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How To Start a Cosmetic Business in 2024 [+Case Study]

In this blog post, we’ll go through every­thing you need to start a successful cosmetic business.

We will cover all the essen­tials to get your business off the ground and thriving. It’s important to have a plan in place to be successful after launching your cosmetics line.

Maybe you want to raise money for your venture from investors or friends and family. In this case, a plan is crucial not only for yourself.

It’s a blueprint for success.

Think of your business plan as your adventure map. It outlines your journey, keeps you on track, and helps you dodge pitfalls along the way.

What You Are About To Learn

First up, you’ll need to under­stand the market.

We’ll look at how to detect trends and what your compe­titors are up to. You’ll find your own sweet spot in the beauty industry. 

Next, we’ll talk about defining your target audience & buyer persona. It’s all about figuring out who’s going to buy your products and getting deeper into what makes them tick. 

Then, we’ll choose the right product category. You’ll learn how to pick the lane that’s right for you. Of course, we can’t forget about managing the financial part, so we’ll go through some financial modeling. Planning your budget and under­standing your numbers is crucial. 

Finally, it’s all about getting the word out with Marketing & Distri­bution Channels. We’ll develop strategies to ensure your products find their way to your customers. 

Lastly, we’ll wrap up with a Case Study, where we’ll break down what worked for a successful brand to rewind the concepts we went through.

Step 1

1. Under­standing The Cosmetics Market

Starting with a solid under­standing of the cosmetic market is essential. Maybe you’re already familiar with current trends and you have a feeling for what’s selling well from a consumer perspective- that’s a great starting point.

But we need to dive deeper.

Conducting In-Depth Research

For instance, you could study beauty magazines, follow influ­ential beauty blogs, explore industry reports and guides for industry profes­sionals.

You’ll gain insights not only about product specifics but also explore the business side.

Your products may be awesome, but you need to under­stand how beauty companies operate, learn about distri­bution channels and the latest research to stay on top of the game. 

Analyzing Industry Data

You’ll also want to explore statistics, reports, industry studies, and consumer survey results.

They can be found on platforms like Mintel or Statista. They provide you with all the numbers you need to analyze the cosmetics industry.

You may already have a product in mind you want to sell.

But try to keep an open mind when analyzing the market high-level. It is important to under­stand WHAT you want to sell, WHERE you want to sell it and to WHOM. 

Say, you’re exploring the sale of makeup products in the US, you might be interested in what’s selling the most.

According to this report, it’s Founda­tions.

This infor­mation alone doesn’t tell you much about whether it’s a good or bad idea to sell Foundation. You would need to drill down into how the sale of founda­tions has developed over time, what is its share of the overall market, is it usually sold in combi­nation with other products and so on.

It is also important to read statistics the right way.

Does the chart show revenue or units?

Is it overall sales, retail, or online?

How are certain products catego­rized?

How was this data collected?

Identi­fying Specific Products

Once you’re done with high-level research, you may want to consider specific products. This also affects the choice of cosmetic manufac­turer you’ll work with.

Let’s go through an example.

Let’s assume you’ve noticed a trend on TikTok lately. More men get into grooming, so you think it could be an interesting category to explore.

You may want to start your business in your home market — for example, Germany — and then expand further to other European countries or to the US. In this case, you want to look at data speci­fi­cally about men’s cosmetics use. 

For example, from this data point, it seems like the majority of men report that they use skin care either never or less than once a month.

You may need to do some calcu­la­tions and analysis to find out exactly what you are looking for. The number of men using skin care products daily looks flat, but you may need to look at the develo­pment over a longer period.

Also, the latest trends might not be captured yet, and you can’t make any inferences about future trends — so take all reports with a grain of salt. 

Targeting Niche Markets

Most importantly, you’ll need to under­stand if the market you’re selling your products to is a mass market or if you’re looking to sell in a more niche market.

Mass markets are more compe­titive and aim for lower price points but generate the majority of total revenue.

They are harder to compete in and be successful.

You may need to invest a lot more into marketing to acquire new customers and retain them, but you also have high revenue potential.

In smaller markets, your products need to target a specific niche. The demand will not be as high, but you’ll be able to enter the market with a lower budget and more effective marketing efforts.

If your budget is limited, it might be a good strategy to start in a specific niche and expand your assortment once you have some traction.

Step 2

2. Analyze Your Compe­tition

Once you under­stand the cosmetic market well enough, it’s time to analyze your compe­tition.

This may sound obvious but it’s important to under­stand who you’re competing against. This goes back to under­standing the market you’re in.

Identi­fying Compe­titors

Let’s imagine you intend to launch a series of lip oils.

You did market research and you understood it’s a growing category.

Next, you want to see what similar products are sold in your target market.

Which companies are out there that you’re competing with?

You can do this research on- or offline. Some products will stand out because they are listed with major retailers, or they rank well on Google or Amazon.

But don’t stop there, you may need to dig deeper to find brands that are still compa­rably small but growing fast.

It is important to keep in mind, who you’re actually competing with. There’s direct and indirect compe­tition.

Choosing a Niche

Your lip products might have a special ingre­dient that makes them unique.

Maybe it’s plumping — that puts it in a sub-category. Or you may be targeting a certain demographic.

This narrows down the products you’re directly competing with, but there is also indirect compe­tition.

These are products that could substitute yours. It’s better to be on the realistic side when you do this analysis.

Analyzing Your Compe­titors

Now that you know who your compe­titors are, let’s look into how to analyze their positioning.

What are the things you want to check?

First, you’ll want to look at their product offerings.

  • What options do they have?
  • What are their price points?
  • How do they diffe­ren­tiate themselves through specific features?

You’ll also want to analyze their social media presence, marketing campaigns, and partner­ships. This will give you insight into how they connect with their target audience.

Try to examine their distri­bution channels.

Are they selling online, in boutique stores, or in large retail chains? This can tell you a lot about their target demogra­phics.

You can benefit from your compe­titors’ mistakes. Look for recurring comments about what their customers love and what they don’t.

If many reviews on a competitor’s lip oil complain about the taste or feel, those are areas where you could diffe­ren­tiate and improve.

Under­standing Compe­titor Opera­tions and Scale

Lastly, you’ll want to get an idea about the scale of your compe­titors’ opera­tions.

It is very hard to compete with a product that sells really well already in a certain category.

The more revenue your compe­titor generates, the harder it is to compete with.

You can appro­ximate the size of the revenue generated with tools that analyze web traffic. If the company needs to report financial state­ments, they should be acces­sible online.

That tells you the size of the company, but not neces­s­arily how well a specific product sells. In any case, it is important to know who you’re up against.

Don’t be discou­raged if there are existing companies in the same space.

There will be for sure.

It just means you’ll need to be even more creative with brand develo­pment, marketing or diffe­ren­tiate your product even stronger to set it apart.

But be realistic about your chances of success.

Step 3

3. Define Your Target Audience & Buyer Persona

Now that we have a clear under­standing of the market and our compe­titors, it’s time to zoom in even closer and define exactly who we are selling to.

This is where we create a detailed picture of our target audience and develop specific buyer personas.

These personas are our ideal imaginary customers, and they will guide every decision we make, from product develo­pment to marketing strategies.

Identi­fying the Broader Target Audience

First, let’s start by identi­fying the broader target audience for your products.

Think about the demogra­phics such as

  • age
  • gender
  • income level
  • geographic location

For example, if you’re planning to launch a moistu­rizer, you might target middle-aged women who are keen on maintaining their skin’s health and appearance. They value products made from natural ingre­dients.

Diving into Psycho­gra­phics

Next, we dive deeper into the psychographics—these include lifestyle, values, and attitudes.

Does your target audience prioritize eco-friend­liness? Are they influenced by skincare experts, or do they prefer real-user testi­mo­nials?

Under­standing these aspects will help you connect with them on a deeper level.

Crafting a Buyer Persona

Now, let’s craft a buyer persona.

This is a fictional character that embodies the charac­te­ristics of your ideal customer.

Let’s say our persona is named ‘Sophia’.

Sophia is a 42-year-old corporate executive living in a suburban area.

She follows skincare blogs, prefers products that are derma­to­lo­gi­cally tested and safe for sensitive skin, and is willing to invest in high-quality skincare solutions that promise long-term benefits.

Gathering Real Data

To make these personas truly useful, gather real data through surveys, inter­views, and social media inter­ac­tions. Ask potential customers about their skincare routines, their favourite products, and what they feel is missing in the market.

The more detail you can gather, the better you’ll under­stand their needs and prefe­rences.

With a well-defined buyer persona, you can tailor your product develo­pment, packaging, and marketing messages to resonate with your target audience.

Remember, the goal is to think like your customer.

This way, you ensure that your product fits into their lifestyle and meets their expec­ta­tions.

Step 4

4. Plan Your Finances

Alright, let’s dive into one of the most critical aspects of launching your cosmetic business: Financial Planning.

You may have an awesome product but your finances need to work to build a sustainable business.

Let’s first explore which costs we need to account for before we move on to pricing our product and managing our cash flow.

Identi­fying Start-Up Costs

First things first, we need to talk about Start-Up Costs.

These are all the expenses you’ll encounter just to get your business off the ground.

This includes:

  • regis­tering your company
  • building up your first inventory
  • setting up your infra­structure
  • and so on

You should make a list of every­thing you’ll need to spend money on before you make your first sale.

Under­standing Operating Expenses

Next, let’s consider your Operating Expenses.

These are costs you will regularly face while running your business. Think about ongoing costs like office rent, staff salaries, utilities, marketing efforts, and so on.

Depending on your distri­bution channel, there might be different costs. If you sell online directly to consumers, there will be logistics costs.

Either you ship the products yourself or you outsource it, in any case, there will be costs that you need to account for.

If you get your products into Sephora, you’ll need to give a share of your margin to them. This is usually more than you pay for the cost of logistics.

But In both cases, these costs of selling your products need to make it into your calcu­lation.

Pricing Your Product

With that in mind, onto pricing your product.

Let’s say you’re selling a line of eye products such as Mascara.

You’ve done market research, analyzed your compe­titors, and ordered your first batch of products.

Now, how much should you sell your Mascara for?

Calcu­lating Total Cost per Unit

To figure this out, you need to calculate the total cost on a unit basis. That means for every product you are selling, what’s the associated cost?

Let’s assume you buy a Mascara from a supplier for $2.80 per unit, and you sell it online directly to consumers.

Based on some market research and surveys you did, you would like to sell it for $13.95.

Is this a reasonable price to sustain your business?

Calcu­lating Gross Profit

$2.80 represents your ‘Cost of Good Sold’.

On top comes the cost of logistics for shipment. Depending on the size of your baskets, we can assume that it costs around $0.28 per unit. That’s comprised of shipment and material costs.

If you sell your Mascara for $13.95, what remains after you deduct the cost of goods sold and logistics, is $10.87.

This is called your Gross Profit. It’s what’s left after you deduct the cost directly associated with the sale of your Mascara.

Under­standing Overhead Costs

Next, you need to under­stand how much you’ll have to pay for marketing, personnel, and other adminis­trative expenses such as rent, etc.

In business, this is called overhead. This is all costs, not directly related to the production and shipment of the Mascara.

To calculate this on a unit basis, you’ll need to divide the total cost by the number of units sold.

Calcu­lating Operating Profit

For simplicity, let’s assume you only sell Mascaras — 2000 units per month. Every month, you have $10.000 in personnel costs, $2.000 for office space, and $500 for software.

This equals $12.500 per month divided by 2000 Mascaras sold. That’s $6.25 per unit sold.

That leaves $4.62 from every Mascara sold. That will be your operating profit, which is a 33% operating margin.

Finally, you need to deduct taxes and loan payments should there be any to get to the net profit, which is your bottom line.

So, $13.95 indeed sounds like a reasonable selling price.

Forecasting Sales

In practice, this calcu­lation is slightly more complex but in principle, this is how you should calculate the economics of your business. If your cosmetic venture is well funded, you might not need to generate profits from the beginning.

But you have to make sure that you will be able to generate a profit in the future with the selling prices you deter­mined.

Last but not least, you should be able to forecast your sales. Estimating how many units you can sell can be challenging, but it’s vital.

Start conser­va­tively: it’s better to be pleasantly surprised than to fall short.

Step 5

5. Choose the Right Distri­bution Channels

Alright, let’s talk about how you’re going to get your products into the hands of your customers.

When we talk about distri­bution channels, we’re really looking at the pathways that connect your product with your buyers. Each channel comes with its own set of perks and challenges, so let’s walk through them one by one.

Direct to Consumer (D2C)

First up, Direct to Consumer, or D2C.

This is when you sell directly through your own website or maybe an e‑commerce platform you set up.

You call the shots.

You control the brand, the pricing, and the customer experience from start to finish. You also get to gather loads of customer data, which is cool for tweaking your marketing or product.

The flip side is that it’s all on you to bring customers to your site and deal with every­thing from shipping orders to handling returns.

Retail Distri­bution

Next, let’s talk about Retail Distri­bution.

Think physical stores—could be big names or cute boutiques.

Here’s the upside: being on shelves can give your brand instant credi­bility and visibility. Customers often trust a product more when they can pick it up and look at it.

Plus, if you land in retail, you could see your sales jump big time.

But here’s the catch: those retailers are going to take a cut of your sales, and sometimes, it’s pretty steep. And you have to play by their rules when it comes to how your product is displayed and promoted.

Wholesale Distri­bution

Moving on to Wholesale.

This means selling your products in bulk to other businesses—like online shops, spas, or salons.

It’s great because it can get your product out there in a big way, fast, and you deal with fewer, but larger, orders.

However, your profit per item drops, and you have less say over how your products are sold once they leave your hands.

Online Market­places

Finally, there’s selling through Online Market­places like Amazon or eBay.

These places can explode your reach overnight with access to loads of customers. They handle a chunk of the customer service and logistics hustle, too.

But, it’s a crowded market, and standing out can be tough—not to mention the fees and the cut they take. Also, you won’t get to weave that personal brand experience you might want.

So choosing the right channels boils down to under­standing your audience, your business capacity, and how hands-on you want to be with sales.

Start with one, see how it goes, and don’t be afraid to mix things up as you grow.

Example

Case Study: E.L.F. Beauty

Let’s do a case study to rewind what we’ve learned so far.

E.L.F Beauty is an inter­na­tional company offering high-quality, affordable makeup and skincare products. They are publicly traded since 2016 so they need to report their quarterly earnings.

Let’s look at their finan­cials and see how this can help you gain a deeper under­standing of your business starting up.

Income Statement Overview

Now, let’s look at their Income Statement for a quarter of a year.

Their net sales — that’s the total revenue — are $270 Million. That’s up 85% compared to one year ago.

Compa­risons are often done to the same period one year ago for companies that are impacted by seaso­nality.

E.L.F sells its products direct to consumers, retail, and other online market­places. This gives them wide distri­bution to grow their business topline.

If you’re just starting, don’t worry about having only one distri­bution channel to begin with. Eventually, you might have to expand to keep growing your customer base.

Gross Profit and Margin

Next, we’ll look at how much they keep from their net sales after the cost of sales. That’s what’s called ‘Gross Profit’.

For E.L.F., they managed to improve their ‘Gross Margin’ to 71%. Their gross profit is $78 Million in total.

That’s what’s left to pay for all other expenses of the company. Especially for growing companies, it’s important to increase the gross margin over time.

E.L.F. managed this by lowering their cost of sales.

The net sales went up, but the cost did not by the same amount. They claim this is due to foreign exchange impacts, improved trans­por­tation costs, and other cost savings.

You should also have a healthy gross margin but keep in mind it can be improved over time, it does not need to be extra­or­dinary when you launch your brand.

Especially at low order quantities.

Over time, you will be able to increase your gross profit by better purchase prices, improved cost of logistics, and other cost measures that will get you there.

Operating Expenses

E.L.F’s gross profit is $191 Million. They do have to pay their staff, rent, spend money on adver­tising and other fixed costs.

That’s what’s called Selling, general and adminis­trative expenses, or SG&A in short. It’s $160 Million, that’s a lot of money, it’s almost 60% of their revenues.

It’s more than it costs to manufacture the cosmetics.

E.L.F claims it is due to an increase in marketing spend, employee compen­sation, visual merchan­dising, and other costs like paying consul­tants and so on.

These expenses will not be nearly as high in your beauty business to begin with. But it is important to keep in mind that they can be a large portion of your total cost.

Especially marketing spend can be a large share of your net sales if you want to grow your brand.

Operating Income and Net Profit

Now, what’s left, is the so-called ‘Operating Income’.

For E.L.F in Q3 of 2023, that’s $31 Million. That’s not bad at all. Now all that’s left to pay is interest — if your company has any — and taxes.

If you own machinery, it’s important to keep in mind that they lose value over time. But it’s an unlikely scenario for most beauty startups so we’ll simplify this for you.

Now, their final net income is $26 Million.

That’s the money that’s left at the end of each period that you can use to re-invest in your business to drive marketing or hire additional people to your team.

E.L.F. is publicly traded, people own stock in it, even employees. That makes financial reporting a little more complex.

But we’ll neglect this, as it will likely not apply to your business.

Lessons Learned and Takeaways

E.L.F. seems to run a well-estab­lished, growing, and profi­table business. They leverage different distri­bution channels to reach a wide audience.

They have good gross margins, free cash flow to invest in marketing, and growing net income.

But they have not always been profi­table, they were actually losing money for a long period of time.

What can you take away from this?

You need to under­stand how to plan your business finan­cials.

You don’t need to make money from day one.

Your margin doesn’t need to be perfect from the start, but you need to have a plan for how to build a sustainable beauty business that will generate a profit eventually.

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