have a high bargaining power. This will bring pressure towards the cosmetic manufacturers, for consumers can