Article by: Valerie Patton
This is a joint article written by cosmetic chemists Valerie Patton & Perry Romanowski
The original question was posted on a business forum and the questioner specifically wondered, how profitable would a natural cosmetic business (skin care line) that I started in my kitchen be? Many of you may be wondering the same, so here are some key things you need to know.
The cosmetic market is a pretty good one as nearly everyone on the planet uses some kind of personal care product. There is a ton of competition of course, but consumers are always looking to try something new and with the right dedication you can create a following of loyal consumers who will be the basis of your business for years to come.
Cosmetic start up costs
Starting your own skincare line from home *can* be profitable, but how quickly profitable is where it gets sticky. If you are a small shop starting out, it is unlikely that you are going to get your products into major retail stores or even mid sized local stores. Your best bet is to begin online where you can build some sales data which you can then take to your local markets to convince them to carry your product. If you take the online route, your key start-up costs will be in three primary areas including product development, marketing, and business expenses.
Of course, these costs can vary widely depending on the formulations you are making but here is a general ballpark for what you can expect.
Product development costs
When people think of starting their own cosmetic line, the product development costs are what they generally think about. Basically, these costs include anything related to creating your product such as raw material costs, packaging, and labeling. It also includes the cost of production activities such as mixing the materials together and filling them into the packaging. Cosmetic formulations can run anywhere from $0.10 per pound to $3 per pound but on average you can guess products will cost about $1 per pound. Packaging & labeling will cost another $1 per unit. Add in production and filling costs and your average per bottle cost will be about $2 – $3 per unit.
But you can’t just make a few bottles at a time as you’ll have to buy minimum quantities of the raw materials and bottles. To get the costs to $2 – $3 per unit you are going to have to make a minimum of 500 — 1000 units. If you make less your costs will go up significantly.
So, figure this part of product development will cost you around $3000.
Hidden product development costs
While $3000 doesn’t seem too bad, the product development costs are not done yet. If you are serious about running a cosmetic business you MUST test your products to ensure they are safe and effective. Preservative Efficacy Testing is a must. It can be a little pricey to start out if you have multiple products, but the one-time cost of this (~$350/product) is far less than payment on a lawsuit. Sensitivity testing should be done too, but can be optional, if your budget is super tight. However, if the product is going to be applied near the eyes or has ingredients like SPF, AHAs or BHAs, etc, you should really consider budgeting this in. These tests start at $800 and go to $1500 at some labs in the California area. If you’re selling an SPF product, don’t forget that SPF testing will probably cost you around $3000-$4000. Note these are ballpark figures.
So, the hidden costs of formula development have now pushed your cosmetic start-up costs to about $6000. Make sure these costs are tracked during development with processes like Workday’s financial management systems.
Cosmetic business costs
If you are going to sell cosmetics and you don’t want to lose everything, you should incorporate. In the US you could conduct your business under a Sole Proprietorship, but this makes you completely liable for anything bad that might happen as a result of your products. You would be risking your savings, your car, and your home. You do not want to do this. Incorporate to protect your personal assets from liability. This will cost you about $500.
Now, you also need to further protect yourself. Whether you’re the formulator, manufacturer, or skincare company, get insurance. There are two basic types to be considered – Property Insurance and General Liability Insurance. Property insurance is just that – it protects your property, like rental insurance would. In the event of, let’s say, a fire, everything related to the retail aspect of your business (computers, your product inventory) are covered. The insurance company will write you a nice, big check for what you lost. This insurance is a great idea for a skincare or hair care company, in the event of misfortune, but if your budget is tight, it is probably not necessary. Formulators and manufacturers don’t necessarily have to have this one, but again, it’s a good idea.
Anyone serious about a cosmetic business should have is general liability insurance. And, unfortunately, this is the expensive one. This insurance is in the event that someone experiences an adverse reaction to your product, or slips and falls on your property. The cost of this insurance is typically based on how much sales your business has during the year. The limits are set so that the insurance company will pay a total of X amount of dollars (general aggregate limit), and will only pay a certain number of occurrences or claims. The higher your sales, limits, and occurrences, the higher the monthly premium. Formulators should have this insurance in case their formulation is the reason for the occurrence, and likewise for manufacturers – if something they did during the manufacturing process contaminates the product and causes the adverse reaction, they are responsible.
Sometimes, if you work with contract manufacturers and or contracted formulators they will “umbrella” the cosmetic company on their policy. This means that the manufacturer or formulator’s insurance company is including your products on the insurance. It does not mean that you are insured individually as a cosmetic company. That is why it is important for your company to have its own insurance. Formulators and manufacturers can be insured until kingdom come, but ultimately responsibility falls on the your company for the safety of the products. If the product doesn’t perform the advertised claim, or you do something to make the product unsafe, you are responsible. Selling homemade products is a huge risk – and any adverse reaction can potentially cost you thousands or millions. So, you just have to weigh the odds.
Finally, the last thing to consider about insurance. If your dream is to get your product into a large retailer – most major companies require proof of insurance before selling your product, as they will assume no liability. Insurance costs will depend on lots of factors but a rough estimate is ~$100 per month per $1,000,000 of insurance.
There are lots of other business related costs such as fees for lawyers, accountants, employees and taxes but the details will be highly dependent on where you are located and how you run your business. You should just figure on some number for business costs like these.
Marketing & Sales Costs
The final area of start-up costs that we’ll cover is your marketing costs. This represents any money you put out to develop and sell your product. If you begin an online business (which is what we would suggest) the initial costs can be fairly low. Running a website can be done for less than $500 a year. Online promotion can be done for next to nothing and requires mostly an investment of your time. The amount of time you dedicate to online marketing will directly relate to how much product you sell. More time generally will mean greater sales. The activities that you do would be writing blog posts about your topic, participating in social networking sites, commenting on other people’s sites, and conducting online auctions.
Filling orders will be your next significant cost. You will need to have money available for boxes for shipping, people to actually fill the orders and shipping costs. When you are coming up with the price of your product don’t forget to including shipping as part of your costs. This can often be as much or more than the cost of the product. For example, if it costs you $3 to make your product, shipping costs will easily be $3 so you need to charge $6 per unit just to break even.
Another option is to get a booth at a local market and sell your products directly. Booth costs vary but you can get some for between $50 and $125 a day. If you can sell more than that in a day then you’re making a profit. Once you’ve established your brand you may also attempt to get your product sold by some of the local shops in your area. For hair care brands, go see if your local salon will carry your brand. For skin products, perhaps a local spa or specialty gift shop would carry your products. You will have to give up a significant amount of your direct sell profit but you’ll ideally make it up with a high volume of sales.
Cosmetic Start up Costs
A cosmetic business can be profitable but it is much more complicated than making a lotion in your kitchen and selling the product to a demanding public. When you figure in the costs of product development, business, and marketing you realistically need about $10,000 – $15,000 to invest up front. Once you start making sales you can make that money back but understand that this is the minimum amount you are going to need to get started.