Finances for small producers
There are potentially up to 4 or 5 people that would all like to take a slice of the money being made on your product. The main three however are you, a distributor and a retailer or stockist.
OK, so lets start from the beginning. First you'll need to work out your COGS, or Cost Of GoodS.
hankfully this is quite simple at its most basic.
Cost of bottle + label + cap + filling fee (where applicable) + ingredients cost + box to put them in + label for box
You then need to look at how much a retailer would expect to make as from this you will need to work out an RRP and your sale price to the retailer.
Next it can get to be a bit of a vicious circle. You can either work out your RRP based on your retailers expected margin and your own desired sale price, or you can work out your sale price based on RRP and retailer margins. You get the idea. Either way you need to know what they are and how to work them out.
An independent retailer would expect to make 40% gross profit, or 40% GP, up to maybe 45-50%. Some stockists would require vastly more, up to 60% GP in some cases! Gross profit can be worked out by taking the RRP, or expected sales price of the product, then deducting VAT (currently at 20%), then taking off 40% from this figure. That 40% is what your stockist would get. VAT will be added to your product at point of sale if your stockist is VAT registered, even if you are not adding it on to your sale price to your stockist.
E.g. A retail price of £5.00, minus the VAT = 5/1.2 = £4.17. Then take off 60% (to leave 40%), so 4.17 * 0.4 = £1.66. So £1.66 is your stockists margin at 40% GP.
At this point you will see that the RRP is crucial to the retailers margin and hence your buy-price. Hence, as a small producer you must either make your product very cheaply, or sell it at a premium price.
Here is our costs from when we first started making our own product on day 1:
Bottle, Cap & Filling Fee = 72p
Label = 18p
Box (for 20 bottles) is 45p, so that's 45p/20 bottles = 2.25p per bottle
Total COGS: £1.27 for a 330ml bottle of lemonade. Ouch.
There are some things that you can do to decrease costs as you go along. A 275ml bottle with a crown cap will cost anywhere from 5-10p per bottle less to make than a 330ml. That's just the cap and the bottle costs, not taking in to account the lower ingredient cost in the lower volume. A smaller bottle could mean a smaller label, again lowering costs. We will be saving 6p a bottle on our own branded drinks by moving from a larger label to a 62mm circular label. Pennies add up. However, there comes a trade off, and that is that while some customers will have no problem with crown caps, others will. A sandwich shop for example wouldn't really be able to use them.
he short answer here is that there is no 'cheap' way to produce at a commercial scale on a small scale, so you need to increase volume and drive costs down. Don't expect to be made rich overnight, no matter how good the product you make is.
Something to bear in mind is that for every 10p you can save the retailer, the RRP can be circa 24p lower and still give the same GP% to the stockist. Working on a 50% GP requirement (purely for the simplicity of the maths): 50%GP is the same as 100% mark-up (GP you work RRP down, mark-up you work wholesale price up), and so 10p saving + 10p retail margin = 20p. 20p + vat @20% = 24p. 24p! A little sometimes does go a long way, and so saving those few pennies might make all the difference.
lease contact us for more information, or to get us to help you understand the finances - it can be complicated, and seem pointless, but we're glad we've done it and if we can, anyone can.
Please leave a comment if you'd like us to help clarify things further.