Build your Private Label Brand (Part 4): By the Numbers

With everything you need to get your private label off the ground, it’s time to figure out the costs. Fortunately, determining the cost of starting your private label isn’t as hard as it seems. This time, we’ll break down the expenses you’ll have in building and establishing your brand and how you can work towards paying off those expenses while still making a profit.

Fixed Costs

Mandatory business costs for starting a private label typically fall under manufacturing and development costs. In addition, these costs may come as a single bill from your cosmetics manufacturer or several bills to pay over time. Regardless, the following items are paid to your cosmetics manufacturer:

Product Samples or R&D
Cosmetics product samples provided by your manufacturer exist for the business owner to test a product before going forward with manufacturing. Buying a few samples at a time is more expensive than purchasing bulk products, but overall, product samples aren’t meant for retail sales. Instead, they’re for the new private label business owner to experience the product before putting a label on it. You may have to pay for multiple samples depending on the stage of your product’s formulation.

If you are looking to create a customized formulation, be prepared to pay for Research and Development (R&D) fees to cover the costs associated with time, testing, and ingredients. As mentioned in the previous section (Part 3), R&D can give you a unique and customized formulation, but be prepared to wait for the products to be formulated and refined. 

Manufacturer Fees
Your manufacturer fees will make up most of your mandatory costs for starting a private label. After choosing your product manufacturer, these expenses will include any and all things you’ll need to get your product formulated, packaged, and produced. Your manufacturer fees will include general product manufacturing costs, product formulation and testing, and fees for package design. Your graphic design fees will also be included if you work with your private label manufacturer to design your logo and product labeling. Shipping costs and order sizes will also be included here.

There are many factors which determine your product cost (Cost of Goods Sold- CoGS) as it relates to the manufacturer. Depending on the quality of the products, types of active ingredients, degree of customization, minimum order quantity (MOQ). Keep in mind that the manufacturer has a heavy amount of fixed costs as it relates to labor, raw materials, machinery, packaging, testing, and filling. So the MOQ is often a large determinant of your individual product cost.

Minimum Order Quantity (MOQ)
Your minimum order size is your private label manufacturer’s minimum requirement for fulfilling an order. Minimum order quantities (MOQs) range from manufacturer to manufacturer, but larger orders generally cost less than smaller ones (on a unit basis). However, larger product orders might not be the best when ordering your first batch. Cosmetics products can expire, and you won’t profit from expired, unsellable bottles leftover from an order that’s too big! In addition, larger orders mean more pressure to sell your product. Smaller orders may sell out quickly if a product is popular. Overall, your first few orders will determine your product’s general order size for the future. It might be worth paying more per unit initially until you can determine forecasts and sales volume.

Some private label cosmetics manufacturers don’t have a minimum order quantity, while others require a minimum order size to make a profit. 

You’ll have to work with costs to determine your minimum order size. Most private label cosmetics businesses find their MOQ by combining an individual product’s cost with manufacturing and other hard costs for running the business. For example, if Janet sells her product at $15 per package and needs to cover at least $100 worth of hard costs, she’ll have to sell enough product to break even or make a profit. Things like product quality, ingredient concentrations, and packaging factor into the product unit cost.

Start-up Fees
E-commerce set-up (website/payments)
If you are planning to sell your products directly to the consumer via E-commerce, you need to set-up a website and also a payment and order processing system. Most of the current e-commerce platforms today like WooCommerce, Shopify, BigCommerce often have templates which you can yourself create a basic and easy-to-start website. In today's economy, you can often find a freelancer to set-up your website for a fixed or hourly fee. fiver.com and upwork.com are a few places to look for a freelance designer who can develop the UI/UX you are looking for. Consider if/how you want to integrate your social medias to the website as well.

Most of the e-commerce solutions (WooCommerce, BigCommerce, Shopify) require monthly fees, but will handle your sales processes and tracking, etc. You can also integrate these services with your 3PL to work seamlessly to manage inventory.

Storefront Rental or Web Domain Costs:
If you’re working in a salon or own a brick-and-mortar storefront, you’ll have to pay for the property. Owning a storefront includes rental or mortgage costs, electricity, water, heating bills, and internet service bills. 

You’ll need to pay for a domain name to house your digital storefront online. While some sites like Wix, WordPress, and Squarespace offer free website hosting services, you’ll still have to pay monthly for a custom URL or extra services like linking a social media account or uploading video files to your site. GoDaddy, Amazon Web Services (AWS) are also domain hosting options.

Variable Costs

In addition to costs from your manufacturer, there are a few additional costs to running a business, regardless of your product type. These secondary costs aren’t necessarily required to run a successful private label cosmetics business, but you may encounter them along your journey.

Shipping Costs - Third Party Logistics (3PL)
Your product shipping costs will vary based on the package size, fragility, weight, and shipping dimensions. Shipping costs will also change based on where you’re selling a product from and whether or not your selling a product online directly to a consumer. Partnering with fulfillment companies may also help streamline your shipping and order process. If you are using a 3PL, you need to consider storage costs, pack-and-pick, as well as actual shipping costs. For example, partnering with Amazon for product fulfillment is generally $39.99/month, while ShipStation or ShipBob’s pricing scales based on order quantity. For 3PL you can generally estimate $10-16 per shipment. 

When first starting, you might just keep the product in your residence and ship them yourself. This works well also, and many E-commerce providers can help you with shipping labels and tracking as well.


Advertising and External Marketing
Advertising costs include fees for both digital and in-person advertising methods. If you plan to advertise your product outside your storefront or office, you may need to print some posters and business cards. If you want to make a bigger statement, billboard space is readily available along highways. For online advertising, you’ll have to design and pay an ad company to show your advertisement on the internet. Your target audience may change online advertising costs depending on where you want to show your ads. For younger audiences, Twitter, Tik Tok, and Instagram ads will reach your target audience a lot more effectively than Facebook ads. On the other hand, YouTube advertising reaches a massive audience based entirely on viewer preferences. However, YouTube ads will feature video production costs alongside general advertising expenses.

Some advertising strategies, like guerrilla marketing or an MLM product showcase, will cost far less than traditional advertising methods. Guerrilla marketing, for example, relies on unique, unconventional advertising techniques made to be eye-catching and newsworthy. A product showcase or “party” is a small-scale version of guerrilla marketing commonly used by MLMs to create a local buzz about a product. The seller will host a gathering centered around their product and recommend it to friends, who will then recommend it to others in their circle.

Custom Graphic Design Fees
Although most private label manufacturers provide graphic design and package design services, you might want to partner with a non-affiliated graphic designer. Freelance graphic designers work based on commission, and you’ll have to negotiate commission rates for your artist and what they design. If you’re looking for private graphic designers, sites like 99Designs, Fiverr, and Design Pickle are good places to start.

FDA Registration and Regulatory Costs
If your manufacturer isn’t a member of the FDA’s voluntary cosmetics regulation program, you may have to pay for FDA registration and approval. For cosmetics businesses, FDA registration costs $449 per establishment. While the FDA doesn’t require registration to manufacture and sell cosmetics products, having “FDA approved” associated with your product will certainly put you above the competition.

Determining Your Profit Margin

Now that you’ve got your product ready to sell, it’s time to figure out how you’ll make a profit. Private label cosmetics businesses are already set to make a small profit from reselling wholesale cosmetics under a unique label. However, determining how much revenue you’ll generate per sale is essential to keeping any business up and running. To calculate your profit margin, you’ll need a list of your expenses. First, add up your primary expenses, including expenses required to set up your business. Then, add in the monthly or yearly expenses required to keep your business running. These expenses may include future orders, website costs, or insurance policies for your storefront and employees. The total is how much you’ll need to make within your first year of operation.

Generally, private label retailers sell their products at prices 20-30% higher than wholesale prices. However, if you’d like to avoid price changes, sell your product at a higher margin– around 40 to 50 percent. Compare your pricing ideas with other private label sellers to determine the best average price to sell your products.

Paying for Everything

Even with your profit margin determined, it’ll still take some time. Unfortunately, not all business associates are willing to wait. So how do you pay for your major expenses from the start? 

Loans and Other Financing Options
One way to help pay for your startup costs is with loans. The United States’ Small Business Association provides loans and other financing options for burgeoning small businesses that feature different interest rates and payment options based on your business’ size, scope, and specialty. Links to SBA loan information are available at the end of the lesson.

Bootstrapping and Scaling Your Business
There are two ways you can generate revenue with your small business: bootstrapping and scaling. Bootstrapping a business means that you start out with pre-existing funds. For small businesses, this looks like using money from your savings to pay for your fixed costs. The primary goal of a bootstrapped business is to focus on generating revenue quickly and efficiently by building relationships with loyal customers and hiring people who will make your business earn revenue. Treat this portion of growing your business like a testing phase: this is the time to focus on finding out what works for your business in terms of profitability and build upon what works to find success.

The next step to growing your small business is through scaling. Scaling your business means setting it up for further growth in the long run by planning your upcoming expenses, examining current sales patterns, and developing sales leads for further expansion. You’ll already have information from the bootstrapping phase regarding what works for business profitability during this step. Your main goal is to use those skills and apply them to different aspects of your business for further growth. If you’re a small business looking to scale upward, selling online might be just the thing for you.

At the end of the first three months, your expenses should look something like this:

Financial help

If you’re looking for some financial help to start your small business, check out the Small Business Association’s resources for startup loans, including their loan information, loan calculator, and general contact information:

• National SBA
• SBA Loans to Jumpstart your Business
• How to Calculate Loan Amount for SBA
• SBA 7a Loan Calculator
  
  

So, in this section, we’ve discussed the general costs of starting your business. From primary, fixed costs to additional, optional costs to help your business stand out, you’ve got an idea of what you’ll need to pick and choose to make your private label business a success. Ultimately, budgeting your business will take time and a lot of math– it’s okay if you need an extra hand managing it all! 

NEED HELP??

If you’re looking to get started with your private label business today, send us a message! At Hale Cosmeceuticals we have been working closely with Estheticians, Dermatologists, Cosmetologists, and Entrepreneurs to help build and work as a brand incubator!! We streamline the process for you and our products have a 30-year track record of customer and business success! We’d be happy to help get you started on your journey. Please reach out to us for more information!!