Article by: Valerie Patton
If you have an idea to startup a cosmetic business you might be wondering how much it will cost you and whether it will be profitable. The original question posed to us was on a business forum and the questioner specifically wondered, how profitable a natural cosmetic business (skin care line) that was started in my kitchen. Many of you may be wondering the same, so here are some key things you need to know.
When beginning a cosmetic business you first need to know a little bit about the cosmetic industry.
While you might think the cosmetic industry is limited to products like lipstick, nail polish, or eyeshadow, it is actually much bigger than just that. Color cosmetics represent only one part of the cosmetic industry. Other products like skin lotions, shampoos, body washes, and even toothpastes are considered cosmetics. In fact, almost any personal care product is considered a cosmetic.
That means the cosmetic market is a great one to get into 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.
You may have seen on the Internet or elsewhere that the cosmetic industry in the US is not regulated, but this is just wrong. In fact, the cosmetic industry is regulated by the Food & Drug Administration (FDA). Before you even get started, it would be a good idea to check out the information published by the FDA specifically for startups and home based cosmetic businesses. This will help you when you get started and are figuring out your costs.
Cosmetic start up costs
While starting your own skincare line from home *can* be profitable, how quickly it becomes 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 and get some customers. You can then use this information to take to your local markets when you try to convince them to carry your product. The more places you can have your product on sale, the more likely you will be successful.
To start any cosmetic business, or really any business your key start-up costs will be in three primary areas including:
- Product Development – approximately $5000 for a single product
- Business Expenses – varies but at least $2000
- Marketing & Sales – starting at $500 and up
I’m going to assume that you are going to start small so the best way to do that is to start online. Of course, costs can vary widely depending on the formulations you are making, but here is a general ballpark for what you can expect. We’ll break down each cost type in more detail.
Cosmetic 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.
Now, you might think you can just get a recipe off the Internet and start making the product yourself. Unfortunately, it is not that easy. Most of those formulas don’t work and even if they do you’ll need to find suppliers for ingredients, a company who can manufacturer it for you, and conduct testing. If you want to make it yourself you’ll have to spend some money to set up your own manufacturing space based on FDA guidelines.
If you’re really serious about creating a product you’ll want to work with a cosmetic formulator to get your product made. Their services are not free and could run you anywhere from $500 to $25,000 depending on the chemist and the formulations you make. The average cost of working with a chemist will be around $2500.
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.
To get your products made you typically will work with a contract manufacturer who produces products based on your formula or requested formula characteristics. If you don’t want to invest in a lot of expensive manufacturing equipment (mixers, raw materials, filling equipment) then it is best to work with a contract manufacturer to make your products. If you are producing the products in your own home, your raw materials may be much higher so the cost per unit will ultimately be higher too.
Of course, you’ll also have to pay someone to make your product labels and this can vary in cost from $500 to $2000. It’s best to work with someone who has previously made cosmetic labels because they will know all the proper information to include on the front and back labels.
Considering everything that it takes to produce a cosmetic product first production run, you should figure that making one type of product will cost you around $5000. It may be less if you can find someone who can do smaller runs and you’re working with a product like a skin lotion or a body wash. It will be more if you’re wishing to launch a cosmetic line that includes a variety of different color cosmetics.
Hidden product development costs
While $5000 might not seem too bad, the product development costs are not done yet. In the US, there are no specific laws about the type of testing you must do to start a line but there is one overriding law. It is illegal to sell unsafe products. You must be able to prove that your products are safe. If you are serious about running a cosmetic business you MUST test your products to ensure they are safe and effective. There are a number of tests you should run before launching a cosmetic line.
Microbial testing: 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.
Stability testing: Cosmetic stability testing is a type of testing which just looks at how your product reacts when stored at different conditions over time. It will tell you if the product separates, changes color, gets contaminated or still continues to work and for how long. See the following where we’ve written about cosmetic stability testing. This is something you should consider hiring a lab to do.
Safety testing: 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 and they are highly dependent on the lab you use.
So, the hidden costs of formula development have now pushed your cosmetic start-up costs to about $8000. Remember, this is just for a single product.
Cosmetic business costs
If you are going to sell cosmetics and you want to protect your personal assets, 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. And unhappy consumers can be quick to hire lawyers and start lawsuits which could wipe out a small business. The best strategy is to incorporate to protect your personal assets from liability. It also makes it easier to get business insurance. The costs for incorporating will vary but you can figure on 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: 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.
Liability Insurance: 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 their insurance. It does not mean that you are insured individually as a cosmetic company.
This 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 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 or sell it on Amazon – 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. So, figure you’ll need at least $1200 for yearly 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 have a lot of control in how much this will cost you. Just be sure to 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 cosmetic 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 via social media or email 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 and communication generally will mean greater sales. The activities that you should spend your time on will depend a lot on who your customers are but things like writing blog posts about your topic, publishing videos, participating in social networking sites like Facebook or Instagram, commenting on other people’s sites, and conducting online auctions are all things that can boost sales of your cosmetic product.
Cosmetic order filling
Filling orders will be your next significant cost. You 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.
One of the biggest mistakes people make when starting out is not charging enough for their products. Remember there will be hidden costs and if you’re not making a profit, you’ll go out of business.
Another option for distributing your products is to get a booth at a local market and sell 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. Typically, you’ll have to sell your product at a reduced cost to these outlets so they can markup the price to make a profit. This won’t cost you any money directly but it will cut into your own profit.
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 – $20,000 to invest up front. And if you are going to make more than one type of product you should figure on adding $5000 for each additional cosmetic product. 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.
Product ideas may be free to conceive but they aren’t free to launch. If you want to start up a cosmetic line, start saving your money now.
This is a joint article written by cosmetic chemists Valerie Patton (@thelahobo) & Perry Romanowski