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When a contract manufacturer ask you for a “price target” per unit, how should you respond?
Naturally, it’ll depend on the formula,so should you calculate the cost of the raw materials and do some percentage added to that cost? And if, what %?
I find this practice a bit strange, so wondering why they’re asking. -
10 Replies
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The contract manufacturer should provide to you a unit price for production with various price break points based on the volume of the manufacturing run.
Have you an idea of the number of units you would like to have produced in each manufacturing run? If so, then you can calculate the volume of each ingredient required for the production run and break that down to price per unit. But, beyond that, the contract manufacturer should be providing YOU with the price per unit for them to manufacture for you. You can’t possibly know what their overhead and manufacturing margins are that they need to cover to manufacture for you at a profit.They could be asking for any number of reasons and exactly what “price target” are you (they) referring to. Is it your target price at retail to the consumer? Is it your manufactured target price (production cost)? First, clarify what ‘price target’ you are referring to.Has the contract manufacturer priced-out the manufacturing run for you and told you what the manufactured unit price is? Or, are you at the beginning stages of the discussion? Perhaps, if their manufactured cost to you is say $3.00 per unit and your “price target” was $2.00 per unit, then you have a “disconnect”If the contract manufacturer is trying to get you to throw out a number as your “price target” for them to manufacture for you and they have not yet given you a unit price to manufacture based on your formula, I would be cautious. It should work the other way around. You give them a formula, they come back with a unit price for manufacturing. You consider that unit price relative to your target retail and wholesale prices. If the unit manufacturing cost is too high, you consult with them on ways to reduce the cost … look for ingredient substitutes or lower percentages of expensive ingredients in the formula to achieve materials cost savings.And, always get quotes from more than one contract manufacturer. -
Under most circumstances, the only legitimate reason a contract manufacturer should ask you for a “price target” is if they are doing some or all of the formulation for you. In that case, they will need to know what their raw material cost limit is, so asking you for a target is reasonable.
If you already have an established, stable formula, then (in my opinion) the only reason for them to ask you for a target is as a sleazy negotiating tactic. They want you to give them a price first, in the hopes that you will give them a price that is higher than the price that they’ve already calculated for you. If you do, they can say “Great News! We can match your target price.” and pocket the extra profit.Now, to be fair, because you haven’t given detailed information, it is also possible that they are legitimately discussing the cost of the entire package, and they are asking about a price target so that they can tell you whether or not you can afford premium components/packaging, or if you have to settle for cheap generic stuff to keep costs down.The rule of thumb, in my experience, is that raw material cost is 25% of the manufactured cost of the finished product, and component/packaging costs are 50%. The remaining 25% is labor. You usually have to add the contract manufacturers profit on top of that.I will give an example: Let’s assume that your rm costs are $1. That means that component/packaging costs will be $2, and labor an additional $1. The cost for the contract manufacturer to buy the raw materials, buy the components and packaging, make your product and then fill/assemble your product will be $4. For most contract manufacturers, their preferred profit margin will be 60%, their average margin will be 50%, and their minimum profit margin is 40%. So, they will try to sell you this product for $10/unit, but they probably won’t mind negotiating down to $8/unit. If you were buying large volumes, you might be able to negotiate lower.If they are being sleazy, as I mentioned, when they ask you for a price target, they are hoping that you will say “about $11 - $12/unit”. They will just pocket the extra money if you do.If you have a formula, the way to start negotiating with an advantage is to determine the volume of each ingredient you need, then call the manufacturers and/or distributors and get price quotes for that quantity, or for their minimum quantity. Do the calculations to get a raw material price per unit, so that you have an idea of what this product should cost. Don’t be afraid to push back against the quoted price, unless your volume is very small. -
In this industry, especially in the South everyone like to play the penny game. Customers are trying to save 2 cents and manufacturers are trying to make an extra 3 cents. I hate that. Also if I quote a product of a formulation we made for a customer but based on a list of ingredients, I may end up quoting $0.85 a unit and another manufacturer $0.75. Why, because I made you a good formula and the other guy used way less of the “goodies” in the formula. Then without saying anything I lose a job solely based on price. IF a manufacturer knows more or less where you need to be then we can formulate to your financial needs.
Of course if you tell them you want to be under $2 a unit they will quote you $1.75 where as if you said nothing you may get a quote of $0.98. I don’t play those games though and people who do are crooks. We always try to give a fair price for the job being done.
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Thanks, very useful feedback. I’ve gone ahead and asked for clarification, and if asking for cost of manufacture per unit, asked to receive a quote as a starting point, as I’m delivering a complete formula including method
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would anytime that a consultant ask for this information also? I contact a consultant, and when i provide them with the quote price target that i want the products to produce, they referral me to another company.
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The best way to handle this is to NOT give anyone a price target if they ask you and you don’t have a reasonable idea of what the manufactured price should be. Or, only give them a price target if you already have a quoted manufactured price from another contract manufacturer and give them a price target 10% lower than that quote.
Simply give them your formula (and process if you have developed one) and ask them to give you a manufactured cost quote. If you know in advance what production run volume you want quoted, it is very easy to work-up your own estimate of the raw materials costs, packaging costs, etc. (ie: all of the physical inputs that you could purchase yourself if you so desired). The differential between the materials costs and the manufactured price given you by the contract manufacturer will be their overhead and profit margin.Get quotes from 3 separate contract manufacturers and see how they line up.If the consultant is referring you to another company, it is probably because the price target you are giving them in unreasonably low and they know they won’t be able to find a contract manufacturer at the price points you are expecting. But, if they are good consultants, they should be advising you of that to begin with. -
@Allan, I agree with @MarkBroussard.
Any product formulating consultant who knows what he or she is doing has at least a rough idea of what any given product will cost. If your initial target price is unreasonably low, an experienced consultant will know that you will have to be educated about formula, packaging and manufacturing costs, and then dragged, kicking and screaming all the way, to a price that is probably 2 - 3 times your target price. Most consultants have had to do this for a number of customers, and experience has shown them that such a customer will probably never be satisfied with anything the consultant does.So, knowing this, some consultants who have enough business will turn away clients who have unrealistic expectations for price and/or performance. The process of having to educate such a client takes up so much extra (unpaid) time that it’s not worth it unless a consultant has no other choice. The consultant you talked to referred you to people that he thought would have no choice but to take you on as a client.But…to keep this from happening, you can educate yourself. Look at products and back-calculate to get ideas about price. Talk to contract manufacturers to get an idea of how volume discounts work. Talk to packaging suppliers. Come here and ask us questions. Pretty soon, you will have a better idea of the economics. -
Building that sense of economics myself, I’ve seen price vary as much as 10x between manufacturers once you factor in all their required testing and fees.
Get 3 quotes if you already have established a good relationship with those three and know that they are capable and competitive in pricing. Otherwise I’d get 30 quotes LOL. -
IF you are providing the formula there is no need for you to provide a target price. Just remember that you don’t always want to go with the lowest price. There are other important factors too.
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thanks all, I still have a lot to learn .
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