Beauty brands are increasingly working with point-of-sale lenders.
Lenders like Afterpay, Klarna and Affirm are the modern and digital equivalent of layaway, but customers receive their purchases immediately instead of waiting to pay it off first. While luxury beauty products or expensive facial devices may warrant the need to pay in installments, products in the beauty category are typically much less expensive than those in the fashion, electronics and furniture categories. Despite this, beauty companies have racked up a long list of partners, ultimately influencing customer behavior and expectations. Afterpay works with Haus Laboratories, Fenty and Jeffree Star Cosmetics, among others. Klarna, meanwhile, boasts Ernest Supplies and several other indie brands, while Affirm works with Pat McGrath Labs and men’s brand Scotch Porter.
“Consumers are changing the way they like to shop and have different ways that they feel comfortable shopping,” said Molly Rosenman, Haus Labs senior director of digital. “Our price point is accessible [between $16 and $34], but everyone comes with their own set of financial circumstances.”
Indeed, many younger millennials growing up in the shadow of the 2008 financial crisis have become suspicious of buying on credit, instead relying more on debit cards. However, wages have not risen in tandem, suggesting that despite a preference for paying with cash, customers may not have it on hand.
Heather Marianna, founder of clean skin-care brand Beauty Kitchen, which works with both Afterpay and Klarna, said she noticed millennial-friendly brands like Morphe and Kylie Cosmetics relying on point-of-sale lenders. She then decided it would make sense for her own brand to attract that customer base. Beauty Kitchen customers range from 15 to 65 years old, and Marianna anecdotally said customers who use Afterpay and Klarna are often teenagers or college-aged women. Since partnering with Afterpay and Klarna in July 2019 and December 2019, respectively, Beauty Kitchen has experienced a 10% sales increase, with transaction values increasing between 100% to 300%, she said. Furthermore, at least 20% of all sales are transacted through Klarna or Afterpay, and 80% of those sales are from new customers.
Some of those customers were likely driven to Beauty Kitchen because point-of-sale lenders list their brand partners on their own websites. Following Google, Afterpay is the second-largest driver of organic traffic to e-commerce sites in Australia (where Afterpay is based) through its app, according to Nick Molnar, Afterpay co-founder and CEO.
Because point-of-sale lenders have ultimately encouraged customers to purchase more, these services have received some criticism. Afterpay was rebuked in 2018 because 24% of its income came from late fees, indicating that these services were trapping shoppers into a new form of debt. Since then, it has implemented a late-fee cap, and its share of late-fee revenue dropped to about 17%, according to The New York Times.
For men’s grooming brand Scotch Porter, the objective in using Affirm was not to increase basket size but to increase conversion. Throughout 2018, the brand polled approximately 300 people who had abandoned carts to ask why they did not purchase, and determined first-time customers were still too price-sensitive to purchase, despite a 60-day money-back guarantee and a price range of $10-$50 per product, said Calvin Quallis, founder of Scotch Porter. After adding Affirm in the fourth quarter of 2018, Scotch Porter has seen conversion rates increase by 20%. However, the number of new customers the service brings in is small, at around 7%.
Unlike Marianna, Quallis said the popularity of point-of-sale lenders within the beauty category was not a motivator.
Ross Greenberg, an independent e-commerce consultant, said that, in his experience, the benefits of these payment services were motivation enough to convince beauty companies to use them.
“I don’t think it’s a herd mentality, because I think game theory is in direct contrast with that,” said Greenberg. “Finding pockets of opportunity that are against the grain is how you stay ahead of the curve.”