Choosing a Contract Manufacturer to manufacture your cosmetic products is one of the most critical decisions that a Beauty Brand/Entrepreneur will make in building your Brand. Your relationship with your Contract Manufacturer is a long-term working relationship, so one that you should choose carefully. Here are some tips on choosing the right Contract Manufacturer for your Brand.
Personal & Business Chemistry
As with any business relationship, perhaps the most important issue is personal and business chemistry. Is the CM someone you trust with your Brand and someone you enjoy doing business with? Ask for client references to understand how the CM’s existing clients feel about working with the CM.
Expertise & Business Fit
Choose a contract manufacturer who has the proper experience and expertise to manufacturer your products. If you are manufacturing OTC products or Organic certified products, your choices will be limited to contract manufacturers who are certified to manufacture those products.
Most contract manufacturers fall into two categories in terms of the products they manufacture Skincare & Hair Care or Color Cosmetics (Makeup). I have a client who chose a Color Cosmetics CM to manufacture their Skin Care line and the mismatch in expertise caused some serious product quality issues and a strained relationship.
Most CMs have specific Minimum Order Quantities so look for a CM who manufactures run sizes that fit your business requirements, but also have the capacity to scale production runs with as your business grows.
Intellectual Property Ownership
There are two ways to have your products developed.
Contract Manufacturer: Many CMs have in-house chemists who can develop your products. The product development costs will be relatively low depending on the product. Generally, you will be given an exclusive use license to the formulas, but you will not own the Formulas/Intellectual Property, nor will you be given the exact formula and method of manufacture. The CM retains the IP to the formulas. However, you may be given a “buy-out” option to own the Formula/IP if you manufacture in excess of a certain number of units or a cash buy-out.
Independent Cosmetic Chemist: You can have an independent cosmetic chemist develop your products and then tech transfer the formulas to the CM for manufacturing. The advantage of this approach is that you own the Formulas/IP upfront and if your business relationship with a CM is not satisfactory, you can transition your manufacturing to another CM of your choosing.
The approach you choose is a function of how much capital you want to invest in formula development and your end goal of building a Brand. If you are building a Brand as a lifestyle business, then having the CM develop your formulas may make sense. But, if your intent of building a Brand is to build wealth by pursuing an exit strategy of selling your business at some future point in time, Formula/IP ownership is critically important.
IP Ownership & Building Wealth: Give this careful consideration and if you elect to have a CM develop your products make certain that you negotiate the terms of Formula/IP ownership upfront so the requirements are clear in the event you may want to acquire the IP in the future. If you don’t and you get an offer to acquire your business, you will not have to first negotiate the acquisition of the Formulas/IP with the CM before you can then negotiate with the party offering to acquire your business.
Product & Ingredient Quality
Here’s an issue that Beauty Brands really need to pay attention to!
Stock Commodity Ingredient Substitutions: Contract Manufacturers have ingredients that are commonly used in cosmetic products that they have qualified and have experience working with. These are referred to as Stock Commodity Ingredients. If the CM develops your formula they will use their Stock Commodity Ingredients as this helps keep your costs low and they have an ample supply of these ingredients on hand.
However, if an independent cosmetic chemist develops your formula, it is not uncommon for the CM to substitute the ingredients specified/used by your cosmetic chemist with their stock commodity equivalents. The ingredients are the same INCI, but the suppliers will be different.
For instance, Cetyl Alcohol is commonly used in cosmetic creams. There are many manufacturers of Cetyl Alcohol and substitution of one supplier of Cetyl Alcohol with Cetyl Alcohol from a different supplier can have an effect on the haptics or skin sensorials of your product. If you find that the CM’s prototypes do not match the prototypes from your cosmetic chemist, ask the CM to tell you which ingredients they used different suppliers than those specified by your cosmetic chemist.
For the great majority of cosmetic ingredients, substitution of an ingredient supplier specified by your cosmetic chemist with a CM stock ingredient equivalent will not be noticeable in your product. In the event your prototypes are not matching up this may help you understand why. And, if the difference is noticeable enough, you may request that the CM use the ingredient specified by your cosmetic chemist.
Read our Linkedin Post on this topic: Is Cetyl Alcohol, Cetyl Alcohol?
Formula Changes
I had a client call me up one day telling me the CM told him they had to change the formula:
Michael: “Hi Mark, I just spoke with a CM and they told me they need to change the formula”
Mark: “Michael, why do they need to change the formula? The products have all been stability testing and preservative challenge tested and passed the testing.”
Michael: “I don’t know, they just told me they needed to change the formula”
Mark: “Michael, that does not make sense. What changes do they need to make? Did you share the formula with them?”
Michael: “No”
Mark: “Then how do they know the formula needs to be changed?”
Michael: “I don’t know, that’s just what they told me”
While it is quite different to make a prototype at the lab bench than manufacturing scale batches it is sometime necessary to modify your formula or method of production to accommodate commercial scale production. If your CM desires to modify the formula, have them discuss the proposed changes with your cosmetic chemist to develop an understanding of what changes need to be made and why.
While the above conversation is not at all common, it can happen. In this particular instance, the modification of the formula was tied to the IP ownership of the formula/product. If the CM modified the formula, per their contract, the IP ownership transferred to the CM and the client was granted an exclusive use license to the products.
The moral to the story: Engage your cosmetic chemist to help you in your negotiations with CMs, particularly when it comes to formula changes and IP ownership.