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The beauty industry is not at all transparent about how it sets prices on products. It’s known, vaguely, that margins and markups are high, but most shoppers probably don’t know how a lipstick gets from a mood board to your local Sephora. And why do some cost $8 while others cost $50?

It’s a question that brands never speak about on the record, and the secretive attitude is prevalent all the way down the supply chain. Some manufacturers and ingredient suppliers even require beauty companies they work with to sign a nondisclosure agreement, according to industry sources.

So-called radical transparency has been a big buzzword in fashion as more brands face scrutiny about sustainability and labor issues. It’s a concept that is just starting to hit beauty, especially as consumers are demanding more “clean” products and information about ingredients. One of the most visible companies peddling transparency, at least as it relates to pricing, is Beauty Pie, which sells makeup and skin care at cost after members pay a monthly fee. It was founded by Marcia Kilgore, the serial entrepreneur who launched Bliss in the ’90s. The site lists the actual cost breakdown of each product, in three general categories: product/packaging, warehousing, and safety/testing.

A post shared by Stowaway Cosmetics (@stowaway) on May 25, 2018 at 5:27am PDT

Julie Fredrickson, the CEO and co-founder of Stowaway Cosmetics, is a big fan of Beauty Pie. Fredrickson launched Stowaway in 2015 with makeup artist Chelsa Crowley, who is no longer with the company. The company has grown 30 percent month-over-month since launch. (A bit of early fashion internet trivia: Fredrickson was also the founder of Coutorture, a network of fashion and beauty blogs sold to PopSugar in 2007.)

All of Stowaway’s products are shrunken versions of makeup basics in classic shades. “I wanted to solve my own problem, which is: How do I get an entire routine locked up in a teeny little bag to take with me?” Fredrickson says, also noting that she thinks not many women actually finish a whole full-size lipstick. She categorizes it as a premium brand based on its ingredients and performance.

Fredrickson offered to open Stowaway’s books to Racked and speak frankly about what it costs her to make products. Every bit of the process is an expense: the lipstick tube, the decoration, the product itself, filling the product, the outer box, and putting it in a box to ship it to customers. “Beauty is the only industry in which I have found that the aphorism ‘you get what you pay for’ isn’t true, and that really bothers me,” Fredrickson says.

Exposing a bit of the underbelly of the industry in which she makes money is a risk for her and her business, though obviously it could benefit Stowaway if customers perceive this as a genuine goodwill gesture. (More on this concept shortly.) Regardless, she came with literal receipts as well as lab samples and promotional materials from suppliers touting the major name brands they work with.

How much does it cost to start a makeup company?

“If you’re doing it with less than 2 million bucks, good luck,” Fredrickson says. Stowaway raised $1.5 million at launch from a group of investors, so this is something she knows about. “I was like, ‘That’s a shit-ton of money!’ But the amount we spent just on product when we first launched was $250,000.” (For comparison, Glossier raised $2 million at first, then another $8.4 million a year later. It has subsequently raised an additional $76 million. Fredrickson won’t disclose any subsequent rounds of funding Stowaway has had.)

Then take into account creating and maintaining a website, warehousing, marketing, and operational costs, and it’s easy to see how you can blow through startup money. All of this is also eventually factored into the final retail price of products.

Retail versus direct to consumer

Stowaway sells mostly directly to consumers via its site, but it sells kits in Bluemercury and has done one for J. Crew. The decision to wholesale to retailers can be fraught for small brands, as illustrated by the recent Sephora and Obsessive Compulsive Cosmetics lawsuit. In general, when a retailer wants to sell a company’s products, the retailer buys those products from brands at 50 to 65 percent less than the retail price, then marks them back up to sell, taking that profit.

That means the brand needs to sell a lot more to make a profit, which explains why makeup prices can sometimes be 10 times higher in a store than what they cost to make. Both the store and the brand needs to see a profit. Selling products to retailers means giving up a lot of potential income and control; the upside is that you can make that up in volume as well as get incredible exposure. Of course, if a brand chooses to stay direct to consumer, that comes with its own costs, like paying more staff and maintaining a website. Shipping and handling can also be a big financial hit. It all contributes to the final price you the shopper pay.

One product can come from three different countries

To understand where the money goes, follow where the product goes. Generally, the formula comes from a different supplier than the palettes, tubes, and packaging. Formulas, once they’re made in bulk, are often filled at an entirely different location. This is the norm, unless it’s a company that’s vertically integrated like ColourPop or Deciem, meaning it owns and manages most of its supply chain. Very few beauty brands are set up like this.

Stowaway’s components come from China and its pigments come from Italy. While many products are filled in Italy, a few are filled in the United States. All of this travel for a single product means increased costs and logistical nightmares. Lipsticks in particular have to be air-shipped rather than shipped on a ... ship, because of temperature variance, according to Fredrickson. An ocean crossing can result in a gob of melted wax. “I actually care a lot about Trump’s tariffs. That is a very real problem for me,” Fredrickson says.

Frederickson is looking into sourcing formulas from Korea, which has a booming cosmetics industry. Stowaway can then manufacture and fill in the same place, which is more cost-effective in the long term, not to mention that it’s quicker to get the lipstick tubes from China to Korea. “The Italians, for all of their flaws when it comes to speed, really understand color, but the Koreans are much faster on the chemistry,” she says. “And remember that quote that Netflix gave: ‘We have to become HBO faster than HBO becomes us’? That’s happening in cosmetics, and America is like a distant 10th on the list of places you would source from.”

Lipstick packaging is expensive

Fredrickson says lipstick is one of the most expensive products to manufacture. For Stowaway, it costs about $2.48 to make its miniature version, though she says that can vary by about 20 cents in either direction.

Prices are not static and can change from batch to batch. She used to charge $12 for one but has since dropped the price to $9. For comparison, a standard-size lipstick at Beauty Pie is listed as $3.13 to $4.45 depending on formula and color, which would be a retail equivalent of $25. Pigment can be expensive, with lipstick formulas costing about $1 per unit; Fredrickson says browns are “super cheap.” Pigment price can vary between colors by as much as 50 cents per unit.

“Goop in a bottle is cheap,” Fredrickson says, mainly because there is less labor involved. A lipstick requires more elaborate machinery and a “hot pour” via an expensive mold. Stowaway had to make a custom mold for its lipsticks because of the size.

The real cost is in the packaging, though. Brands pay for the lipstick base and caps separately; even the little sticker on the bottom with the color name is a separate cost. They range from 30 to 60 cents for each tube half. Decoration with logos and other design increases the cost. Stowaway adds a matte, rubbery coating called Soft Touch, which is the same as what’s on Nars’s packaging. Fredrickson chose it because it looks and feels more luxe, but it can increase the cost of a cap by 10 cents or more. A complete tube can cost from 60 cents to more than $1, depending on the treatment and how many a company orders.

The lowest order quantity is usually 10,000 units at a time. If a brand can order 100,000 at a crack, the price goes down significantly. Fredrickson notes that large companies order in the millions, and costs are therefore significantly less. “Sometimes the components are so expensive that we can’t afford to keep as many on hand as we would like,” she says.

It’s easy to make dupes

In the beauty industry, finding dupes, or products that closely mimic popular yet expensive favorites, is a cottage industry. Fredrickson does not shy away from saying openly that she sometimes seeks to dupe things. For the brand’s new Burnt Rose lipstick, for example, she wanted it to be the same color as Charlotte Tilbury’s uber-popular Pillow Talk, which retails for $34. On Stowaway’s site, there’s even a header for each product that reads “What It’s Like,” and compares it to its name brand equivalents.

“It’s actually really easy [to dupe], and this is why nobody patents anything, because then you have to reveal the exact proportions of ingredients,” Fredrickson says. She’s right.

“It is really a simple matter for a cosmetic chemist to start from an existing formula and recreate something that works just as well,” writes cosmetic chemist Perry Romanowski. “If you have a patent, it’s an even easier task...Making something that does not violate the patent but works just as well is easy. ... Consumers are not good at discerning subtle differences between similar formulas.” Oof.

Half the size doesn’t mean half the cost to produce

Smaller products, which is what Stowaway makes, don’t necessarily cost proportionally less than their standard-size counterparts to make, according to Fredrickson. For example, Stowaway’s 2.7-gram powder blush costs $3.98 to make; Beauty Pie’s 3.5g version costs $3.43. So all those minis you’re tempted to buy at the checkout lines at Ulta and Sephora are not necessarily profitable for those brands; they’re hoping you’ll get hooked and buy the larger version.

“Sometimes minis are even more expensive to make, as they require more precision [to tool]. So when a retailer takes 65 percent of your retail cost and you have almost the same costs of goods to manufacture a smaller size as a larger size, you are often losing money if you sell it at retail,” Fredrickson says.

The bottom line about the beauty industry’s bottom line

Giving customers a peek into what it costs to make a lipstick is one thing. But the $17 billion question here (that’s how much the US prestige beauty industry sold in 2017) is: How do the prices consumers pay jump by ten times or more? There are a lot more intangibles that go into pricing besides just deciding to sell through retailers or not.

“Cosmetics are marked up so much because conglomerates aren’t just in the ‘sell you great makeup’ business. [Some of these] companies are in the lifestyle and brand business, and because cosmetics are so cheap to make, they use the opportunity to make 90% profit on the makeup they sell you in order to subsidize the rest of their business,” says Fredrickson. “Your lipstick is paying for everything from really expensive brand campaigns, to unprofitable designer clothes, to the profits for the retailer that sells the makeup to you.”

In an unusual move for a beauty company, Stowaway has added cost breakdowns for all of its products to its website. Its eyeliner costs 95 cents to make. The eyeshadow palette costs $4.08. Concealer in a tube is $2.44.

The brand has also also just dropped its retail prices on everything by several dollars. Fredrickson denies ever having received complaints about the old pricing, though brands, most recently Bliss, will make big price corrections if the market calls for it. Stowaway dropped prices, “because we can,” says Fredrickson, noting that “consumers are used to paying [higher] prices.” (Recently, an article in Beauty Independent for new beauty entrepreneurs advises them to “trend high on the price.”)

Stowaway’s increased transparency and lower prices have so far garnered positive feedback from customers. The cynical take would be that this is a savvy marketing tactic in a time of fake news, fake product reviews, and influencers peddling products for big bucks that they don’t disclose. But the brand might also be shooting itself in the foot with this strategy by possibly alienating retailers and decreasing its own profit margins. People also respond emotionally to brands and branding, which is why they’re often happy to spend for products that speak to them.

Fredrickson is sanguine about the risks. “When it comes down to it, I’m a capitalist and I’m trying to get you a great product.”