So many brand owners are swept along on a wave of excitement having created a product that they know will be successful but without knowing their product profitability.
You’ve had to spend a load of money on design, production, trademarking, formulations and now you’re ready to start selling and make some real money. Well for many brand owners there’s a step that’s been missed right at the beginning that is critical to spend time and effort perfecting. Knowing your product profitability and understanding how you’re going to make money before you start on your journey will significantly increase your chance of success.
So where do you start when calculating your product profitability.
Well, if you have done your research and looked at the competitor landscape you will likely have decided the range of products, the brand differentiation, the brand positioning in terms of premium, masstige, or mass and therefore you will have an idea of the retail price points.
With that stake in the ground complete, you should assume an average category margin for your type of product. If you don’t know, then initially use 50% as an estimate. This will give you a price to the retailer or the MSP (Manufacturer Selling Price). As a rule of thumb, your cost of goods (COGS) should be a maximum of 50% of your MSP. So as an example, if your COG’s is £2.50 you would want your MSP to be at least £5, therefore with a 50% margin your RRP (Recommended Retail Price) would be £10. You would then verify £10 as your RRP against the competitor brands to see if there is some further stretch.
The gap between the COGS and the MSP multiplied by the number of units you think you will sell in a year will have to fund marketing, people costs, distribution costs and still allow some profit. The bigger you can make this gap the better, so negotiating hard on ingredient and component costs is super important. If the gap isn’t there, don’t be tempted to just increase the suggested retail price and therefore the MSP unless you have great rationale for why customers will pay that extra.
The moral here is do your homework…
Negotiate hard, plan for profitability and seek help if you’re not sure. Much better to get it right at this point than having unwelcome surprises later.
If you need some help to understand all the potential costs and revenues for your brand then do get in touch.