Know Your Product Profitability: A Critical Step for Success
Many brand owners get caught up in the excitement of launching a product they believe will be a success, but they often overlook a crucial factor: understanding their product’s profitability.
After spending money on formulations, design, packaging and production to name a few, you’re finally ready to start selling and see the returns. However, many brands miss a key step early on—knowing exactly how much profit their product will generate. Taking the time to understand your product’s profitability from the beginning is essential and can significantly increase your chances of success.
Where to Begin: Calculating Your Product Profitability
If you’ve done your research on the competitive landscape, you’ve likely decided on your product range, brand differentiation, and market positioning (whether premium, masstige, or mass). Based on this, you should already have an idea of your target retail price points.
Once you have a general retail price in mind, it’s time to work backward. Start by estimating the average category margin for your type of product—if you’re unsure, a 50% margin is a good initial assumption. This will give you a Manufacturer Selling Price (MSP), or the price you will charge retailers.
As a general rule, your Cost of Goods Sold (COGS) should be no more than 50% of your MSP. For example, if your COGS is £2.50, your MSP should be at least £5. With a 50% margin, this would lead to a Recommended Retail Price (RRP) of £10 before tax or VAT if you’re in the UK. At this point, verify that the £10 RRP before tax aligns with competitor pricing—if it’s too low or too high, adjust accordingly, but don’t over stretch the pricing unless you have a strong rationale for why consumers would pay more.
The Profit Gap: Key to Financial Planning
The gap between your COGS and MSP is what will fund everything else: marketing, your team, distribution, and most importantly, profit. The wider this gap, the better your chances of profitability, so it’s critical to negotiate ingredient and component costs rigorously.
If the gap isn’t large enough, resist the temptation to simply raise your retail price. Customers will only pay more if you can clearly demonstrate extra value—without that, an inflated price could hurt your sales.
If you’re pitching to retailers and are likely to need an additional production run to fulfill the retailers pipeline and stockholding quantities, understand the latest COG’s from your suppliers as these may differ from your last production run. Going into the meeting with accurate COG’s and lead times will give you confidence you can meet the retailers dates.
The Bottom Line: Preparation is Key
The takeaway here is to do your homework and understand your commercials. Plan for profitability from the start, and don’t leave it to chance. Negotiate hard on costs with suppliers, refine your pricing model, and seek advice if you’re unsure.
It’s far better to get your numbers right in the beginning than to face unwelcome surprises down the road.
If you need guidance on understanding all the potential costs and revenues for your brand and how these change as you scale your business, we’re here to help. Contact us, or book a strategy session, and let’s ensure your brand is set up for profitability from day one.