A glimpse behind the scenes: Cost breakdown of a small-batch production

We’ve just produced our first small batch of 100 pairs of Zephyr Berlin pants: Pants that travel well, from high-end Swiss performance fabric, made in Germany.

We learned a lot along the way. Some of it might be very useful for others who are also thinking about producing their first physical product. Today we’ll look at financials.

For context, Zephyr Berlin are a decidedly premium product. The fabric is Swiss performance fabric from Schoeller, who produce high-end outdoor and active wear. We wanted to keep manufacturing as local as possible, so we worked with a local textile production studio consisting of four people on the outskirts of Berlin.

For funding we went the Kickstarter route (here’s our archived Kickstarter page) and ended up successfully funding the first production batch. The main support levels had to be higher than we had previously hoped to match the costs of manufacturing (in the range of €160-200 per pair, aiming for a later retail price of €220). Also, we went into this whole adventure treating it as a learning experience and not expecting profit. We paid our design lead Cecilia a prototyping fee for her work early on, before we had decided to take this to production to protect her from financial risk. Neither Michelle nor I expected any payout, nor did we end up with an unexpected profit.

Spoiler alert: This is the common theme here. Every step on your journey is going to be more costly than you might expect, and even more so for a premium product.

Local production is more expensive and much easier

We wanted to produce locally both for philosophical and practical reasons: Local production supports local industry and fair wages, and it’s much easier to meet with the production team. That way any issues that might arise are much more easily mitigated (plus, it’s fun to see your product come together first hand).

We were happy to pay fair wages, and believe our backers stand by that decision, too.

Premium materials take time

Materials can be very expensive. Ours certainly were not cheap. Also, because we ordered just about smallest possible amount we had to pay another premium: Small orders from large manufacturers tend to be charged above-market rates, sometimes 10% above list price, sometimes 30%. Also, textiles’ availability and pricing is subject to a strong fluctuation, presumably because the production relies heavily on global supply chains and fashion industry-related manufacturing cycles we knew (and still know) relatively little about. We had to order the fabric long before we know how much we’d need in order to hit our (self-imposed) holiday shipping deadline. At this point we took a somewhat larger financial risk than we’d have preferred, ordering four giant rolls of fabric for a few thousand Euros long before we could anticipate the result of our Kickstarter.

Still, there was a production delay on the side of our supplier and we ended up with a pretty darn tight schedule for production and shipping. We were very, very happy that we had planned with a lot of buffer time, and just so made the deadline. One more day of delay and we wouldn’t have.

In the end, we got lucky both with the schedule and with the amounts we ordered. The Kickstarter ended successfully—we ended up with 127% of our funding goal—and the production run matched our fabric order. High fives!

We can’t overstate how important it is to take a leap of faith every now and then. It can be nerve-racking to say the least, but otherwise we would have never gotten anywhere.

Research your customs, shipping, payment fees (and taxes!)

Now, some admin. I can’t overstate how important it is to do the research into customs fees, shipping costs and options, and payment fees—and of course taxes and how they apply in your jurisdiction.

We researched shipping options, prototyped packaging options, weighed them, confirmed several options with the postal service (in our case, DHL and the German post office). For especially US-based projects, Kickstarter has great documentation online. Internationally, you might find more relevant information talking to others who’ve done similar things.

Payment fees are significant. If you do crowdfunding, you’ll lose some money in payment fees both to the crowdfunding platform and to the payment processing entity (in our case, Kickstarter and Stripe). This is extremely well documented and important. Also, should you move from Kickstarter to your own online shop later on, you’ll keep paying payment fees, so make sure to take them into account. In our case, the payment fees total roughly 10% of all revenue.

Depending on where you are, where your manufacturing is, and where your materials come from you might have to pay customs & import fees. In our case, the fabric came from Switzerland, so the customs & import fees are 19% (they match German VAT). That’s not nothing! Also, shipping costs of materials can easily rack up, especially for large/heavy items.

And finally, taxes on crowdfunding are interesting to say the least. In our case, full tax rates apply to the Kickstarter revenue, but it looks like VAT is not going to apply because we’re based in Germany and Kickstarter is a US company (it’s still under discussion, though). All revenue will of course be taxed under corporate tax (it’s all done under my company The Waving Cat to be on the safe side, and because my company already is registered for commercial imports from abroad, which was very handy for the fabric).

Retail guidelines for pricing

Depending on which part of retail you look, you’ll find solid guidelines for pricing for consumer goods. It’s up to you to figure out how they apply. If we decided to run Zephyr Berlin as a business, we’d have to aim for a profit margin of around 100% (if we sell only directly online and don’t want any other intermediaries) to 160% (if we also considered trying to get into retail shops).

For us, this didn’t apply this time round: Instead we figured this (relatively) small first batch would be a learning experience and we’d be happy if we could pull it off without losing money. (We did!)

(Had we gone the route of planning to sell from the beginning as a serious business proposition with 100% margin, we would have had to price a pair at far above €300. We simply didn’t want to charge that much, so rather we radically cut down on our own potential margin and took our own labor time out of the equation. For a longer-term project that would be very dangerous; for a test run we figured it was absolutely worth going this route.)

Final numbers!

So, here’s the numbers you’ve been waiting for as best as we could gather them and clean them up. They include prototyping, pre-launch and launch costs, as well as costs occurred until and including January (i.e. 4 weeks after the first shipping).

For our production run of 100 pairs, per each pair of Zephyr Pants the costs break down as follows:

cost breakdown

Materials: 26 percent
Labor: 36 percent
Misc: 38 percent

How about margin?
For this first small production batch there’s hardly a margin, for the simple reasons outlined above. That’s ok: We optimized for learning rather than profit. We see this as a learning experience, and a test balloon. We knew we’d be paying a mark-up on everything because of the small size of our first production run. For future runs (if we decide to go that route) we’d likely get better rates on materials, and we could optimize quite a few things here and there. At the same time, we would then also need to hire some help, and would need to figure out some ways to create a real profit margin to allow for some buffer for future product development, as well as to mitigate risk. One thing to keep in mind is that a lot of the prototyping is now done: The prototyping costs weren’t that high, but at such small unit numbers even a relatively small line item means a relatively high per-unit cost. (For example, a €1000 item on a 100 unit run means €10/unit, but only €1/unit for a 1000 unit run.)

While we’d have liked to come out with a bit more budget to fund future experiments and/or production runs, we’re quite happy: With the tremendous support from our Kickstarter community we managed to finish a full production run of 100 pairs of premium pants that the backers seem to be enjoying (we certainly enjoy our own), with high-end fabrics and paying fair wages to a local production studio. We did all that without losing any money, and without any major hiccup. For a first foray into manufacturing of physical goods that’s a serious achievement.

For that, we’re very happy (and a little bit proud). To future adventures!