The SULA LABS Report - The Cost of Making Skincare + Dupe Economics
Authors: AJ Addae, Kahina Jean-Baptiste, Spate Trends
Abstract - A letter from the founder, AJ Addae
Q4 - it’s here, and it’s heavy. In fact, it’s been so heavy that this SLR is going out a day late. One of the things people don’t talk about in running a business is the heaviness that this can all bring. Sure there’s glory and good times, but there can be a lot of overwhelming low times, especially when you feel that your worth is tied to your success (hard pill to swallow: it shouldn’t be). But if you are reading this, and you are a founder (or not), I just want to give you a comforting nod that you’re not alone. This can be a very rewarding journey, but at many times, a lonely journey. And you’re doing it, even though you don’t have to. The heavy thoughts that there are people depending on you, that there are goals to hit, and that you may not be enough - try putting them aside for a moment. There is something that keeps you here, and that thing matters.
It’s Q4, and you’ve made it here. It’s October 1, 2023 and you have made it here. That’s enough to celebrate about, in my opinion. If you can, please ignore the fact that this SLR going out a day late - I’m (AJ) a founder and this year has been heavy, but I’ve made it here. With you, reader. And I’m glad.
This month’s SLR will focus on a few money-oriented things: pricing out products, the validity of dupes, and the most expensive materials a product can use. If you’re a founder or consumer that is curious about cost versus quality, then this SLR is for you.
Cash Flow — The Cost of Making Skincare
Picture this familiar scenario: a new product rolls out, and it boasts promising technology — peptides you’ve never heard of, that one stable vitamin C that’s too hard to spell (tetrahexyldecyl ascorbate), and it’s all wrapped up in the most beautiful airless packaging. Above that, you have the lovely convenience of purchasing online, or at your local Sephora stores. You’ve been sold, and you’ve decided you need this product — until you glance at the price tag: $65 for a 1 oz/30 ml moisturizer that will expire in 6 months. It can feel absurd that 30 milliliters of goop in shiny packaging can cost as much as a tank of gas. Absurd that is, until you ponder the cost of making skincare.
Above is SULA LABS’ pricing pyramid. What the consumer sees is the selling price — but what we see in the lab (and what the skincare company sees) are formula costs, packaging costs, MOQs, and distribution channels. Below is a breakdown:
Formula cost (“the goop”): This is how much your formulation costs. And that comes from the cost of your ingredients. Every ingredient has a specific cost per kilogram (i.e. $50/kg). And to complicate things even further, each ingredient supplier sells ingredients at various different MOQ’s and package sizes (i.e. 25kg drums, or 5kg pouches). For example - your formulation calls for 4% glycerin. You can buy glycerin for $3/kg from Supplier A, and their MOQ for this ingredient is 100kg. In comparison, you can buy higher quality glycerin from Supplier B, and their MOQ is 25kg. In both scenarios, which glycerin you ultimately end up buying is determinant on how much glycerin you’re using in the formulation, your production run’s MOQ, and in several cases, whichever glycerin has the shortest lead time so you can produce your formulation on time. Ultimately, the culmination of your individual ingredient costs create the formula “goop” cost. But, put a pin on this until we get down to manufacturing MOQ’s.
Primary & Secondary packaging costs: Primary packaging is your bottle, jar, and whatever you are using to dispense your product. Note that in many cases, the caps, droppers, and lids are sold separately from the bottles and jars (we know - it’s a pain). Secondary packaging is the box, any leaflets, inserts, or kits. Simply, it’s what you put the primary packaging in. There is an element of practicality and synergy between the primary and secondary packaging. Similarly, there is an element of practicality between the goop and the primary packaging. And of course, “fancier” packaging costs far more than your standard customized plastic packaging. Until we get to manufacturing MOQ next, just note that packaging is often bought separately (and has its own MOQ volumes as well - i.e. 5000 dropper bottles, or 10,000 leaflets).
Manufacturing + Minimum Order Quantity: It’s about to get complicated and math-y, so follow us here. Previously, we mentioned that ingredients have their own MOQ’s, and the culmination of your individual ingredient costs create the formula “goop” cost. We also mentioned that packaging has its own MOQs, which is an additional cost to take into account when determining your “formula cost”. The last thing that ties this all together is your manufacturer’s MOQ.
These days, manufacturing MOQ’s commonly start around 5000 pieces. Have you ever tried to buy a custom t-shirt and notice that the lower the amount of t-shirts purchased (and therefore produced), makes for a higher t-shirt unit cost, whereas a higher amount of t-shirts produced makes for a lower t-shirt unit cost? This same thing applies to manufacturing as a whole — and this is made true because raw materials and packaging types are purchased in bulk (often 5000+ units). The lower the manufacturing MOQ, the more excess of raw materials is left over that you are already paying for. And this all just sits in your manufacturer’s warehouse, especially if you use materials that they don’t often use (such as custom packaging with your brand’s name on it). This is especially true when you ask to run a 5000 unit production run of your formula, but the lowest MOQ you could find for your packaging was 10,000 units. Not to mention that formula types such as emulsions tend to add more of a labor cost, versus serums (which may not require homogenization or certain industrial equipment). You can always assume that the higher the amount of units, the lower the unit cost. This is why the #1 manufacturing mistake we see from our founders at SULA LABS is assuming that a lower manufacturing MOQ means a lower formula cost. Yes, even if you are making and filling your product at home. We’ve done the math below:
Scenario A: The founder asked for a 5000 pieces production run, even though their primary packaging’s MOQ was 10,000 pieces. Their formula has a $7.19 goop cost per unit + $1.12 packaging cost per unit + $0.50 labor cost per unit = $8.81 per piece. For 5000 units, the founder will pay $8.81 x 5000 = $44,050, with 5,000 units of excess primary packaging they will use for later
Scenario B: The founder asked for a 10,000 pieces production run. Their formula now has a $5.02 goop cost per unit + $1.12 packaging cost per unit + $0.65 labor cost per unit = $6.79 per piece. For 10,000 units, the founder will pay $8.81 x 5000 = $67,900.
Why is there a price difference? Scenario B turned out with a lower formula goop cost per unit, likely for several reasons. The #1 reason we see for this at SULA LABS is that a founder is wanting a material with a high MOQ, so they are essentially paying for excess of this material that they won’t be using in the 5000 pieces run. If they were to remove this material, or switch to a similarly performing material, this could decrease the goop cost of Scenario A. However, when they choose Scenario B, they are using the material all the way through. Another reason could be that in many cases, when you purchase more of an ingredient such as in Scenario B, the cost per kg decreases because you purchased more (sound familiar?).
What is more efficient? In Scenario A, the founder will later do another $38k production run after they run out of 5000 units (we subtracted the packaging they had left over). In Scenario B, the founder paid up front to have units around for longer. Scenario B saves the founder more money in the long run.
Distribution channels: As one can presume, logistics and fulfillment is an additional cost. Many medium-size brands tend to use their manufacturer’s third-party logistics (3PL) services to house their units and distribute to retailers, and e-comm purchasers. 3PL’s are great if they are affordable, because they take the distribution aspect off a brand’s hands. Founders of omnichannel (distribution through multiple channels, not just e-commerce) brands might tell you that purchase orders from retailers may not be that large, and this portion really all depends on the stage that your brand is in, and what a retailer believes your brand will offer to their customers. For this part, we advise to add shipping costs to your formula’s “unit cost” in determining your overall selling price.
Selling price: Finally, we’ve arrived at what the consumer sees. The selling price is a culmination of goop, packaging, manufacturing costs, distribution channel, and of course the margin that you apply to the product.
Now, let’s take it back to the familiar scenario of the peptide-rich THD ascorbate moisturizer mentioned that costs $65 for 1 oz of product. If this product is coming from a larger brand with omnichannel distribution, expect for them to be running production runs of let’s say 50,000 pieces. Not only are the packaging and expensive ingredient costs hiking up the price, but also the margin. The larger company has to make back all the money they put into producing this product, marketing this product, undergoing clinical tests that cost upward of 25k, and paying influencers to get the word out. Let’s say the $65 for 1 oz product came from a boot strapped brand (a brand that has taken on no venture capital or investors). You can bet they’re running 5000 pieces, and a lot of the cost comes from the margin applied (due to all the money they put into producing the product), and the fact that the brand needs to grow.
While we fancy ourselves as scientists more than mathematicians at SULA LABS, the cost of making skincare is a complicated equation. Shameless plug of course, that we offer pricing exercises as a service. But overall, the take home message for consumers is that brands had to spend a lot of money to earn your money. And with supply chain difficulties evergrowing, manufacturers raising labor costs, and ingredient prices often fluctuating, our message to founders is to hold tight — and tighten up where you can.
Product — The Rise of “Duplicate” Beauty
According to our friends at Spate, “Dupe” has been searched 30.9K times on average each month alongside skincare (+30.3% YoY growth) and while it normally means to be tricked or fooled, TikTok has rebranded it as the shorthand for a cheaper “duplicate”/knockoff of popular products seen in the general market. Dupe content has been driven by TikTok’s heavy GenZ demographic due to their low economic power in the economy right now. It’s cold, hard proof that they’re enticed by products typically marketed to those at higher socioeconomic backgrounds but don’t have the money to shop the real thing. Take the recent Trader Joe’s Farmacy Dupe into example. Dupes allow GenZ, or anyone without the budget for their taste, to be able to participate in shopping popular products and keeping up with trends without spending beyond their means.
Here is a deep dive of the recent leaders of average monthly search volume in skincare dupes:
Dior Lip Oil - This $40 lip oil has taken SkinTok by storm. TikTok Dupes for this product includes Nyx’s $9 lip oil, Haus Lab’s $24 lip oil, and Amazon’s $8 Lip Oil that even takes Dior’s signature packaging and labeling design.
Paula’s Choice Skin Perfecting 2% BHA Liquid Exfoliant - There’s a reason this is one of Paula’s Choice’s #1 product worldwide. TikTok Dupes for this product overwhelmingly points to Peach Slices’ $11 Acne Exfoliating Toner which uses not only salicylic acid but lactic and glycolic acid as well.
SkinCeutical’s CE Ferulic with 15% L Ascorbic Acid - It’s no surprise this $182 serum is well out of the average TikTok user’s budget, however it’s well loved in the skincare community as a must have for treating skin discoloration — the price is in the patent. Did you all know that no other brand is allowed to combine vitamin C, vitamin E, and ferulic acid thanks to SkinCeuticals’ patent? Dupes for this “cosmeceutical” serum includes Maelove’s Vitamin C E Ferulic for $32 and while it doesn’t have the patented technology or clinical tests, it has 15% L-ascorbic acid similar to Skinceuticals and glowing reviews from its consumers.
But can dupes ever really be duplicate?
Well, from a formulation perspective — not really. This is reinforced by the fact that some products don’t even try to be dupes of each other, but their formulations feel similar. Ultimately, there is no such thing as a 1 to 1 ratio in dupes, even if you copy the ingredient list. In Cash Flow, we mentioned that you can purchase two types of glycerin. Same goes for several other types of ingredients. For example, dimethicone has several various weights (i.e. “heavier” and more viscous dimethicone versus lightweight, silky dimethicone), that are all just captured in the name “dimethicone” in the ingredients list. This gives a difference in product feel. Same for hyaluronic acid — there are several kinds of molecular weights that can be used. This gives a difference in product performance. Let’s take the Dior Lip Oil vs. Amazon Lip Oil for example. They have quite literally the same ingredients lists, but we know nothing about the ingredients’ grades, which has a lot to do with quality (and therefore, the price tag). This is illustrated by the visibly cheaper packaging of the Amazon product, and the visibly premium packaging of the Dior product. Even then, this is the dupiest you can really get.
Let’s look at the Paula’s Choice 2% BHA versus the Peach & Lily Acne Exfoliating toner.
Paula’s Choice INCI: Active Ingredients: 2% Salicylic Acid. Inactive Ingredients: Water, Methylpropanediol, Butylene Glycol, Polysorbate 20, Camellia Oleifera, Sodium Hydroxide, Tetrasodium EDTA
Peach & Lily INCI: Active Ingredient: 2% Salicylic Acid. Inactive Ingredients: Water (Aqua), Butylene Glycol, Arginine, Allantoin, Cucumis Sativus (Cucumber) Fruit Water, Glycerin, Centella Asiatica Extract, Malpighia Emarginata (Acerola) Fruit Extract, Lactic Acid, Glycolic Acid, Potassium Sorbate, Sodium Benzoate, Citric Acid
The Paula’s Choice product gets to the point — mostly water and some glycols, an over-the-counter active ingredient (2% sal acid), a solubilizer (Polysorbate 20), sodium hydroxide to slightly bring the pH to a tolerable level for the skin, and tetrasodium EDTA for formula stability. The Peach & Lily product has all the above, plus a ton of soothing extracts, added glycerin, and a different preservative system. Even with these slight tweaks, these aren’t necessarily going to perform the same for everyone. The Peach & Lily formulation is formulated to be soothing, but could be more irritating for some due to the extracts and small percentage of exfoliating acids. The Paula’s Choice formulation has less ingredients but it’s 3x the price of Peach & Lily’s. The Paula’s Choice formula uses sodium hydroxide to adjust pH upwards (and this can be irritating for some), whereas Peach & Lily uses arginine (which is gentler, but far more expensive than sodium hydroxide). From the bench perspective, these are actually two completely different formulations.
These days, we like to think of “dupes” as formulas that happen to have similar efficacy, but not formulas that are 1:1 ratios of each other. But we’d love to poll the audience here:
Ingredient & Vendor Reports
This month, we’re giving you the details on the most expensive ingredient types to use in your product formulations. This could also be why a product you love is so expensive. This doesn’t mean to stay away from these ingredients — we just know they’ll run the price tag up (and most of the time, for good reason). When we say expensive, we mean more expensive than the average skin care ingredient. For perspective, as mentioned, glycerin should run you about $3/kg. These ingredients below will run you hundreds, or even thousands of dollars per kg.
More expensive Ingredients to Formulate With:
Vitamin C in general, but most specifically tetrahexyldecyl ascorbate
Ceramides. All of them. Even just one Ceramide.