A manufacturer can make your product. That does not tell you whether your business can make money from
it. Before agreeing to a formula, package or production run, work backward from what the market will pay. Then
determine whether the revenue available to your business can cover production, selling costs and the cash
required to keep operating. This matters for hemp operators considering a move into cannabis because a
new sales channel can change the economics even when the product looks familiar.
Start with the revenue your business receives
The shelf price is not your revenue. Ask what the retailer would pay and which entity invoices that sale. Under
a brand licensing or contract manufacturing arrangement, your business might receive a fee, royalty or
another negotiated payment rather than the entire wholesale amount. Clarify the commercial structure first.
Then calculate the economics using the revenue that actually belongs to your business.
Retail markups vary; do not build a plan around a percentage nobody has agreed to.
Get a complete quote
Ask the manufacturer to specify what is included in the unit price and what is billed separately. Development,
ingredients, cannabis inputs, packaging, testing, storage and transport may be handled differently by different
partners. Also ask about setup charges, packaging minimums, overruns, waste and changes in input prices. A quote is
easier to compare when both manufacturers are pricing the same specifications and responsibilities.
Separate one-time development costs from recurring batch costs. You need to understand both the cost of
launching and the economics of reordering.
A simple example shows the difference
Suppose your business receives $10 per unit. Manufacturing and packaging cost $4, while allocated testing and
transport add $1. That leaves $5 before sales support, promotions, overhead and development costs.
If sales support and promotions consume another $2, the remaining contribution is $3 per unit. Selling 5,000
units would contribute $15,000 toward fixed costs and profit. These figures are illustrative, not market quotes.
They show why a $6 difference between revenue and manufacturing cost is not automatically a $6 profit.
They also assume your business receives the full $10 and bears the listed costs.
Test what happens when sales are slower
A plan should still be examined when buyers request a lower price, production costs increase or inventory sells
more slowly than expected. Ask how many units you must sell to recover the upfront commitment.
How long can the product remain suitable for sale? How much cash is available for a second run before the first
one is fully paid for? A profitable unit on paper can still create a cash problem if deposits are due immediately
and retailers pay later. Payment timing deserves its own review.
Decide what the first run must prove
For a new channel, the first run should answer specific questions: will retailers reorder, will consumers buy at
the planned price, and does the product leave enough contribution to support the business?
A smaller run at a higher unit cost may preserve cash while you test those assumptions. A larger run may work
when demand is supported by credible commitments. Choose the volume that fits the evidence and available
capital. Through GrowthWorks, we’re exploring how manufacturer matching and product planning can begin with
these economics. It is easier to adjust the specification before production than to repair a margin problem
after inventory arrives. Do you know your target wholesale revenue and the highest production cost your product
can support? Send me your product category and the number you are trying to make work.
GrowthWorks | Holly’s High Society
This article is for business-planning discussion and is not legal advice. Confirm product, licensing, manufacturing and sales requirements
with qualified counsel and the appropriate Illinois agencies.
