The founder of a supplement brand told us recently about the best structural decision he ever made. Two years ago he moved most of his products from turnkey manufacturing to tolling. Instead of paying his co-manufacturers one all-in price for finished goods, he started buying the raw materials himself and paying the co-mans to convert them.
“We cut about 50 percent off COGS in the best case scenario. Usually the minimum was 30. Just sliced right off.” The business had been struggling before the change. “This really was the saving grace.”
A few days later, on a different call, the president of a co-manufacturer told us why he never checks market pricing on the ingredients he buys for his customers: “It’s irrelevant, because I’m not the one paying it. My customer’s paying it. I’m pass-through now.”
Every co-manufacturing relationship answers two questions, whether anyone asks them or not. Who sees the costs going into your product? And who has a reason to fight them? The supplement founder rebuilt his company so the answer to both is “we do.” The president’s customers answered the questions too. They just don’t know it. He sees, and nobody fights.
The rest of this piece is the tolling vs. turnkey decision, run through those two questions.
The two models
Turnkey: the co-man sources and buys the ingredients and packaging, runs production, and sells you finished cases at an all-in price. You get one number. Your co-man sees your costs. Whether anyone fights them depends on which co-man you happen to have.
Tolling: you buy the ingredients and packaging, get them to the plant, and pay the co-man a fee (the toll) to convert them. You see every line. Whether anyone fights them is up to you.
To clarify, almost nobody runs a pure version of either. Plenty of brands direct a few strategic ingredients and let the co-man buy the rest. The supplement founder kept his gummies fully turnkey (“that’s too complicated of a process”) and moved his simpler formats, powders and capsules, to tolling first. You can choose the model SKU by SKU. Most brands never realize that.
Why turnkey costs brands margin
We want to be careful with that heading, because plenty of turnkey relationships are run honestly. But five things happen by default under turnkey, and each one moves margin away from you. Nobody has to be a villain. It runs on incentives, not intent.
1. The buyer isn’t the payer
Incentives, incentives, incentives. The person negotiating your ingredient costs feels a price increase as paperwork. You feel it as margin. “I’m not the one paying it” is just the honest version. A head of procurement at another co-man told us that when suppliers raise prices, “our customers just pay for it. It doesn’t matter to me at all.” How hard would you negotiate under that setup? More on that here.
2. The markup rides on the materials
A pet food brand we know runs fully turnkey. The co-mans buy everything and pass it through at cost plus a percentage. When proteins spiked, every increase flowed straight through, and the markup rode on top of it. So the co-man made more dollars in the same quarter the brand made less. That structure gets pitched as “aligned incentives.” It isn’t.
3. Sourcing stops at your target price, not the market floor
The founder of a fast-growing co-man walked us through how he prices a new project, and to his credit he was completely straight about it. His company spent years as a toll producer (“our customers would buy materials and then we would just toll produce it”) and only recently started buying materials itself. Here’s how a new project gets sourced: “A lot of times we’re inheriting a project from another manufacturer, so we kind of have a target price to hit, and we just work until we hit that target price.” Work until the target. Then stop. Nobody keeps hunting below your number, because everything below your number is his. And there is usually a lot below your number. The same founder, on materials that have never been competitively bid: “We’re probably going to save at least 10%. Sometimes upwards of 30%.“
4. Price checks stop once a supplier is qualified
“You have this vendor you’re qualified with, you just buy through them, and you don’t price check as often. I noticed that with a lot of our team members.” He’s describing his own shop, and most shops work this way for a defensible reason: requalifying an ingredient is expensive. Butter is not butter, and an identical spec sheet does not mean an identical ingredient. So the incumbent wins by default, year after year, and pricing goes stale. When stale categories finally get taken to market, they give back 8 to 12 percent. Recently bid ones give back 3 to 5.
5. You can’t see any of it
One number hides everything above it. The supplement founder, on life under turnkey: co-mans would “blind, just send me a single number.” After the switch: “I can look at it and see exactly where the numbers are. This ingredient is the one that’s causing the problem.” He found an ingredient that added nothing for the consumer and was quietly wrecking a product’s economics. It had been sitting inside the single number for years. Increases show up as letters. Decreases don’t show up at all. There’s no line to argue with.
Each of these is small on its own. The co-man president made exactly that argument to us: being 15 percent high on an ingredient that’s 2 percent of a recipe is “arguing over pennies.” At the line level, he’s right. But ingredients and packaging run roughly half of revenue in this industry, formulas carry dozens of lines, and you ship every case for years. The pennies add up to points of gross margin. Yours.
What turnkey is good at
So why does anyone run turnkey? Because it’s easier for the brand. And often more lucrative for the co-manufacturer.
For the brand: One party is responsible for everything: one PO, one invoice, no argument about whose ingredient caused the problem. You don’t have to build a procurement team, finance pallets of inventory, or manage MOQs. And the execution risk stays at the plant. For the co-man? The same president put it bluntly: “Tolling sounds great right up until the point that you have to run a food plant, and you’re relying on your customers to get their ingredients here on time. Which they don’t.” Under tolling, your late pallet is your lost line time.
For a small brand, a cash-tight one, or a complex process, that trade can be worth it. Just be honest about what you’re trading away: the view of your own costs, and probably the fight too.
What tolling gives you, and what it doesn’t
Tolling gives you the view automatically. Every invoice is an ingredient-level education, and the numbers can be big. The supplement founder took 30 to 50 points off COGS. One of our customers recently found they were overpaying 19 percent on their number one ingredient. Another found 30.
What tolling does not give you is the fight. You still have to staff that. The supplement founder has four people in supply chain, including one whose whole job is “all day just reaching out, shooting out messages and getting new quotes.” They bid everything. “We do it all. All raw materials.” Even items on blanket orders with a supplier they trust get re-quoted: “We source again just to see. And then we always go back to the same one.” They know the market on every input they buy, and they mostly don’t switch. That’s the discipline.
If you can’t resource that, tolling doesn’t fix the blindness. It moves it in-house and adds freight, storage, MOQs, and shortage risk on top.
”Our scale gets you better pricing”
Every turnkey pitch has a version of this line. Sometimes it’s true. Some of the best sourcing operations we’ve seen sit inside contract manufacturers. One takes over $150 million of spend to market every year, more than a thousand items, mostly with no intention of switching. A buyer at a supplement co-man told us, about one ingredient: “I want to get pricing from everyone who carries it. And there may be more that I don’t even know about.” Those manufacturers exist, and they earn their keep.
But scale is the ability to fight. It isn’t evidence of fighting. The president who said “I’m not the one paying” also said this about his own buying power: “I’m a drop in the bucket to my suppliers, for most of them.” Same company, both sentences. And when we told the pass-through story to the fast-growing co-man founder, his reaction was two words: “That’s crazy.” The good ones know exactly how the other kind operates.
The problem is you can’t tell them apart from the outside. Same certifications, same plant tour, same deck. You have to check.
How to check, under either model
You don’t have to change models to fix the two questions. The work is the same either way.
Get the cost build-up in writing. Ingredient cost, packaging, conversion, the markup on materials. A turnkey co-man doesn’t owe you their whole book, but pricing out your top ten inputs is a reasonable ask. A flat no is also a strong signal of the partnership.
Know the market on your top ten ingredients yourself, even if you never buy a kilo directly. This used to take a week of emails per ingredient. It doesn’t anymore, which is exactly why the informed side of the table is changing.
Put the mechanics in the contract. Pass-through in both directions, with dates: when an input falls, when does your price fall? Index the big commodities. State the materials markup and whether it applies to increases.
Ask your co-man three questions. When did you last take our ten biggest ingredients to market, and what did you find? When one of our inputs drops, how and when does that reach our price? Who on your team owns ingredient cost for our account? Watch the reaction more than the answer. Some will show you their work, and a few will be glad you finally asked. Others will explain why the question is a rabbit hole nobody should open.
And go hybrid before you go all-in. Direct-source your two or three biggest ingredients, where the dollars actually are, and leave the tail turnkey. Do it SKU by SKU, simplest processes first. That’s how the supplement founder did it, gummies excluded.
Choosing
Turnkey fits when volumes are small, the process is complex, cash is tight, or there’s nobody to run procurement. Tolling fits when you have volume, simple conversion steps, working capital, and the discipline to keep bidding the market. Most brands we work with should probably run both at once, on purpose, SKU by SKU.
Either way, the two questions come with you. A turnkey brand that checks the market knows its costs without owning a single pallet. A tolling brand that never re-quotes owns the pallets and still doesn’t know. The model decides who does the buying. It doesn’t decide who does the knowing.
“I’m not the one paying.” The president meant it as the end of the argument, and in a way it is. The one who pays is the one with a reason to look. Whatever model you run, be the one who looks.
