EP21. Melinda Coss on How to Price your Skincare Products

Hello and welcome to the Formula Botanica Green Beauty Conversations podcast. If you want to know a little bit more about our award winning natural and organic online cosmetic science classes, then head over to formulabotanica.com and try out our free sample class. In this episode, we chat to Melinda Koss about pricing and how to develop a effective pricing strategy. Enjoy. Hello and welcome to the podcast, Melinda.

Hi. Hello. Hi, Jemma.

Thanks for joining us.

Lovely to be here.

I know that you're a very busy woman, so I appreciate you taking the time out to have a chat with us today. And for those of you who are familiar with Formula Botanica, you know that we've done webinars and different bits and pieces with Melinda. She's spoken at our conference before and she's speaking at our 2018 conference. But for the benefit of people who are new and just tuning into this podcast, Melinda, it would be great if you could just introduce yourself and chat a little bit about your background.

Sure. Probably. I'm mainly known because I introduced handmade soap making into, into Europe. I found it in America and introduced it into Europe. But I then went on to build what became the largest soap making company in the UK Nowadays, because I'm, I'm getting old now, but nowadays what I do is I, I mentor skincare entrepreneurs on their whole journey. So it's from conception of an idea right through to international distribution and it basically takes them on a journey that I took myself and hopefully helps them to avoid a lot of the potholes.

The reason why we wanted to do this podcast today is because in a lot of our previous webinars, people have asked you a lot about pricing and it's one of those kind of quite emotive and controversial topics in the natural skincare, natural green beauty movement. I wanted to get your thoughts on this and obviously we've prepared a few questions and points that we should address. So to kick us off, I wanted to chat to you about what the main things should be that you should consider before setting your prices. And I know this is going to be quite a big question, so hopefully we can break it down into a few sections. But what are the main things that you should consider before setting your prices?

The main, absolute main consideration is why you're doing this. And that sounds kind of strange, but a lot of natural skincare entrepreneurs look at the market and say, well, these prices are much too high. Everybody's selling their products much too high. I want to create a range that's accessible to everybody, that's full of wonderful Ingredients. And often there's an element of I want to help people. All the great things that they have, thoughts that they have often goes into their passion for creating a range. So the first thing to establish is why you want to do this. The first thing to realize is that a business is not a business unless it makes a profit. How are you going to make a profit from your business? Is the first key question. Sounds crazy, but a lot of people don't. So it's your mindset behind your whole enterprise. The second thing to consider is going to be your positioning in the market. Because once you've covered your overheads and you know that you're going to make a profit, it's a completely separate decision to decide how you're going to show the value of your range. The value is shown in your branding and in your price because it's still the one thing that people measure quality by. If you see something that's too cheap, you immediately dismiss it. Or the organic guys, I think, would immediately dismiss it because they would assume that it doesn't have good stuff in it. It's a mistake to be too cheap. It's a mistake both in terms of what you're going to end up with in terms of profit, but it's also a mistake in terms of how the market and your consumers are going to perceive you. So those are the two key questions. You've also got to consider, obviously, the price of your actual basic price of your ingredients and your packaging and your labor. And then you've got to think about your route to market, because a number of people set out thinking, I'm going to just sell online. And that's great. That's a brilliant way to go. And your margins are going to be very high if you do that. But the problem comes when you want to grow big or when you see that there might be a huge advantage in getting export orders or selling to major retail stores, and they look at their numbers and they see that they don't actually have the margins that they can give away in order to allow themselves to scale up.

So you're saying that if you calculate your prices just on making a profit, you're selling online, it then makes it difficult to expand and scale into retail or working with a distributor. Because the margins will be different, because there's different kind of costs and things that will be incurred.

Exactly. So it's a really good idea right at the beginning. Most of my students have a spreadsheet to do this on, quite a complex spreadsheet. But. But It's a really good idea to have to do a time and motion study and work out exactly what your ingredients. This is, if you're making the products yourself, to exactly what your ingredients are costing you per unit, exactly how much time each product takes to make cost in your labor. Because this is something that also that people tend not to do and that's to cost in their labor. So, for example, and it's the small things, because in the greater scheme of things, whatever you're going to make is a relatively small profit. I mean, you're not selling Rolls Royces or you're not going to get. Or houses. You're not going to get a big chunk of money for each product sale. You know, if you're spending an hour packing a box and sticking it down and writing the labels on it, people forget to cost this sort of time element in. And it's really, really important because every penny that you, if you calculate that in terms of the value of your time at the end of the day, or if you're going to pay somebody to do it at the end of the day, if you haven't costed it in, then that money's lost. So every penny needs to be costed in right at the beginning.

Okay, so that's obviously quite a big. What do you call it? You know, you need to take the time to think about this properly, a big kind of work piece at the start of your business to figure out how to do this properly.

Well, you know, my view is that at the start of your business, if you can really address all the issues involved in running a business before you spend money, then you're going to be working from a solid foundation. If you go into it with licking a finger and holding up to the air and seeing which way the wind blows, then you can lose a great deal of money. So I'm a strong believer in building a firm foundation in everything you do. And that requires research and it requires.

Time, and it's worth putting that effort in in the beginning. Just like we've mentioned in other podcasts relating to branding and packaging, etcetera, etcetera. So to move on to the next question, which is a biggie, and probably what everybody who's listening to this podcast wants to know. How do you calculate your prices to make sure you're going to make a profit? And when we say profit, I mean, because obviously if you're making one penny, that is technically a profit, but that's probably not what we're aiming for. I mean, how would you define Profit really for. Do you know what I'm getting at? You'd want to, you'd want to make.

I mean, yeah, I mean again, I need a spreadsheet. I need a spreadsheet. I think really, you know, when you start to think about running a business, you have to make a decision as to what your expectation is. Let's say in your first year, what do you need? You know, this is that you're quitting a day job or you're not. You know, your time is valuable. What would you be happy to earn? What do you absolutely need to earn in your first year? Personally, anything less than that is a loss.

Okay. Yeah. So let's get that stuck in our mind when we, when we're thinking about the question, how do you calculate your prices to make sure you're going to make a profit?

Yeah, I mean there's, there's basic formulas that you can, you can use. So what I, what I can advise my clients to do is first of all do a time of motion study or if you're getting ingredients, you're getting your products from a contract manufacturer, be sure that you know exactly what the prices they've quoted you include and that you're not going to have any surprises when they start filling bottles or packing boxes for you. So find out the cost of the product at the point where you've got to deliver it to a client. So that's either the cost of ingredients, packaging, Sellotape absolutely. Labels absolutely everything and your labour, or it's the cost that the contract manufacturer is supplying the product to you at. At that point what you should do is immediately add, I advise that you add 77%. These costs only cover the cost of your actual product and they're going to. The only changes that you're going to find in those prices as you go forward is that when you start buying bigger volumes of bottles or product or whatever, they should drop considerably. So if you cost them at the price that you're actually paying, if you want to do a small run, if you're buying your oils in relatively small quantities, you're not going to go wrong, you're not going to under cost, you're probably over cost. The prices will go down as you, as you go on. But what we don't include in this calculation is your wages, any administrative costs, the cost of electricity, the cost of heating, the cost of your rental, all those things that you've got to find and the reason that we don't include them is because if you were paying a secretary A virtual assistant, whatever, to type out an invoice for you, you'd have to pay her the same. If that invoice was for one item or for a million items, you've got a light bulb burning. You can make 10 products or you can make 10,000 products. The cost of that light bulb isn't going to change. But pro rata, you can't put that into a unit cost because. Because it does change. Does that make sense?

Yes.

Complex subject. Okay, we've got our price of our product, packaging and labor, and then I would add 70% to that and that should bring you to a minimum trade price. That's the price that you would sell to shops at. Now, out of that 70%, you are going to have to take all your overhead costs, all your marketing costs. So you've got to have enough, that margin allows you enough for your marketing, your overhead, your administrative salaries. I would then add 7% as a contingency. And that contingency particularly covers, for example, if you've got to pay for, you've costed in your ingredients, but you, your ingredient supplier might charge you for delivery and you haven't got that cost in there. So it covers all the little incidentals that are going to come up along the way. So we've got, we're at 77% then to get to a recommended retail price and it's called an rrp. But in fact you cannot dictate to a retailer what they sell your products for. It's against the law.

Exactly. I know because I've had an incident with that myself.

Okay?

Not with my own products, with someone else's.

Okay. So I would assume that the minimum a retailer that's going to survive in today's climate is going to do is double the price they've bought it from you and add tax that brings you to your retail price and that should be the price that you're selling on your website for. Now here's the big caveat. Once we've added that 77% to our, the cost of our labor and ingredients and our product, we then have to look at the market and then we have to make a completely separate decision around what you should add to that in order to show the value of your brand. So if you want to present yourself as a high end luxury brand that's made with pure gold or that's, I don't know, whatever that is exquisite in, in whatever, you should add a considerable amount onto that, onto that wholesale simply because of your positioning. If you want to remain to Be accessible and to be seen to be a pretty basic brand, then you should keep to your 70%, but don't go lower than that. So, as we all know, there are brands out there that sell for £200 a pot, you know, pot of cream, whatever. Most of that is about the perception of their positioning. And in order to. If that's your aim and you want to be seen as a luxury brand, you need to understand that you need a higher budget because you're going to have to invest in really strongly in your marketing. That makes sense.

It does make sense, yeah. So you might need to add on more to accommodate for that cost.

Absolutely. For those who want their brand to be accessible and low cost, the only options open to you really are to use cheap ingredients, because unfortunately, the cost of natural ingredients is very high. And it also fluctuates according to harvest seasons, where you're going to buy it from, and you need to make allowances for that. So it is very, very hard to have a cheap range of natural products unless they are incredibly simple products in very simple packaging. Now, the other thing that I haven't mentioned is the costs that will come, all the costs that will come out of that 70% markup. I talked about your overhead, your administrative cost, your overhead, your travel, your marketing budget, etc. But if you've decided so, the next thing you're going to think about is your route to market. It could be that you've decided to sell overseas through distributors. And distributors work in lots of different ways, but some of them, and certainly when I was running my business, they would give you an order for a very large quantity of product and they would take the risk on that and then they would sell on to shops. So there's another middleman coming in there who wants to make a profit. Now, the profit that they might want to make will vary between about 30% and 60% of your trade price. And it depends on how much they, you know, what they're going to charge, what they're going to want to do. The distribution will depend on their reputation, how many store doors they've got open, how many stores they can get you in. And it will also depend on whether they are buying product up front from you. Because these days, more and more distributors are acting more as sales agents. So they're saying, we'll take your products, we'll go out, we'll open doors, we'll get orders, then we'll give you the orders and you supply them. So they're not supplying in bulk. And in Those case, those scenarios, it could be 20, 30% that they're looking for, but that still is going to come out of your 70%. Yeah.

Okay. You're seeing what you're trying to cover. You're trying to cover all your bases, basically.

And the other thing people don't consider in the early stages when they're looking for packaging, for example, if they want to put their product in a box and that box costs 10p, it looks pretty good. You know, I can get a box for temp. I mean it's probably going to be more like 30p, but let's just say 10p because my maths isn't very good here. Now if you put the TEMPI into that scenario, you've got 10p plus 77% which is 17 and let's say 17 and a half.

Yeah, yeah.

And then by the time it's got to retail, that 17.5% has doubled to 35p and then it's got 20% on for VAT. So that's 35p 3 6. So it's nearly 42p for your box. Your box has gone up from 10p to 42p by the time everybody's taken their bid out of it. And that's why it's really important to put all the detailed little bits that you might not normally calculate in to your product in right at the beginning. And this formula, really, if you do this right at the beginning, this gives you, opens the market up for you to take you in any direction that you want to go in. Because if you're just planning to sell direct, you're making 150, 155% on your price. But you've got room there to offer discounts and you've also got room to offer to do special promotions, to offer carriage free deals. There's all sorts of things you can do because you've got enough margin and you can afford to do it.

Yeah, that makes sense.

Yeah.

Yeah. I'm sure everyone's going to be making lots of notes.

Pay it back two or three times and you'll get. And you'll get it.

So moving on to the two points that you just made. I mean, should you charge extra for shipping?

I think that if you're going to be buying from a major store, they will these days they will either expect you to throw the shipping in. I mean they're going to negotiate you down at every point. You've also allowed enough margin in for them to do that. If this is going to happen. People are going to especially big stores. There's a, you know, a discount they want to pay you in 90 days. If you want to be paid sooner, they're going to require you to discount for that. The floor buyer can have her own discount that she will ask you for, because you have to remember that a buyer's job is measured on how much profit she can make for her company. So she's going to try and negotiate very hard with you to get the prices down and you're covered for that. In terms of online, my thinking is that free shipping is a promotional element, so you can offer. You need to work out what works for you in terms of the cost of the shipping and the cost of your goods. But if you can say, buy three and we'll ship for nothing, that's a huge advantage because people love a deal. People love to feel that they've had some advantage in their purchase from you. If you do it consistently, it loses its value to some point. So charge for shipping, but give concessions. It's always a give and take situation. Give concessions where you can, or if you decide that you feel it would be beneficial to you to give free shipping, cost that in at the beginning so that it's actually not costing you anything. And that's why these sitting down and doing all the calculations and understanding all the various costs in and out are so important in the very early stages of building your business. Because once it's out there, it is incredibly difficult to put the price up. You can take it down, but you go back to your customers and say, oh, I got that wrong. I've got to charge another 20%, 30%, and they'll drop you. Well, unless it's selling really well for them, they won't take kindly to it. Let's put it like that.

No. And if, and if you're struggling with these sorts of things, I mean, get a friend to help you or get someone's input on, on the calculations that you've done. Because often, you know, people can spot something that you may have missed. Or, I mean, at Formula Botanica, obviously we've got a great community. You could ask someone who's already had experience with pricing or, you know, you can go and work with Melinda, talk, she'll talk a little bit about that later. But you get other people's opinions because often you could have missed something quite simple off the list and it will, you know, avoid you some pain later.

You know, your figures are the most. To me, again, we're going to use this word to me Business means making money. It's as simple as that. It's just whatever, whatever the passion behind it is. Business is money. If you're not making money, you don't have a business. And to me, I mean, my big weakness has always been numbers. I. I mean, I left, I'd stopped doing arithmetic at 11, but I've always made sure that I had a team around me that understood the numbers. So even if you've got an accountant or a bookkeeper or somebody, don't sweep this under the carpet. Get it right, because it is actually the heart of your business. And then because you've got other things to deal with, you're going to have your cash flows to deal with, your management accounts. All these things are incredibly important, even if you don't like it. And unfortunately, many people get into a skincare business and they're wild about the skincare, but they haven't quite grasped what it means. Skincare, social media, all the fun bits. But they haven't actually quite grasped that running a business is about making a profit and being sustainable because you want to be in business next year. And I think that's why so many businesses fail in their early stages, because, you know, they're working with energy, but not with any knowledge or any, any good, strong foundation.

Yeah. And there's people out there that can help you and their books and there's websites and there's all sorts of things, you know, that, that you can seek help with. Because if there's one thing I've learned from my limited time in, in a smaller business, in comparison to Melinda, is that as an entrepreneur, you have to wear so many different hats, and there's so many different kind of anxieties and stresses from, from really small, small little ones that you can easily sort out to ones that become slightly bigger. And if you, if you can get the, the basics right and ticking over nicely, then it means that you can put your energy into dealing with the other things that crop up, the unforeseen things that crop up all the time. And I was telling Melinda before this call, something that happened this week that I ended up spending a lot of time on that I hadn't anticipated. And if the other things are ticking along nicely in the background, you can, you don't, you don't get that sense of overwhelm that so many entrepreneurs say that they feel because they have to wear so many different hats all the time.

Well, I think you should only wear the hats that fit, or there are so many other people that. But you have to know yourself. It's a false economy to, to try and save money on things that you, by doing things yourself that you're not desperately. That are not within your strength and not within your knowledge with. It's absolute false economy.

No, totally. You've got to try the hat on to figure it out. Sometimes you do know yourself and you know you're not going to be good on that. Sometimes you put the hat on it, you're like, oh, this one is not quite right for me. I'm going to try and get someone else to do that.

I mean, having said that, it is also extremely important that even, you know, get help. But you do need to understand your numbers, you do need to have a grasp on your turnover, your cash flow, you know, your forecasts, your costings, what, where the money's going. You really, as a business owner, that's your role. Otherwise, until you get to the stage where you can employ a financial director to take all that weight off you, that is your role. So try and get to grips with it. If I can, anyone can.

Yeah, I mean, yeah, you're absolutely right. You have to understand the ins and outs of your business and how it functions, even if you don't enjoy kind of certain parts of it. And obviously you have to understand how the money is used. Exactly. And there's all sorts of ways of trying to figure that out and understand things. And if there's a term you don't understand, you just ask, what does that mean? Yeah, that happens to me all the time. I'm sorry, I don't know what that term is. What does that mean? Explain that to me. Explain what this means exactly.

I didn't use any jargon. That did, I hope. I RRP recommend.

I can't. There was a term someone used earlier today and I was like, I have no idea what that means. Tell me what that means. And they, you know, and most of the time people just say, oh, sorry, that's. Yeah, that's industry jargon. Sorry, it means this, but I think obviously we're, we're sometimes intimidated by the use of those terms and, and things. And what was someone talking to me about the other day? Coefficients. And I was like, oh, what's that? You know, and they were like, oh, yeah, yeah, I'll happily explain it to you. And you do have that moment where you think, oh, I feel like a little bit of an idiot asking this, but you're not, you look like more.

Of an idiot if you haven't understood what they're saying. And Then you go, something wrong? Absolutely.

Exactly. So you've got to say, oh, really, sorry, I don't know what that means. Or please explain exactly what that means to me. I'm starting to ask that question more and more often after a few hiccups. I want to know exactly what that means. So, okay, so there's some good thoughts and points on shipping. Now, what about offering discounts? Is it good to offer discounts regularly? Should you offer them at all?

Well, again, this is part of your marketing and it's a part of your promotion. So once you've handled and understood exactly how to do a cash flow forecast, which we're not talking about here, whole subject on its own, you can see certain months where you might need to bring in extra money, or you might need to bring in cash to pay for bills or to pay for a trade show, or to pay for any initiative that you've got going. And that's the time to do a discount offer. Discounts are great. They're great. They're great to introduce people to your range because nothing promotes your products more than having people actually use them. So your product is your cheapest form of marketing. So if it helps you get the product into the hands of people, then offer a discount, offer a flash sale, whatever. And also when you need the cash, you know, just in terms of your day to day management of the business, it's interesting with stores because as you know, I sold to supermarkets and big department stores and sometimes they would come to me, I mean, the marketing budgets, that's a whole other topic as well. But sometimes they would come to me and say, right, we want to do a buy one, get one free offer. And you sort of wince and you know, I mean, it's sort of dreadful, a bug off, A bug off. But what actually happens in those circumstances is they place a huge order with you because they've got to supply two, where they were supplying one, they got to supply two. And because in fact they've got to supply more than two because they expect the order levels to double, because they've got to buy one, get one free offer. So there's all those people out there going to be buying and using your product. So from that point of view, it's great. And also from a cash flow point of view, it can be great because it can bring in at a much lower margin a huge chunk of money for you if you make sure that your margins are there to start with by doing those calculations.

So you're saying if you price it right correctly, from the beginning.

Room for that. You've got room.

And they can be quite an innovative and interesting marketing tool and getting your products into the hands of the consumers that you want to be trying them, essentially.

Yeah. And again, I think because there's this gray area between I've got my 70%, what shall I price it at? What is this worth? What is the value of my product? And there's a lot of research that you need to do on that. You need to look at your competitors. I mean, I don't think that you often have to look at your competitors because you need to always be selling a unique product with a unique value and your customers need to be able to see that value. That's your job. I mean, that's about branding and what's in your products and making it clear that they have a specific purpose. And if you've got all that right, you can afford to. They will pay a lot more for it. They will be prepared to pay a lot more for it. So again, this is part of that very early exercise where you have to get all these elements right. So this getting a price right is just one element. A business is not just about making product, having a great social media campaign and thinking that you're going to make a lot of money. You've got to have all the nuts and bolts in place first.

So why don't we just end off with a little bit about what you can offer to help people get all the nuts and bolts in place using your vast experience in business.

My vast experience, as you know, I work in two ways. I work one to one with clients on a VIP mentoring program. But also I'm about to launch, we're launching it any day now. I'm not sure when this is going out. What I call the ultimate skincare business Masterclass. And that's a 12 module program that runs over six months and there's a webinar every two weeks. There are workbooks to fill in. There's a very, very active Facebook group where you share your woes and your wins with your peers. There's lots of homework and basically I'm holding your hand through every step of building your business and getting it to. I mean, we cover mindset, we cover identifying who your ideal customer is, branding, range creation, what's actually going to be in your range, how you're going to get it made, how it's going to comply with the law, costing your route to market social media. I mean, it's a massively comprehensive program. I've mentored about 200 key entrepreneurs now and many of them have got international distribution and they started with absolutely nothing. And this is about. So what I'm trying to teach is that everything that I learned on my journey and everything that I've learned on the journey that I've taken with my clients and the obstacles and successes that they've, that they've had along the way. And I've done this course twice now and it's just, it's just great. Well, it's just got a great, such a great respons response from the people that have been on it. So that's, that's actually, you can actually sign up for that right now. And there's a big bonus offer for Formula Botanica students on that as well. And it's going to start in January. It's not going to start until January, but the bonus offer is closing. It's an early bird offer and it's closing on November 6th.

Yeah. So you can find the discount code and link in the show notes that accompany this podcast.

Yeah, absolutely.

Awesome. Thank you so much for joining us, Melinda. I know that pricing can be quite a difficult topic to talk about sometimes and explain succinctly. I'm hoping that we did a reasonable job for our listeners.

I hope so. I hope they get this right because I want to see them all get really succeed. But I want to see the money in the bank as a result of their success.

Yes, me too. So thank you once again for joining us and you've been a lovely guest and thank you for taking the time out of your bus busy schedule to share some of your knowledge.

You're welcome. I didn't say that. The website for the Masterclass is skincare.

Businessmasterclass.Com yeah, I'll include that in the show notes below. Thank you, Melinda.

Thank you for having me.

Thank you so much for joining us on this podcast about pricing. I'm sure it has left you with loads and loads of questions and hopefully you made lots and lots of notes and it has given you some food for thought and some tools that you can work with on developing your pricing. If you want to join in the global green beauty conversation, then find us on social media, Formula Botanica on Instagram, Twitter and Facebook. And you can also head over to our free Facebook group, the Skincare Entrepreneur Mastermind. Once again, thank you so much for listening.