How to reduce your product costs and increase profitability

Our Thoughts

01/03/2023 by The Red Tree

As we live in an ever challenging commercial environment, it is more important than ever to be aware of and make changes to products and their costs in order to maintain profitability.

Having spent her career, before The Red Tree, leading trading and product development functions in major UK retailers, Director of Projects Fiona Glen has extensive experience of working with suppliers to reduce product cost and increase profitability.

Here are some ideas we have picked up over our time in the beauty industry of how you can engineer your products.

For each of these we would advise picking off your bestsellers first, as those are the products that can make the most difference to your margin most quickly:

Overall tips

Think creatively and ask lots of questions of your suppliers, it may have been that a decision which was based on cost previously, is not the most cost effective option now.
If in doubt, use your community to validate changes before you make them.
There will always be risks and costs of making these changes so these need to be weighed up against any cost savings.

Formulation

Often product development focuses on new product development rather than existing product development.
Can you redevelop some of your hero SKU’s to be more cost effective yet retain their quality and consumer perception?
If your fragrance is driving cost in your product there could be an opportunity to re-brief or modify your fragrance to achieve a better cost.
Can you use a modified stronger fragrance at lower percentage ?
Testing costs of implementing the change are likely to be high so this option makes the most sense for high volume SKU’s.

Primary packaging

If you free issue your packaging, can you resource your packaging to achieve a better price?
If your manufacturer purchases your packaging, ask them if they are buying alternative similar packaging for other customers at a higher volume – hence allowing you to benefit from other people’s economies of scale
Staying within the same packaging format eradicates the need to repeat compatibility, testing but both options should be reviewed.
Is there any stickering which is going on that can be added to your pack permanently ?
Can any primary packaging changes also bring greater sustainability credentials.

Manufacturing

Is there an opportunity to commit to higher minimum order quantities that your manufacturer is already accounting for?
Can you achieve a cost saving from resourcing via different manufacturers?
If your manufacturing is disparate, is there an opportunity to consolidate them?

Outer packaging

If you’re using cartons, are they necessary on all products in your range?
How easy are your cartons to assemble for your manufacturer?
Can you decrease the GSM and or print specifications on outer cartons?
If you are using a leaflet, can information be printed on the packaging or a QR code?

Transportation packaging

Thickness, shape and construction and print specification could all impact product cost.
Cost savings can be achieved from tendering this to different producers.

Third parties

Can you renegotiate any terms with third parties such as logistic providers

This isn’t an exhaustive list however, the more you understand the process of your product development from end to end, this will help you to evaluate potential changes.

Obviously the cost of these changes need to be weighed up across the savings of implementing them. Many of these changes could impact testing costs and there could be write off costs or stock disruption if you’re not able to run everything down.

In summary, it’s imperative to talk frequently and in detail with your suppliers. Just because the bottle or the box that you previously chose was the most cost-effective option then, does not mean that it still will be now and therefore asking questions needs to be constant.

The Red Tree is the UK’s leading international beauty brand consultancy and a powerhouse of ideas, insight and inspiration. For an informal discussion on how we might help you, please contact us.