To Co-Pack or Not to Co-Pack: That is the Question
You’ve developed a brilliant consumer product idea. Retailers are expressing interest, and the future looks promising. But now comes a pivotal decision: should you invest in opening your own production facility or partner with a co-packer? This is a dilemma faced by many startups today, and the answer isn’t one-size-fits-all. Let’s break it down to help you make an informed decision.
Focus on Growth, Not Overhead
Capital is the lifeblood of any startup, and in the early stages, it should be allocated toward growth—building sales and scaling volume—not running a plant. Before diving into manufacturing, it’s critical to understand your costs and ensure your financial foundation is solid.
Get Your Numbers Right: The Role of a Proper P&L
A well-structured Profit & Loss (P&L) statement is your best friend. It’s the scorecard that helps you assess your business’s financial health. Many entrepreneurs make the mistake of misclassifying costs, which skews their margins and can lead to catastrophic financial decisions. Here’s a quick refresher on what should go where:
Costs of Goods Sold (COGS)
COGS includes everything directly related to making your product, such as:
Raw Materials: Ingredients, labels, and packaging.
Labor: Manufacturing, shipping, receiving, and storage.
Facilities: Production-area rent, utilities, and depreciation on equipment.
Freight & Transportation: Deliveries and fuel expenses.
Insurance: Allocated workers’ comp and health insurance for production staff.
Miscellaneous: Uniforms, equipment rentals, and temporary labor.
Sales, General & Administrative (S, G&A)
S, G&A covers the operational side of your business, including:
Labor: Sales, marketing, and administrative staff.
Sales Expenses: Travel, trade shows, and business development.
Overheads: Office supplies, internet, and subscription services.
Professional Services: Accountants, lawyers, and consultants.
Pricing: The Key to Success
Properly capturing all your costs is essential for pricing your product. If you underprice, you’ll struggle to cover your expenses, no matter how much you grow. A good accountant with industry experience can help you structure your P&L and set the right pricing strategy. This is an investment worth making.
Don’t Overlook Distribution Costs
One critical aspect that newer brands often miss is the additional 25-30% margin that distributors will take on top of your wholesale price. While your pricing may seem competitive initially, once the distributor takes their share, your product could end up being priced out of the market. This often leads to retailers dropping your product, which can be devastating for your business. Be sure to factor this into your pricing from the start to avoid costly surprises.
When to Move Into Your Own Plant
Once your P&L is in order, you can calculate whether it’s time to invest in your own facility. Here’s a simple formula to guide you:
Gross Profit Dollars per Unit = Sale Price (per unit) - COGS (per unit)
Monthly S, G&A Costs ÷ Gross Profit Dollars per Unit = Units Needed to Cover Overhead
Example:
Sale Price (per unit): $30
COGS (per unit): $20
Gross Profit (per unit): $10
Monthly S, G&A Costs: $100,000
Units Needed: 10,000
If you can consistently sell enough units to cover your overhead for a full year, even accounting for retail seasonality, then it may be time to open your own plant.
Why Start with a Co-Packer?
For most startups, working with a co-packer is the smarter choice. Here’s why:
Efficiency: Co-packers often have advanced equipment and lean production processes, allowing them to produce at a lower cost.
Focus: Partnering with a co-packer lets you concentrate on building your distribution network and growing sales.
Flexibility: While co-packers may require larger minimum runs, they save you from the high fixed costs of operating an underutilized facility.
The downside? Minimum production runs can be daunting for startups. You may need to commit to 100,000 units instead of the 10,000 you’d prefer to make in-house. However, this trade-off is often worth it to preserve capital for scaling your business.
The Bottom Line
Nothing happens without a sale. Your primary focus should be on growing your distribution and sales volume. A co-packer can help you achieve this by handling production while you invest in customer acquisition and market penetration.
Moving into your own production facility is a milestone, but it’s one that should only be reached when your sales volume justifies the investment. Until then, let your capital work for you by driving growth—not funding overhead.
Remember, the goal isn’t just to grow your business but to grow it profitably. With the right financial structure and strategic decisions, you’ll set yourself up for long-term success.
Need Help with Pricing or Distribution Strategy?
If you’re unsure about your pricing structure or how to account for distributor margins, let’s set up a call. I specialize in helping brands like yours navigate these challenges and make data-driven decisions that lead to sustainable growth. Contact Me Today to schedule a consultation and take the guesswork out of your strategy.
