Marketing, Margins, + COGS. Don't try to sell until you have these both locked down.
La Onda is a newsletter by Sandra Velasquez, founder of Nopalera, with actionable insights around brand building, selling, and a recap of the most asked questions during Mentor Mondays.
Hi there,
Before you launch or market a single physical product, you need to have a rock solid understanding of your COGS and your margins.
COGS = Cost of Goods Sold
Margin = the percentage of revenue left over from a sale once the COGS are subtracted.
When other founders ask me about running ads or preparing for wholesale, I first have to ask, "Do you know your COGS and margins like the back of your hand?"
If not, then hold up.
As a former CPG sales rep, I witnessed many food & bev startups take their great idea to market, get into stores like Whole Foods, only to realize they weren't going to make any money. Please don't let this be you.
Doing the math in advance can literally make or break your business.
As you start to scale your business and perhaps look for funding, one of the first questions you will get from anyone that is going to give you money is — What are your COGS? and What are your margins by channel?
So, today's newsletter is going to be dedicated to these two topics. Because literally, nothing else matters if you do not have these on lock down.
Good branding will not save you if you don't have good margins.
Running ads will not save you if you don't have good margins.
Getting more wholesale accounts will not save you if you don't have good margins.
Dig?
You can't figure out your margins if you don't know your COGS.
What are COGS and what goes into them?
Your COGS is everything that goes into producing one unit.
All packaging + shipping to get it to your manufacturing site
All ingredients + shipping to get it to your manufacturing site
Labor/ Production (this is always the biggest expense)
Freight to get it to your warehouse
*do this math by unit
What COGS are not:
Marketing Spend
Operating Expenses (rent, phone bill, etc..)
Salaries
Shipping products to customers
If it's not related to the physical creation (ingredients, components, labor) of your finished good, it's not COGS.
Your COGS are not something you do once. You are always recalculating them as you scale and purchase ingredients in larger quantities. I've been in business for a little over a year and I've redone my COGS at least 4 times.
Once you know your COGS, then you can determine your Margins.
Everytime your product sells, someone has to make a margin. aka, a profit margin.
You most of all, you, in order to stay in business.
Scenario:
You make a product that costs $2.50 to produce. (your COGS)
You sell this directly on your website for $10.
Your dollar profit is $7.50
$7.50 is 75% of $10. ($7.50/10=0.75)
You have a 75% margin.
This margin is how your pay for everything else in your business. Salaries, operating expenses, marketing, etc......
Now, you want to sell this item wholesale direct (no distributor).
The wholesale account needs a 50% margin.
This means when they sell it for $10 on the shelf, they want to keep 50% of those $10.
So, they need to buy it from you for $5.
Your COGS: $2.50
Your Wholesale Price $5
Your Dollar Profit: $2.50
Your Margin: 50% ($2.50/5 = 0.50)
Though you have a 50% margin, your dollar profit is much smaller.
Wholesale Price: $5
SRP (suggested retail price on shelf): $10
Wholesale Profit: $5
Wholesaler Margin: 50%
In the food & bev industry, brands have to work with distributors, which brings another middleman into the mix. Your margin would be even lower than the above scenario.
As I mentioned on today's IG live, I recommend an app from the App Store called Wholesaler/ Retailer Calculator. It's green and has a white $ in the middle.
I like this app because you can see the margin and markup side by side and calculate several margins along the products sell journey. Margin and Mark up are not the same thing.
If you are building an omnichannel brand, you will have different margins for each channel.
To complicate things, retailers have different margins as well. There is no law about what retailers can ask for.
In the world of beauty, independent retailers take anywhere from 50% to 55% margin, while larger chains like Sephora and Ulta, take a 60% margin.
You thought that $34 body butter at Sephora was expensive?
Sephora is taking $20.40 of that sale. (60%)
This means the brand needs to produce it for a lot less so they can make money to run their entire company.
As I mentioned today during the live: Price for where you want your product to live and the type of brand you are trying to build. Begin with the end in mind.
Happy Mathing!
S