"The cost structure is different" - Why small production runs cost more per unit but less overall

Key takeaways

• At a 1,000 minimum order quantity, physical sample costs came in at 2.4x the rate they would at 15,000 units - in a real new product launch engagement

• The cost gap isn’t because your supplier is making more margin. Materials, setup, efficiency, and waste reduction all change structurally at volume

• Ashley, a custom bag manufacturer: “It’s not because the factory earns a higher margin on small orders - it’s because the cost structure is very different”

• The early margin hit is best framed as an R&D cost. It amortises at scale - but only if you used your first product run to test your trading and marketing strategy

You’re developing a new product and you’re getting in manufacturing quotes. The cost sheet tells you that you can buy 1,000 units for £5.28 per product, or 15,000 for £2.20 per product. You see this as lost margin, and you start looking for new manufacturers, downgrading certain quality variables, or thinking about how to get more cash so that you can place a bigger first order and pay the lower price per unit.

I was working with a brand at early stage and their reaction was similar to yours. They thought that paying 2.4 times more per product was a waste of money. They were already cash-strapped and this would add further budget pressure because they wouldn’t be capturing the margin they’d factored into their longer term unit economics.

Their target shelf price was £39.00. At 15,000 units, gross margin came out at 94.4%, but at 1,000 units it dropped to 86.5%. The gap of £3.08 per unit wasn’t insignificant, but it also wasn’t a business-breaker. We had a modest paid marketing budget for the first run, with a plan to shift toward organic channels as awareness built. But we needed that first run of product to give us the information to make those channels work harder, faster.

That first product run wasn’t about making as much margin as possible - it was about gaining as much insight as possible, to increase margin downstream.

If minimum order quantities cost more per unit, is it because you’re giving away your margin to your manufacturer?

I asked Ashley, a custom bag manufacturer, to explain the cost structure from her side. Her answer was that, “It’s not because the factory earns a higher margin on small orders - it’s because the cost structure is very different.”

She explained how material purchasing costs more at low volume because suppliers price for scale. When production runs are shorter, her team’s setup time isn’t spread efficiently because the fixed costs across sampling, pattern making, machine setup, and quality control, are the same regardless of the output. She also pointed out that material waste is higher on shorter runs, and utilisation improves with volume.

If you’re ordering a lower volume of products and paying a higher cost per unit, then it isn’t because the price is inflated - it’s because it’s structural.

How can you rationalise higher cost per unit and lower margins when you’re launching a product?

The 2.4x unit cost gap is the cost of being at the stage where being wrong is survivable.

When you’re placing a smaller buy, you’re investing in further research. You can do all of the spreadsheet modelling and desk-based research in the world, but the real test is whether the product does what you think it does, and whether the customer actually exists at the price you’ve set. By the time you’re increasing your product order to 15,000 units, you need to have refined your trading and marketing.

Otherwise, you end up having spend more cash upfront to hit a higher volume order, but you’re sat on unproven product and you’re paying for ads that don’t convert because you’ve haven’t tested your target keywords.

The early margin hit needs to be viewed as an R&D cost that amortises when you scale - or, it does if you learn something from that initial stage.

When do you know you’re ready to scale?

You know you’re ready to scale when you can see a pattern - this is when the first run has told you something repeatable and where you’ve been able to adjust a few variables and see the results you anticipated. Look for evidence that your customer exists in the volume you’re planning for, that your acquisition cost is coming down as awareness builds, and that your product does what the positioning says it does. Customer reviews and feedback will help you with the latter.

Ashley told me that cost per unit shifts most noticeably at 1,000 units, then again at 3,000 and 5,000. Your side, you can use these numbers as milestones, where each step locks in a cost structure that helps you steadily refine your channel relationships, fine-tune customer expectations, and earn a margin profile that increases resilience to margin pressure.

The discipline of this early stage when launching a product, isn’t just about making sure you’re making enough margin to keep going - it’s about keeping the options open long enough to choose the right one, before you’ve committed to so much stock that discounting is the only way out.

FAQ

Why is cost per unit higher at low MOQ?

The cost structure changes with volume - the margin for the manufacturer actually stays the same. Materials, setup, waste, and efficiency all improve as units increase. Recently, I’ve found that pricing shifts noticeably at 1,000, 3,000, and 5,000 units.

Does a low MOQ run have to lose money?

Not necessarily as it your net margin and profitability depends on your SRP, your acquisition cost, and how quickly you can build organic demand to reduce paid marketing costs. The goal isn’t to maximise profit on the first run - it’s to learn enough to justify the next one.

When should a brand commit to higher volume?

When the signal is clear enough that scaling is working from a proven thesis, rather than working with what’s anticipated but not yet evidenced.

What’s the risk of scaling before the positioning is proven?

The unit cost improves but the cost of being wrong - higher upfront cash commitment, higher marketing costs to clear stock, discounting etc - stops being survivable.

Is early stage margin always a problem?

Only if you treat it as a cost rather than an investment in information. It’s best to think in terms of value and what the business needs from that initial product launch.

This content is produced for informational purposes. It does not constitute specific business, commercial, or investment advice for any individual organisation.