Building a profitable consumer brand in 2024
Profitable businesses survive hard times, and grow fast in good times. Consumer brands are notoriously unprofitable. Let's look at fundamentals to turn them profitable.
👋 Hola! Welcome to Out of Singapore.
Merry Christmas! 🎄🧑🎄🎄🎅🎄🤶🎄
I am Shan and I write about my business failures and successes. Failing is important. It grounds me. It shows how little necessities can be. It teaches survival.
One of things I have failed in 2023 is making profits. The scale of revenues are good for a 8 month old brand. However, the burn each month is painful. I will lay out the profit making fundamentals for next year.
Before we begin, I am curious about this.
Work has been slow and everyone has been in holiday mode this week. Next week world will come to standstill. Enjoy the much needed break of the year in your best way.
Today we will go through the fundamentals of profit-making. I will go through the key metrics that really matter.
Cost of product
Cost of marketing
Cost of fulfillment
Cost of talent
Cost of capital
For each of these pointers, I will share
KPIs to measure it
What’s a good value?
How to optimize for profitability?
Let’s start.
#1 Cost of product
This comprises of raw material cost + production cost + consumable cost + freight cost. This is the most basic cost of any consumer brand selling a hard product such as skincare.
For new brands, the best way to measure this the absolute value per unit. For example, a retinol skincare serum may cost upto USD 5 to get the serum, bottle, and labels put together and shipped to your warehouse. So, USD 5 is your cost of product.
To understand the best value of cost of product, you need to fix your retail price. The retail price should be 4-5x of your cost of product. Let’s fix the price of our retinol serum at USD 25.
Now, is this price okay for the market? Let’s look top sellers on Sephora. Average price on the market is USD 30-40. We can safely price our retinol serum at USD 25.
The key metrics to look at is - Gross margin and net margin. They will tell you actual realisation post promotions and returns from customers.
Good gross margin should be 70%+ and net margin should be 40%+.
#2 Cost of marketing
In the initial stage, marketing cost hurts a lot. The sale volume is low, base cost of advertising is extremely high. Note this - A Facebook ad costs over 7K USD to get out of learning phase!
The key metrics one needs to look at for marketing are
ROAS (Revenue on ad spend) - measures total revenue generated as a ratio of total ad spent. If a brand spends 10K USD a month on advertising and earns 5K USD in revenue, the ROAS is 0.5. The minimum ROAS target should be 1. However, during the initial phases, it is difficult to hit this target.
CPA (cost of acquisition) - The amount spent to get one customer is called CPA. The industry average varies between USD 80 to 100 to acquire one customer via Facebook or Google Ads.
Supplementary performance metrics - CPM (cost for 1K impressions) and CTR (click through rate). Optimization of these metrics will make sense once the ROAS and CPA was good.
Ad spend value - Interesting, right? The amount of money you spend with the channels also determines your success. The more money you spend, the more users these platforms can reach and get you the conversion required.
DTC brands spend upwards of 100K USD in monthly ads with digital channels. I would say spend at least 10K USD a month, and scale this as performance keeps improving.
The best cost of marketing would be to keep it 30% of revenues. But can it happen early on? No. For first 2-3 years, cost of marketing can be 50% to 100%.
#3 Cost of fulfilment
This comprises of
Cost of storage in warehouse - This generally is daily or monthly bill based on space occupied. About USD 2-4 per cubic metre (CBM).
Cost picking and packing the order - Costs starts at USD 2 and goes upto USD 10 per item.
Courier charge for last delivery - Costs start at USD 5 and goes as high as USD 40 per order for heavier and bulkier items.
We have kept it simple and outsource it to a third party 3PL. Costs are transparent.
For US, the cost of fulfilment is mind boggling. The last mile delivery costs upwards of USD 25. I have not been able to figure the US market yet.
The cost of fulfilment should be under 10% for consumer brands. However, for low value items such as the retinol serum, the cost of fulfilment will be 20-25%.
The trick to reduce this cost is - drive up the average order value. Get your consumers to buy more in each order. The last delivery cost stays same either you send 50g or 900g. Hence, the more the number of items in an order, the more you can save here.
#4 Cost of talent
Talent = human resources 😒
Okay okay, yes I don’t like managing people. I wish everyone just worked diligently and at their highest productivity. But does any human do it? Very few and such people are expensive.
Cost of talent includes
Salary cost of employees
Agency retainer cost
Freelance cost
Office rent
The way to optimize this is to keep the bare essential employees in the company and leverage agencies and freelancers. Employees are good for high touch activities while agencies and freelancers can do defined tasks repeatedly at 10-20% of employee cost.
#5 Cost of capital
Where are you getting the money to run your business?
Your savings or investment capital - Zero upfront cost, high long term return.
VC investment - Cheap upfront, expensive in long term. They take equity in the business.
Bank loan - Needs business records, costs 7-10% annually in interest.
Revenue sharing startups - They charge you 15-20% of your monthly revenue.
I would only choose the top 3 options, hope I never have to touch the fourth option.
Capital is the constant fuel needed to run the business. Having a reliable source of funds is most important to run a business.
#6 Let’s add up all the costs
Let’s start adding
Cost of product - Assume initial inventory of 2500 units, so total of USD 12,500. Upfront cost.
Cost of marketing - USD 10K monthly. Recurring cost each month.
Cost of fulfilment - Depends on #orders. Assume 100 orders at USD 7 per order. Cost - USD 700.
Cost of talent - Depends on kind of talent you hire. For SG, assume 3 member team at average salary of 4000 SGD. Assume rent of 5K SGD per month. Total cost - 17000 SGD or 12600 USD.
Total cost
Month 1 - 12,500 + 10,000 + 700 + 12,600 = 35,800
Month 2 - 0 + 10,000 + 700 + 12,600 = 23,300
Any consumer brand in Singapore should make at least 30K USD a month to barely survive.
The marketing cost and the talent cost is the devil here. 👿
Thank you so much for reading till here. Are you a superstar or rockstar? 😆
Please do like and share with your friends and colleagues.
My plan to start interviewing founders and Singapore businesses is moving at a tardy pace. Unlike my blog posts, which have turnaround time of 6 hours, the interviews will take over a month to bring out. I am wondering should I write or make videos?
Merry Christmas from Jisoo 🎄🎄🎄🎄🎄
Enjoy the next 2 weeks. Take a chill pill and relax. 😍