How To Calculate Your Budget For OEM (finished product)

Hi guys, so the last post I spoke about how you should know your OEM budget before approaching a manufacturing company. 

Basically its so that when you have your budget/ finished good's targeted cost; it will be easier for a manufacturer to determine what sort of ingredients to use and what the quality should be like (don't expect good quality at super cheap price. You might end up getting water and fragrance as a serum :-()

If you haven't read my previous post about this; click here.

So anyways; back to this; how do you determine your targeted price?

the easiest way; is by knowing what the price of your product is going to be.

Like how much will you be selling it for? who are you selling it to? Who is your target market?

lets go through different common scenarios to determine this:

1) Selling Direct to Consumer

selling direct to consumer would mean you will sell directly to the customers; maybe via face to face in your workplace/ online/ selling in bazaar etc.

Usually for this kind of sales; you will need to do your own marketing etc to attract this customers. 

So the minimum COGS (cost of good sold) I would want is about 30-50% of the selling price. (the remaining for marketing & your profit)

So lets say if you are selling your serum at RM 50. Your targeted cost price for your serum would be 

(0.3- 0.5 x selling price) which is about RM 15-RM 25 of finished products cost price.

So then you can let your manufacturer know this is your all in targeted price for your finished product. 

With this kind of budget; the manufacturer can automatically be given option to come up with the best possible product that fits the budget (again depends on manufacturer also. some are profit oriented so they may not make the best😓Like for us in SoapLab; we want you to be our repeated customers so we will make the best we can so that you get repeated customer too so its like win win for all:😊.) 

2) Selling to Distributor or Stockist.

Now this type of selling is basically like a b2b selling. 

Your target customers are business/ stockiest so your marketing is more to acquire them intead of selling to the retail/ direct to consumers.

In order to attract them; you will need to sell your products at larger quantity and you will need to give them a certain percentage so that they can mark up to sell for profit.

So example your serum, you want your distributor to sell it at rm50 to end customers. 

Now since they will also have to mark up, usually you will sell to them at 30%-50% discount (so that their COGS is 30-50%)

So now your selling price to your stockiest/ distributor is about RM 25- RM 35.

Now you still want your profit. so assuming you want your COGS to be about 30-50%.

So its the same (0.3-0.5) x RM 35 = RM 10.50-RM 17.50

Its lower, but since you will be selling at higher volume where your stockiest/distributors will have to take 50pcs or 100pcs; its quite ok for a B2B profit.

So anyways; now your targeted cost price for finished product will be RM 10.50-RM 17.50 and this is what you tell your manufacturer.

The budget is lower; but because you will be buying in bulk (coz you are selling to distributors at higher volume maybe 50pcs or 100pcs) you will automatically purchase 10x more than if you sold direct to retail; Due to that; the manufacturer might be able to make similar quality as the one from the first scenario (selling to direct consumer) 

So now can you see how one should budget?

Of course there are many other ways to do your budgeting depending on your selling price and tactics. Some wants it super cheap to maximise profit (as it will be a hit and run marketing which lasts only for a year or shorter), or some who wants to have a long sustainable business; might want to reduce profit in return for good quality products that will retain customers. 

so it really depends on you and your business model.

if you need to talk to someone about this; do WhatsApp us at 0126643817.

If you are just starting out and want to learn more about how to start business in Malaysia; I have a FREE online course that may help you out:-) its a 2 hours video with me explaining all including regulations, marketing, ways to price etc for starting a small business in Malaysia. Click here to sign up: