The Packaging Cost Hack Businesses Swear By

When it comes to budgeting for a product, the cost of packaging often takes a backseat to other expenses. It’s a common misconception that custom packaging is only for companies with big budgets. However, attractive and functional packaging can be essential to validating your customer’s purchase and building your brand.

The good news is that packaging doesn’t have to break the bank. While there’s no set cost range, it’s generally recommended to allocate 10–40% of a product’s retail price towards packaging. So if your product sells for $100, you may budget $10-$40 for the packaging.

Pricing and packaging are deeply intertwined aspects of a product’s go-to-market strategy. They must be carefully coordinated to ensure the perceived value matches the cost for the consumer. For example, by opting for luxury packaging or eco-friendly packaging, you can effectively communicate your brand’s essence and values to your customers.

The easiest way to manage packaging costs is to find a reliable custom packaging supplier who can guide you through the process and ensure ordering and receiving your packaging is painless. Components that factor into packaging costs include design, materials, production, labor, volume, freight, and shipping. One key factor to consider is your order volume, as this is a major driver of packaging prices.

Fixed and Variable Costs

When it comes to packaging costs, there are two main categories to be aware of: fixed costs and variable costs.

Fixed costs are expenses your manufacturer incurs regardless of production output. This includes machinery setup, printing plates, molds, and facility rental. The ratio of fixed costs to units produced goes down as volume increases.

Variable costs, on the other hand, fluctuate based on production output. These may include materials, hourly labor, inks, and shipping. Variable costs rise as the number of units produced increases.

Economies of Scale

You may notice your packaging supplier offers lower unit prices for higher volume orders. This is due to the principle of economies of scale. As order quantities increase, the fixed costs get spread across more units, reducing the per-unit fixed cost.

For example, if the fixed costs are $100, the per-unit fixed cost for 100 units of mailer boxes would be $1. But for 1,000 units, the per-unit fixed cost drops to $0.10. While variable costs do rise with volume, the overall per-unit price still decreases thanks to the economies of scale. This allows brands to either capture more profit margin or invest in premium packaging features that can become a competitive advantage.

Diminishing Returns

However, there is a point of diminishing returns as order volumes increase. After a certain optimal capacity, further volume increases have little impact on per-unit costs.

Using the same $100 fixed cost example, 15,000 units would result in a per-unit fixed cost of $0.007. Bumping that up to 20,000 units only reduces the per-unit fixed cost to $0.005 — a marginal difference. This means there’s an optimal order quantity where the benefits of economies of scale start to level off and going beyond that point may not significantly reduce your per-unit packaging costs.

Closing Thoughts

Packaging is a crucial, yet often overlooked, component of a product’s overall budget. By understanding the fixed and variable costs, as well as the principles of economies of scale and diminishing returns, brands can make more informed decisions about their packaging strategy and budget.

Investing in attractive, functional packaging is essential for product success and brand-building. But with the right approach, you can ensure those packaging costs don’t blow a hole in your wallet. By partnering with the right supplier and optimizing your order quantities, you can find the sweet spot between packaging quality and cost-effectiveness to maximize your budget’s potential.