Is A 700% Retail Markup Too Much For A Beauty Product?
During an episode of the ABC television show “Shark Tank” that aired Friday, Fur co-founders Laura Schubert and Lillian Tung reveal the brand’s signature oil costs $5.34 to make and retails for $46, leading to a markup of more than 700%. In a subsequent post about the markup, anonymous Instagram account Estée Laundry wrote, “There might be other costs for a company with ~12 employees and no large marketing campaigns, but the markup seems higher than most brands featured on the show? And we all know the science, R&D and testing that’s involved in creating a natural oil blend is astronomical ?.”
We wondered how beauty industry experts and indie beauty entrepreneurs would react to Fur’s pricing calculation. So, we asked 27 of them: Do you think Fur’s markup is reasonable?
- Jeffrey Ten CEO and Managing Director, Global Brand Development
Within the cosmetic industry, this is far from earth-shattering. We all know that the general price index from retail to COGs is 10 to 1. So, honestly, even a $4.60 COG would be normal. What consumers need to understand is, due to the cost of running a beauty business, the operations, marketing, selling costs and retailer margin consume about $42 of the $46. So, at very best, the brand is making $4 on maybe a $23 wholesale. If it is an e-commerce-only play, there may be a benefit of saving the $23 margin, but, to really succeed in DTC, you are spending money on SEO, advertising, affiliate marketing, influencers, trade shows, etc.
In the end, whether it is retailer-driven or DTC-driven, many times the margins in the end are around 15% EBITDA at best. These figures are for established businesses as startups usually lose money, so the brand needs to recoup losses from their investments. This by the way is no different in any consumer product brand. As they say, everything is in the fine print. I am sure on a TV, where they have five minutes to make a pitch, Fur Oil left out the fine print.
- Stacey Boguslavskaya Co-Founder and CMO, Lunata Beauty
There are many overhead costs to take into account and, just because they are a startup, it does not mean that, even with a 700% markup, they can be profitable. It would be interesting to know what their cost to acquire a customer is, do they pay commissions to sales reps, what margins do they give to retail partners, is this their only product? What is the average cart size? How often do people reorder, and what is the lifetime value of their customer? How much do they actually go home with?
- Ginger King Cosmetic Chemist and Founder, FanLoveBeauty
It’s totally reasonable if they have international in mind. Some international distributors take 80%. Yes, 80% of the margins. As you know, U.S. retailers take 50% to 60% already. For COGs of $5.34, they could retail for $55.00. This is the right business model. What I’m doing at FanLoveBeauty is that I’m almost like a nonprofit, but, for the first collection dedicated to my celebrity crush, I’m OK with that. For future SKUs, it will make business-sense.
- Andrea Pierce-Naymon Founder, OY-L
As far as markups go, I am also a retailer, so I understand markups and what the brands have to go through to maintain a business. What a brand has to do to market a product today is crazy. Every day, I’m astonished what goes into the price of a product besides ingredients, jar and a label. I keep my prices at a mid-price point because I want my products to be obtainable, but I do have to admit, when I look at a label and then see the price, I wonder what other costs are going into that product besides cost of goods.
I’ve thought about “Shark Tank” and, then, didn’t because that info is out there, and I wondered what the general public would think when they hear cost and retail. Anyone that has an indie beauty brand knows there is so much more involved in markups. Something else the public doesn’t understand is that giant companies are using water and chemicals that are pretty cheap and their prices are even higher. I don’t think it’s fair to single Fur out. If Estée Laundry wants to be astonished by markups they should look at designer jewelry and eye glasses. That would really blow their minds.
- Joan Sutton Founding Partner and CEO, 707 Flora
There is so much that goes into making a brand, and each and every product requires a lot of time, brainpower and money to bring to market. The cost of goods doesn’t always account for all the costs of doing business, especially as an indie beauty brand. We have to invest a lot upfront. If you want to own your formula, it could be upwards of $20,000 each. To get decent pricing on anything, you’re probably buying in some sort of quantity. It can be hard to get favorable payment terms. There are surcharges for packaging and deco, testing fees, and all of this requires management, so add in the cost of employment.
Most brands want to sell to distributors and retailers which can take 50% to 70% off retail, and require more investment to sell in with marketing and warehousing. So, is the mark up reasonable? Yes, if you factor in those costs, you probably realize that for a small brand without preexisting infrastructure and a ton of money, it’s not as glamorous as it sounds. And, if you really want to see high margins, look into the COGs and retail pricing of the luxury brands. Also, the margins are high on the mass brands, not just the luxe brands. I've seen what corners mass brands can cut with their raw materials and economies of scale. They have really high margins. Think of the grocery store brands that are selling in the $20 to 30 range. Their COGs can be less than 10% of retail, which is more of a markup than Fur.
- Julie Pefferman Founder, The Lab & Co.
When Estée Laundry highlights the 700% markup, it leads the consumer to think it's pure greedy profit. There are some considerations one should make before just assuming that any company is simply pocketing these markups. There is so much to unravel here, especially when talking about the steep costs of a beauty startup.
First, when you go on “Shark Tank,” you want the markup to seem attractive, and you want your cost of goods to be low. I agree it can be a little off-putting as a consumer to watch founders brag about their huge profit margin, but they are just posturing for the investment. For example, their costs were stated as $5.34. It's possible they had to buy 50,000 units of packaging to get price per unit so low and maybe they did it just for the show, who knows? They might only sell 400 bottles per month. Yet, a startup would have to recoup this cost to just keep cash flowing and inventory available. The goal of any business is to make a profit and, honestly, most startups don't.
As a consumer, you have to ask, what comes out of that markup? Something unique to Fur is that they are starting a new movement, not just selling a product. This means they spend more advertising dollars than most. Startups usually have a higher customer acquisition cost as they are vying for real estate in a really crowded beauty marketplace.
That comes right out of that markup. Anytime you do something radically new, it can cost a lot to educate the consumer. If you believe in the movement, philosophy, mission, charity, etc., then supporting the business at a higher cost might really make sense. That 700% markup includes employee pay and benefits. At my business, we are really competitive for being so small, but it comes at a cost.
I get complaints about the price of my Butt Acne Clearing Lotion. Those customers are comparing me to CeraVe or Neutrogena, and they might not be familiar with all the costs associated with being a small business. It's an apples-to-oranges comparison. We are priced so that we can stay in business, and our loyal customers appreciate that we keep providing them this unique solution.
Usually, there is some minimum markup necessary to survive as an indie brand. My tip is to add shipping costs before adding markup since many of us will have to make shipping concession or offer free shipping on our websites. I always suggest adding cushioning as unexpected fees eat away at your bottom line, especially for first-time entrepreneurs who don't automatically expect all of the hidden costs. It's always easier to lower the price than raise it later. Customers will love you for lowering a price, but they will throw you under the bus for raising it. Raising prices your first few years should be avoided at all costs.
One killer hidden cost is when the company pulls the retail/wholesale switch. Sometimes, you start out thinking retail never. Then, the day comes and your pricing has literally no margin for it. We've had to turn down retail and TV opportunities because we did not build in markup that could support it. Most retailers expect 40% to 60% margins. Plus, the Sephora's of the world demand free customer samples and staff training, which can be hugely expensive.
- Mary Ware Founder, Minimo Skin Essentials
It's easy to look on the surface and assume that a 700% markup is off the charts and absolute consumer price gouging, but there are many other factors to consider. Labor costs, taxes, advertising, insurance as well as the overhead costs of operating a brick- and-mortar facility are significant and quickly eat away at gross revenue. As the direction of Minimo Skin Essentials has shifted over time, our brand has had to make gradual increases to our retail pricing in order to account for expenses outside of the base cost of production and packaging. The reality is that it’s not a question of a 700% markup being reasonable or not, but rather viewing the markup as a necessity due to the required expenses that arise when owning and growing a beauty brand.
- Karen Young Founder and CEO, The Young Group
I have to defend Fur here. Although the brand is selling direct-to-consumer, they also have retail distribution. So, of the $46 SRP, they are lucky if they get $20 to $23 of that at retail. That means their COGs is about 23%. The $5.34 COGs divided by the $23 net sales price equals 23%. The formula we use for prestige, which is where Fur positions itself, is COGs times 10 equals SRP. So, $5.34 times 10 equals $53.40, which is higher than their SRP of $46.
Cosmetics has a very high promotional spend compared to other industries. I work with a lot of indie brands. When I create their P&L and gasp over the amount of money I have to put in for R&D costs, product testing, claims substantiation, packaging, sampling, in-store merchandising and training, trade shows, public relations, social media, it's mind-bending. Honestly, at that SRP, I don't know how they have enough margin to cover their expenses.
- Mia Bell CEO, Opal Avenue
It's certainly brave and bold of a company to disclose intimate business information in such a public way. My reaction to Fur's recently publicized pricing information is one of encouragement. Coming from the wholesale and B2B side of business, I all too often find that independent brands have not built in enough padding in their margins in order to sell into retail competitively and scale to the heights they desire. While it may be a shock to the end consumers that are now aware of Fur's heavy markup, from a financial standpoint, it seems to have been a very smart move from the get-go.
- Ron Robinson Cosmetic Chemist and Founder, BeautyStat
My post on the Estée Laundry thread was, “Nothing to see here. Look at the markup of bottled water.” The reason why bottled water is a great comparison is that the biggest component/ingredient of the product is free! So, a company is taking something that is absolutely free and charging $2 to $4. There is nothing necessarily wrong with this because the consumer is paying for the processing, filtration, manufacturing, research and development, customer service, packaging, convenience, etc.
- Arjun Sampath Founder, Soma Ayurvedic
I think the Fur markup is fair and in line with premium tier brands in industry. While their gross margin may seem very high to the casual spectator or “Shark Tank” viewer, there are so many marketing costs every DTC startup faces to raise awareness and acquire customers. The customer acquisitions costs alone on social media and on Google are increasingly high and, thus, startups need to have healthy margins in order to scale. Factor in other marketing costs like trade shows, sampling and, then, add in salaries and overhead, and most startups are lucky to break even in the first few years. Ultimately, the market will tell an entrepreneur if his or her price is fair and competitive.
- Murphy D. Bishop Co-Founder and CEO, The Better Skin Co.
Yes, it is reasonable. If the brand does any wholesale business, we look at margin, not markup. For instance, If Sephora or any other retailer were to buy this oil, they would pay approximately $18.40 or a 60% margin. If the cost is $5.34, the brand makes approximately $13.06, but has an entire host of other cost that come out of this number, including marketing, warehousing, gratis, personnel, etc. The $13.06 dwindles quickly. Something else to keep in mind is, if the brand produces 5,000 pieces, they do not all sell at an equal rate, yet the brand likely had to pay their suppliers. If the brand signs an international distributor, it can be at an 85% or 90% margin. If we use 85%, the distributor pays $6.90 and the brand makes $1.56. I think $46 is a fair price.
If the brand is DTC-only, I would price it a little less, but not much as the cost to run a DTC business can be the same as wholesale in some instances. The exception is if you are a viral hit and do not have the additional marketing cost like with Kylie Cosmetics and Jeffree Star. The thing about pricing a product is that you must remember is that everyone has to get paid: press relations, social media, digital advertising, components, talent, legal, regulatory, etc. The list goes on. It’s not a cheap undertaking.
- Kimberlee Keitt Founder, Ode to Self Skincare
While they like to call out companies for unethical practices and corruption within corporations, I really feel like Estée Laundry is digging here and honestly can't really point out Fur for this. There are several companies in the beauty and skincare industry with markups that are insanely crazy. Those companies that have products that cost $135-plus have markups are probably just the same, if not more. Now, do I think that the markup of 700% is a little high? Yes, I do. Because looking at their ingredients panel, some of the ingredients on there like jojoba oil and grapeseed oil aren't overly expensive. But what can make it costly is the price of the essential oils and other compounds that they have in that product, which, when you order in bulk, can be fairly costly. Then, when you look in the background of things there’s the salary of people who work in the company, contractor expenses and overhead fees, even if they're minimal there are e-commerce fees, shipping charges, third-party manufacturing, etc.
I don't think that it's fair to point them out and make it seem like they're money hungry or unreasonable or trying to be rich. In today's market as an indie brand, I think that it's fair, especially as an indie beauty brand because you're producing at fewer SKUs, and it's what's needed to remain sustainable to keep business afloat. Truth is, I'm sure it may even cost that much for some of these other luxury brands, but, because they're considered "luxury,” then they can mark it up by even 1,000%. It's not that big of a deal in my opinion because I assure you, no one is ripping apart a brand that sells marula oil at $40 when you can get it for less than one-fourth of that price.
- Kirsten King Founder, OILLE
The markup for Fur’s oil is quite reasonable. They’re a really cool brand with great product positioning and a value-based pricing strategy. Pricing strategies usually fall into two different categories of either product-based or value-based pricing. With luxury goods having an emotion attached to purchase, pricing is synonymous with a value-based strategy that is driven by a perceived value. And this value is conveyed through marketing, which is limitless. Both strategies may include product development, raw materials, packaging, product and finishing labor, and overhead costs, everything from turning on the lights to advertising. After COGS are established, product-based pricing has less wiggle room with retail, wholesale and distributor markups because the product is simply filling a short-term need. Think milk, eggs, etc. Whereas value-based pricing has higher margins since it is filling a desire. Think I want to feel good, I want to look good.
- Graydon Moffat Founder, Graydon Skincare
It’s suggested that brands should base their retail prices on the cost of goods being no more than 10%. For investors who know the beauty world, I think there’s an expectation that there is that type of margin. That’s what builds excitement for them. Our products are probably too reasonably priced. To our discredit, we didn’t have the suggested pricing strategy and, now, it’s affecting us in terms of being able to work with distributors and brokers. If we land a big retailer, they would take a huge cut, not to mention the gratis we would need. That’s why brands go broke if they work with the Sephora’s or Ulta’s of the world. The math is clear. I regret not doing a better job at it because it means we are too lean, and how can we grow?
As people are demanding more—transparency, accountability, and efficacious, fair-trade and organic ingredients—that doesn’t come cheap. There’s room for meticulously-made clean beauty products, luxury department store products and dollar-store beauty products. You just have to decide what’s important to you as a consumer. You vote with your dollars for what you value.
- Alexa Lombardo Founder and Chief Strategy Officer, Atomic N°8
For the first one, this is approximately a 12% cost of goods based on the retail price. That means, if they are selling wholesale, that doubles because the retailer likely takes a 50% margin. Industry-wise, most costs I have seen range from 10% to 25% per item. This means 20% to 50% when sold to retailers at wholesale price, usually half the retail price.
The reason most brands try to keep COGs low is because it costs a lot of money to market a beauty brand. So much of it is digitally-driven and pay-to-play: Instagram, Facebook, TikTok. Margin does not necessarily translate into profit. A lot of the brands I work with are sacrificing margin to spend more on ingredients as their ingredient and manufacturing stories have now become critical marketing tools, so they see this as an important investment.
For direct-to-consumer brands, though, they need to keep driving traffic, which means a high marketing spend always, which puts them in a difficult position when it comes to choosing to accept a higher product COGs. While 12% is a COGs, it is important to consider what they specifically cited on “Shark tank.” What exactly did that $5.34 include” Was it formula, packaging, labor? Maybe only formula? It’s important to understand nuances.
- Vanessa Florentino Co-Founder, Fifth&Root
This markup is very reasonable. If you look at the rule of thumb in determining markup, the recommendation is around 8x to 10x the COGs. It looks like Fur is right at 8.6, so leaning toward the lower end. Many big-box stores ask for a margin of upwards of 60%. So, if you take this into account as well as marketing dollars, sales commissions and overhead costs, you’ll see the brand is only making a small profit on each unit.
- Nisha Dearborn Founder, Fresh Chemistry
The reality is that all products have a markup. I've managed various everyday brands you shop for at Target, and beauty care brands tend to have margins on the higher side within the store. Then, if you consider the luxury segment and, not just in beauty care, but designer purses, shoes, cars, luxury items have the highest margins. Of course, that margin doesn't all go to the company. It is usually split with the store that is selling the product, and also funds the marketing and promotion efforts. So, whether that is the right markup or not all comes down to one question: Does the consumer find value in buying the product at that price? In the case of Fur, they have a unique product that is addressing a specific need that previously hasn't been talked about. If consumers love their product, then they will pay for it. If consumers don't find the product valuable, then the price will have to come down or the business won't exist. The consumer votes with their wallet. That's the best way to know if it is the right price.
- Matty Schirle Founder and CEO, SkinKick
La Mer and others that have the same COGs sell products for hundreds of dollars. They will sell their products at 10x what Fur is selling its product for. Here’s what is important to understand about the beauty startup world. First, the wholesale price is typically 50% of retail. So, Fur would be selling its product for half of $46 or $23 to a retailer. Often, companies employ a sales rep or distributor who can take between 5% and 30%. So, let’s say they take 30% or $6.90 out of the wholesale price. So, Fur may be selling the product to them for $16.
Fur kindly shared that $5.34 is its product’s COGs. That means the material in the bottle, the bottle and the shipping cost. This is not the total cost! You need to add in general and administrative costs to understand how much money they are making. So, $16 minus COGs minus expenses equals profit. Remember, Fur said COGs were $5.34. So, $16 minus $5.34 equals $10.66. Out of $10.66, you have to pay expenses. The expenses to run a company include office rent, electricity, water, salaries, marketing, social media, graphics, printing, videos, marketing and communications, advertising, trade shows, public relations, website design and management, warehousing, inventory fees, and don’t forget development and legal costs. Then, what is left over is profit.
All I can say is that SkinKick has paid over $1.65 million to get to market. This is money that has to be repaid to the person who invested it. Where do you think that money comes from? Not Santa Claus!
- Kristy Hunston Co-Founder, Avoila
As a brand founder, I'm not surprised by that markup. It's important to remember that there are significant costs associated with product development and starting a company that cut into the company's profit margin.
- Chelsi Ostreich Co-Founder, Kinkō
Cost of goods is one line item on your P&L. It takes so much more money to run a business. No matter how large or small the business may be, there are salaries and benefits to pay, warehouse fees, website fees, product send-outs, etc. The list of everything else has to be considered when setting your retail price and included in the markup, otherwise you go out of business fast.
- Aisha Ceballos-Crump Founder, Honey Baby Naturals
While the price of retail products is primarily dictated by the cost of goods, it's also influenced by a variety of additional costs to do business in a specific arena. These expenses include marketing [and] paying retailers 40% in addition to broker and distributor fees. So, oftentimes, even though the raw price of a brand's goods is relatively low, there's still an additional cost of operating a successful business that the consumer doesn't take into account.
Now in this instance, while a 700% markup may seem outrageous, it's likely being driven by what the consumer is willing to pay. If the consumer thinks it's such a hot commodity that they're willing to pay at a higher price point, it comes down to supply and demand, and the brand and, in some cases, manufacturers will respond and mark it up accordingly. So, at some level, it's up to us as consumers to determine the value of a product by not overpaying for it. Another thing people misunderstand or overlook about smaller brands such as Honey Baby Naturals is that our cost of goods are much higher at retail because I'm running less units in comparison to a multimillion-dollar company. So, these are just some of the factors that determine the retail cost of goods. Nonetheless, typically markups are nowhere near the 700% range, and I understand the frustration of consumers.
- Liz Bishop Co-Founder and CEO, Urja Beauty
While a 700% markup is shocking at face value, the brand failed to mention—for TV purposes, I’m sure—the many other costs associated with that markup/profit: product development, testing, packaging, warehousing, shipping, marketing, retail partnerships and, of course, business expenses such as compensation, overhead and legal. Taking all of that into consideration, my back-of-the-envelope math tells me their pricing is not outrageous in order to build and sustain an emerging brand.
- Laura Whitaker Founder, Wildcraft
All products need to be marked up enough to at least cover non-product costs. The biggest of these costs are bricks-and-mortar retail, with some stores asking for as much as 60% of the retail price. And, even if brands sell direct, they need to cover shipping fees, website maintenance and setup. It can also be expensive to get the word out about a brand and educate people on what it's trying to do.
The markup for a product like this seems a bit high compared to others, but I definitely don't find it egregious. There are certainly far worse offenders. When I see a few ounces of oil in the $100-plus range, that's when I really start to shake my head. We created our company as a response to the crazy markups that we see in the industry. And we have managed to create a line of high-quality products at approachable price points, using many of the exact same ingredients that can be found in significantly more expensive brands.
- Morgan Hirsch CEO and Founder, Public Goods
There is no right or wrong margin because every business is different and every brand promise, too. The important thing is the the margins work for that business and their brand promise. A restaurant on a fancy part of Madison Avenue simply can't charge the lowest price for a meal. They also aren’t going to market themselves as a destination for affordable food. Whether it’s a good idea for a company to brag about margins on national TV is another story.
- Akilah Releford Founder, Mary Louise Cosmetics
Whether or not it is appropriate to markup a product by 700% really varies from brand to brand. As a founder, I know that there's many components that are involved to create a high-quality product such as Fur's oil. Ingredients, specific labels, bottles, caps, unit cartons, etc., all have their own individual costs that can vary based upon their quality. As a brand, you also aim to create an experience and lifestyle around your product, and that's hard to put a dollar amount on. It becomes so much more than some random substance in a bottle, but rather a journey that the customer takes when purchasing a specific product.
- Robyn Watkins Founder, Holistic Beauty Group
As a product developer of 16 years, this scenario doesn't seem shocking to me at all. Their margins are nowhere near 700%. Consumers have to understand that there are so many layers of costs involved with developing formulas, testing, packaging and marketing.
Although this brand is making a much healthier margin than most, here is the simple math: $46 retail is approximately $27 wholesale. At a $5.34 cost of goods, they are making around an 80% margin. Retailers often take between 10% and 15% in additional margin to market products. So, at the end of the day, they might be making between 65% and 70% margins.
Although I think affordable products create more brand loyalty, I want to believe that the goop inside of the Fur bottle is meticulously crafted and worth every penny of the $46 retail price.
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