Written by Alexis Forbes-Moorehead
Hey beauty innovators! In my previous post, I discussed the importance of determining your brand’s philosophy and identifying an ideal target market before new product development. Now that you’ve officially identified who you are in this industry and the population you want to serve, let’s talk about developing a budget and making critical investments for your beauty innovation.
Determining a Per Unit Budget
Working capital is a must when starting any business. One of the first things I ask my clients is, "What is your per unit budget?”. When I ask this, I am referring to the maximum amount you are willing to invest to make a single unit, including raw materials and packaging. For example, let’s say I am a budget-friendly brand and I want to spend no more than $3 per unit. So, I would consider a budget of around $2–$2.5 on materials and $0.50–$1 on packaging.
Why is this so important? Setting a budget for a single unit impact some of the most important aspects of product development, which are ingredient and packaging selection. If I knew that I was only willing to spend $2.50 per unit on materials, I would use more budget-friendly raw materials and packaging.
For the sake of clarification, assume that a manufacturer offers you a surfactant for $15.60 a kilogram, which is equal to 1,000 grams. In a 237-gram bottle of lotion formula, you use this surfactant at 4%, which equals 9.48 grams of the surfactant used per bottle. This will cost you roughly $0.15 per unit. You would now perform similar calculations for each component of the formula, giving you the overall material cost figure for each unit.
Materials and Packaging Investment
Another important investment consideration to keep in mind is that when purchasing ingredients and packaging, suppliers tend to have large minimum order quantities (MOQ). From my experience, raw material distributors typically have a starting minimum order quantity of about 25 kilograms. That means, you’d pay roughly $390, excluding shipping costs, for the surfactant mentioned in the scenario above. Packaging prices vary depending on whether they are stock or custom. The average minimum order quantity I’ve seen is about 5,000–10,000 units.
If buying directly from a manufacturer or distributor isn’t feasible due to their MOQ, you can always purchase from a wholesaler to get started. Wholesalers usually have smaller order quantities readily available. The caveat to that is that wholesalers usually have a 30–50% markup in price, which can have a huge impact on the product’s budget as well as profit margins.
Research and Development Investment
Cosmetic formulation is not about combining raw materials and hoping for a stable product. Contrary to popular belief, it is a science that is a combination of chemistry, biology, and physics principles that work in tandem to create a beauty innovation. This fact tends to be lost, as many YouTube University experts have set the precedent that you can formulate market-ready products without basic scientific knowledge and/or formulation training.
Although there are many credible resources out there that provide accurate information and sometimes formulations, it is still the responsibility of the brand to ensure the safety and efficacy of the product before it goes to market. Not doing so could lead to irreversible damage to your brand before it could even meet its full potential in such a competitive industry.
Working with a credible, professional formulation chemist or cosmetic formulator is an investment. Research and development fees typically range anywhere between $1,000-$20,000, and this may or may not include pre-market testing. Common pre-market tests include accelerated and real-time stability testing, antimicrobial efficacy testing (USP-51), packaging compatibility testing, claim substantiation testing, and so forth. Pricing for these services varies from lab to lab. Working with a professional is a one-time investment. If I were to ask you, "Would you invest $5,000 to make $1,000,000?", I am pretty sure the answer would be yes.
With the recent enactment of the Modernization of Cosmetics Regulation Act of 2022 (MoCRA), it is now more crucial than ever that brands consult with a professional. Although some provisions of the act are not applicable to small businesses with a revenue of less than one million dollars, it is crucial to be proactive and plan for the future. After all, I am pretty sure you won’t be investing thousands of dollars just to maintain the title of "small business". #MajorEnterpriseEnergy
To Sum It Up
As a brand owner, you must ditch the mindset of thinking of money spent as a cost and instead see it as an investment. Your brand is a business; therefore, you are an entrepreneur and not a hustler. Hustlers make money to survive, and entrepreneurs raise capital to build wealth. The most valuable things you can ever do to ensure the longevity and vitality of your brand are investing and strategic planning. So, develop a budget strategy, make investments, and prosper!