When embryonic brands select manufacturers, they’re contending for production line space with fellow upstarts and larger players. Manufacturers have the upper hand in establishing pricing, delivery schedules, formula ownership and quantities. However, Allison Moss, founder of 2-year-old deodorant brand Type:A, advises indie brand founders to not be afraid to negotiate. “I was very intimidated in the beginning. I was thinking I had no leverage because I was brand new,” she says. “Understand what the cost structure looks like. Ask around through your network. Call material suppliers. Try to get a sense of how someone might be pricing your product.” The more indie brand founders know about the manufacturing process before initiating it, the better the terms of their manufacturing contracts will be. We’ve examined key elements of contracts to help bolster their production intellect going into manufacturing deals.

There are two principal ways third-party manufacturers produce beauty products: private label and custom. Amy Hart, chief innovation officer at custom manufacturer Elevation Labs, explains private-label companies generate stock formulas. She says, “They have been fully tested, and you slap a label on them with your brand. It’s ready to go in a very short amount of lead time.” Custom manufacturers produce unique formulas for a brand. Prior to entering a deal with custom manufacturers, Hart recommends brands learn about their core competencies. Elevation Labs, for instance, focuses on clean skincare, haircare and sun care. For an entrepreneur interested in deodorants, exploring a manufacturer that hasn’t done them isn’t wise.

Going the custom route isn’t cheap. Paltry quantities aren’t ordinarily worth it for a contract manufacturer. Gavin Collier, CEO of Dynamic Blending, says brands traditionally haven’t been able to get their foot in the door with manufacturers unless they were ordering 10,000 to 50,000 units or above per stockkeeping unit. The indie beauty brand boom shifted the marketplace, and many manufacturers lowered their minimum order quantities or MOQs. Dynamic Blending will consider an MOQ of 1,000 units, and emerging behind-the-scenes companies like Skin Affinity Inc. have been set up to satisfy limited runs of that size. Of brands, Collier says, “If they are going to order 1,000 units, they need to understand they are not going to get rich on 1,000 units.”

Contract manufacturers aren’t going to get rich on little runs, either. Amid the pandemic, they’re increasingly pulling away from them. They don’t want to be stuck taking on a ton of tiny orders that might be canceled when a single bigger order from a well-heeled brand yields the same windfall. Robyn Watkins, founder of product development firm Holistic Beauty Group, details that MOQs for sunscreen have generally climbed from 5,000 units to 10,000 to 25,000 units. Hart emphasizes Elevation Labs is paying extra attention now to doing business with brands that will have longevity. “If you don’t know your stuff, you should make sure you have the right team members that have industry knowledge,” she says. “That’s going to expedite the entire process.”

There are several factors influencing manufacturers’ prices, including ingredients, quantities, testing and labor. “Manufacturers will break down labor cost down to the penny, and it comes down to the number of human touches your product will require,” says Collier. “If you have a carton or a cap that needs to be sealed, there is a price associated with each of those functions.” As Moss counsels, having familiarity with raw materials costs is valuable for brands at the negotiating table to sense whether the quotes they’re receiving are out of whack. Collier says, “If you want to appear to be a bigger customer, usually you will do your own pricing on everything, and you try to determine what the actual price of the unit is. All manufacturers are going to take their markup, but you will be able to determine what the markup is if you’re able to deduct out the things going into the finished goods.”

For manufacturers and brands, quantities are crucial. Collier says, “If somebody is going to be ordering a larger quantity of units, they are going to be entitled to price breaks that someone who is ordering 1,000 units is not going to be entitled to.” To be specific, Watkins estimates an indie brand might pay $5 to $6 per unit for the costs of goods of a simple moisturizer at low MOQs compared to the $2 to $3 per unit a bigger company pays at high MOQs. Jennifer Raphael, president and CEO of product development and manufacturing company Orchard Custom Beauty, suggests beauty entrepreneurs ask manufacturers about the MOQ thresholds triggering price reductions. “Some factories will say it’s at 25,000, and one might be at 10,000,” she elaborates. “The brand might break even on the launch, but, moving forward, when they are able to get distribution up, they will be able to make money, and that might work for their model.”

Warren Becker, CEO of contract manufacturer Cosmetic Solutions, prefers brands impart their target retail prices. “Are they looking for a $4 product they can sell for $100 or are they looking for a $2 product they can sell for $20? Have openness and transparency upfront about what you want to make and for how much,” he says. “If you can go to a manufacturer with that, they should come back to you with a product in your price range.” Manjot Shergill, founder of Skin Affinity, instructs brand founders to figure out what aspects of their product they’re flexible about and what aspects they aren’t. She says, “We have had customers that want a more expensive formula, and we’ve said, ‘OK, we can’t do this at the number of units, but what can we do?’ Can we tweak the formula? Can we work with smaller packaging?”

Manufacturing doesn’t happen overnight. Depending upon the manufacturer, Collier approximates beauty manufacturing lead times span eight to 20 weeks. Small brands won’t typically be placed at the front of the queue and will have to wait the longest. If brands are keen to have a product out by the holiday shopping season, Collier says the product should be in development six to eight months in advance. He stresses brands should have production schedules in their contracts with manufacturers or, at least, outlined in an email. “When you are going to pay for a service, you want to get a timeline from the manufacturer,” he says. “If you don’t have a timeline, you are not going to be able to hold someone to a timeline.”

Raphael underscores brands should discuss reorder timelines with their manufacturers as well. She says, “If the reorder timeline is 18 months, that’s not going to work because they’re going to be out of stock for a long if they sell out.” Collier concurs, noting there can be severe consequences for failed restocks. He says, “Customers like Walmart and Target, if you run out of product, they may drop you.” During the pandemic, Hart mentions lead times are being prolonged across the entire supply chain, making it tricker to go from concept to finished good. She shares that the lead time for a cap a client of Elevation Labs is using has stretched from 12 to 22 weeks. Hart says, “Real hard launch dates right now are being challenged in the world we are in, so maybe think about online launches first. It’s a tough conversation, but there are just so many surprises with lead times.”

Brands should get to know the manufacturing partner they’re going into business with and whether there are quality people behind it delivering quality formulas. Hart says onsite visits can be fruitful get-to-know-you occasions. Of course, the pandemic has rendered them tricky. In place of in-person visits, Elevation Labs conducts virtual visits. Brand founders should ascertain that they’re going to have a point person at the manufacturer to field their needs and concerns. Hart says, “Making sure you have a direct line of contact to the R&D team is key.”

Going into a manufacturing deal, Raphael tells brands to be clear about what they desire in and out of their formulas. “They may say, ‘I want it to be 95% natural or I want it to have 12 ingredients.’ All of those parameters are going to determine the price,” she says. Becker queries brands on their no-no lists at the outset to guide Cosmetic Solutions’ product formulation. “It’s important for the lab and client to really understand what’s in the realm of possibility,” he says. “There are a lot of brands that don’t want silicones, but they want a nice silky feel. That’s a big challenge for any clean formulator to achieve.”

If a brand aims for certifications such as cruelty-free or vegan, Collier says Dynamic Blending will assist them in picking ingredients suitable for those certifications. Hart remarks that brands should worry if manufacturers aren’t forking over information about ingredients. “There’s a movement to become more transparent, and we are all for that,” she says, adding, “If somebody says, ‘I need to understand the organic certification of this raw material and where it is harvested,’ we need to have that for them.”

For brands, Hart says a pilot run is beneficial to verify a product is labeled correctly, and is tested and stable. A pilot run could be 10% to 20% of the full production run. There are a series of tests manufacturers can perform on a product. Stability tests, packaging compatibility tests and preservative efficacy tests are among them. Referring to stability testing, Collier says, “You really want to know that shelf life you’re putting on the bottle is the actual shelf life.” He continues that it’s critical brands touch base with manufacturers about the tests relevant to their exact product formats, formulas and packaging. Collier says, “Sometimes we have to clean up a lot of messes. We receive formulas from other facilities without the proper stability testing so the product, after three months, starts growing microbes or completely disintegrates, and you have to scrap the batch.”

Watkins is adamant brands should be clear about where they stand on formula ownership heading into a manufacturing deal. It’s customary for a manufacturer to own a brand’s formula. The manufacturer’s ownership is in return for its work on raw material attainment, and research and development on the formula. If a brand owns a formula, manufacturers fear they’ll do all the work, and a brand will transfer the formula to another production facility promising cheaper prices.

Watkins doesn’t believe formula ownership is always essential for brands. If they aren’t bringing a product that’s truly innovative to the market, perhaps a non-disclosure agreement (NDA), a customary instrument of cosmetic manufacturing contracts, is sufficient. The NDA will generally stipulate that the formula has to be handed over to the brand in the event a manufacturer is shutting down. A step above an NDA, Watkins says exclusivity can be a constructive arrangement. The manufacturer may acquiesce to exclusivity if a brand signs a five-year contract with it, for example. Watkins elucidates, “If it it was your idea and concept and, although they did the execution, you want exclusivity, 98% of the time, they will grant you that.”

If a brand is insistent on formula ownership, Watkins says it should relay the reasons for it to the manufacturer. “It really does change the whole dynamic of the conversation when I say, ‘The reason why this brand wants to own this formula is they want it for their valuation because they are looking to scale and get acquired and, without owning their IP, it weakens their valuation,” she expounds. “A lot of times, when I say it that way, they get it.”

There are a few paths to formula ownership. A brand can pay for it outright for an estimated $5,000 to $25,000, secure ownership over time or procure it upon hitting prescribed purchase order amounts. A growing group of manufacturers are becoming more open to brands owning formulas. At Elevation Labs, Hart says, “Our stance is that we want to support the brand, and we don’t necessarily want to hold a formula hostage to make sure the brand stays with us over time. We are in this business as a partnership.”

For brands that have formula ownership, Collier urges them to obtain processing instructions and equipment information, too. “If I’m going to move to another manufacturer, and I have a recipe and don’t have the same equipment or similar equipment as the other facility, it’s going to be difficult to copy that result,” he says, “Everybody knows how to make a cookie, but depending on who is making the cookie and what type of equipment they have, it might turn out differently.”