Hey everyone-- back with part 3 of How to Build Multi-Million Dollar Brands + Link to 2nd Post - Net30 Terms
This is a short one inspired by the controversy over the 100,000mg CBD Coconut Oil offered by @Future
Now, you may remember that I’m not the type to offer deals like this. We don’t sell anything that costs us more than 20% of MSRP to produce. Some items cost as low as 6%, and other items in development will cost even less.
Now we’re moving ~$750k in product a month (retail value) at gross profit margins of 80% to 90%.
It’s unclear how competition and regulations will shake out-- can we keep this up for a decade?
We retail grams of outdoor-grown hemp flower for $15. We retail eighths of indoor for $60. We retail 1g D8 carts for $60. How? Brand & channel. Some of you think this is ridiculous or even wrong. My customers disagree, so save it, read, ask, and learn. Our average star rating is 4.8 out of 5 and we don’t do any funny business with reviews.
Since I wrote that original post, we’ve lowered prices between 14% and 25% on some SKU’s to be more competitive. Fortunately, economies of scale have led to cost reductions and margins to MSRP remain 80%+ on all SKU’s. Some margins are still as high as 90%.
We’ve improved quality at the same time. Going forward, flower will be greenhouse or indoor only. The gummies we’re launching are as good as they come.
Some might expect that I’m bothered by the $100 price point on @Future’s 100,000mg coconut oil, but I couldn’t care less.
Thoughts on pricing from the original thread if you haven’t read it, so I don’t have to re-state them–
Fundamentally, @Future can only get away with this price point because he has worked hard to build an organic audience that he owns and doesn’t have to pay to reach. Charging just 2x COGS is his prerogative. I do think he would make more net profit at $300 – a fair price.
People overestimate price elasticity of demand (google it). People underestimate the negative impact of too low a price on consumers’ perceptions of quality. @Future offers the price he does as a service or to manage perceptions of him (pick your poison). He’s shielded from the negative perceptions of quality because his audience trusts him.
What many people on both sides of this debate misunderstand is the economics of the consumer packaged goods supply chain, particularly for these ‘novelty products’.
The brand needs to make a 65% profit margin – not to be confused with profit mark-up – when selling to the Master Distributor, who then sells to wholesale, who sells to ‘jobbers’ (independent sales reps / small wholesalers working out of a white van) and to retail (who pick-up from the wholesale warehouse).
This 65% covers the massive costs of returns, promotion, commissions, freight, legal, tax, fixed operating expenses, and the cash flow issues associated with offering the net terms that downstream parties demand, plus some room for bootstrapped growth. A healthy CPG brand will net out 15% to 40% after all of those expenses.
The Master Distributor needs to make a 3% to 15% margin selling the product to Wholesale. Wholesale needs to make 20% to 25% selling to Retail and 5% to 20% selling to Jobbers. Jobbers need to make 5% to 15% selling to Retail.
Retail needs to double their money (50% margin).
So a product that retails for $30, costs retailers $15, costs jobbers $12.50 to $14, costs wholesalers $11.25 to $12, and costs masters $10 to $11 (economics here courtesy of @Distributionly – the king of this game). Masters & wholesalers are likely to demand exclusivity, too, and all parties will ask for flexible return policies.
Hopefully that $30 product costs the brand $3 to $4 out-the-door, or it will be tough to run a profit.
@Future cannot distribute his 100,000mg coconut oil to retail through traditional channels, let retail match his consumer price point (essential), and make money. Cost to produce for even the most well-connected and scaled up operators would be ~$50. Even going direct to retail, he won’t make money.
If you understand these economics, you will recognize that even I can’t easily go through the traditional novelty channels at my scale. They require a blended / weighted average 87% margin to MSRP. Mine is a bit lower than that so while we would survive as long as the water is smooth, we would collapse if the boat starts rocking.
If you choose to offer your products to consumers at 2x your cost, just recognize that you’ve pigeon-holed yourself to direct-to-consumer forever. Further, consumers may be suspicious of the quality of your products, and since running you’re less than a 65% margin, a little rocking of the boat could crush you if you aren’t well-diversified / well-capitalized.
This !
I’ve been bugging my dad to buy a jar.