What is Contract Packaging and How Does a Business Choose Whether to Outsource Packaging?

Airra Villarampa

February 7, 2025

Categories: Fulfillment & 3PL, Product Sourcing & Manufacturing

Managing and operating all parts of the supply chain in-house is a formidable task for any company. Contract packaging services play a vital role in meeting consumer demand by offering businesses a way to outsource comprehensive and versatile packaging services, allowing them to focus on their core competencies. These services encompass a range of activities, from design and labeling to assembly and distribution, tailored to meet the unique requirements of diverse industries. Due to the fluctuating nature of product demand, high upfront costs to obtain specialty equipment, and increased staffing to operate machinery, more companies are looking to outsource their packaging operations. In this article, we will take a look at the realm of contract packaging, exploring its benefits, applications, and significance in meeting the ever-evolving demands of the market.

What is Contract Packaging?

Contract packaging, also known as co-packing, is a strategic business arrangement in which a company outsources its packaging and other related services to a third-party provider. In this partnership, the contract packaging company takes on the responsibility of handling various packaging tasks, such as designing, assembling, labeling, and preparing products for distribution or retail. Contract packaging encompasses primary and secondary packaging, point-of-purchase (POP) displays and often extends to distribution and logistics services.

This outsourcing approach is enticing to many businesses because of the benefits it offers such as cost savings, access to specialized packaging expertise, scalability, and the ability to focus internal resources on core competencies. Because contract packaging is such a versatile solution, most consumer goods companies leverage co-packers for their products.

How Contract Packaging Differs from In-House Packaging

Companies have two primary options for packaging their products: in-house packaging or contract packaging. Each approach has distinct advantages and considerations, depending on the company’s size, resources, and production needs.

In-House Packaging

In-house packaging refers to the process of managing all packaging operations within a company’s own facility using its own equipment, labor, and materials. This approach provides businesses with complete control over quality, branding, and production timelines, ensuring consistency across their products. However, in-house packaging also requires significant capital investment, ongoing maintenance, and workforce management, which can limit scalability and flexibility, especially for businesses experiencing fluctuating production volumes.

Contract Packaging (Outsourced Packaging)

Contract packaging involves hiring an external company to handle all or part of the packaging process. The co-packer provides the necessary materials, labor, and equipment to package the product according to the client’s specifications.

Types of Contract Packaging Services:

Primary Packaging – Directly enclosing the product (e.g., bottles, blister packs, sachets).
Secondary Packaging – Bundling primary packaged products (e.g., shrink-wrapping, cartons, multipacks).
Tertiary Packaging – Bulk packaging for transport (e.g., palletizing, crate packing).
Specialized Packaging – Custom solutions like cold-chain packaging for perishable goods or tamper-proof packaging for pharmaceuticals.

Key Differences Between In-House and Contract Packaging

Feature	In-House Packaging	Contract Packaging
Upfront Costs	High (equipment, staff, materials)	Lower (outsourced services)
Flexibility	Limited by in-house capabilities	Highly adaptable to different needs
Scalability	Difficult and expensive	Easily scalable for demand fluctuations
Expertise	Requires in-house knowledge	Access to specialized industry expertise
Speed To Market	Longer setup time	Faster turnaround times

Common Industries Using Contract Packaging and What They Use It For

Several industries rely on contract packaging to improve efficiency, ensure compliance, and meet consumer expectations. Here are some key sectors and their uses for co-packaging:

Food and Beverage

- Usage: Contract packagers handle bottling, canning, labeling, and portion control for products like snacks, beverages, and frozen foods.
- Why? Ensures compliance with food safety regulations (e.g., FDA, USDA) and helps brands quickly scale production for seasonal demand.

Pharmaceuticals and Healthcare

- Usage: Blister packaging, single-dose sachets, and tamper-evident packaging for medications and medical devices.
- Why? Compliance with strict safety regulations (e.g., GMP, FDA) and enhanced product protection against contamination.

Cosmetics and Personal Care

- Usage: Filling and packaging of beauty products such as lotions, perfumes, and shampoos in tubes, bottles, or single-use sachets.
- Why? Reduces production costs and provides customized packaging solutions for premium branding.

Consumer Electronics

- Usage: Protective packaging, anti-static bags, and retail-ready boxing for smartphones, headphones, and accessories.
- Why? Enhances product safety during shipping and ensures attractive retail presentation.

Automotive and Industrial

- Usage: Bulk packaging for spare parts, lubricants, and tools in cartons or shrink-wrapped pallets.
- Why? Reduces handling costs and ensures product integrity during transportation.

E-commerce and Retail

- Usage: Subscription boxes, fulfillment packaging, and display-ready retail packs.
- Why? Enhances customer experience and streamlines supply chain logistics.

Advantages and Challenges of Using Contract Packaging

While contract packaging offers numerous benefits, it also comes with potential challenges that businesses need to consider.

Advantages of Contract Packaging

✅ Cost Savings – Businesses save on capital expenses related to packaging machinery, materials, and labor.

✅ Scalability – Easily adjust production volumes to meet seasonal or market-driven demand changes.

✅ Expertise and Compliance – Contract packagers have specialized knowledge in industry regulations and best practices, ensuring compliance with safety and labeling laws.

✅ Faster Time-to-Market – Businesses can launch new products quicker without the need for in-house setup and testing.

✅ Focus on Core Business – Companies can concentrate on product development and marketing while outsourcing the packaging process.

Challenges of Contract Packaging

⚠ Loss of Control – Since packaging is handled externally, businesses may have less direct oversight over quality and timelines.

⚠ Minimum Order Quantities (MOQs) – Some contract packagers require large order volumes, which may not be feasible for small businesses.

⚠ Supply Chain Dependency – Relying on an external provider means potential risks related to supplier delays, material shortages, or logistical issues.

⚠ Intellectual Property Concerns – Sharing proprietary designs and formulas with third-party providers requires strong confidentiality agreements.

Types of Contract Packaging Services

Contract packaging, or co-packaging, encompasses a range of services designed to help businesses efficiently package their products for distribution, retail, or specialized use. Depending on the product and industry, contract packagers offer primary, secondary, tertiary, and specialized packaging services. Each type serves a distinct purpose in ensuring product protection, presentation, and compliance with industry regulations. Below, we’ll explore these packaging types in detail, including their uses, benefits, and typical pricing.

Primary Packaging

Primary packaging is the first layer of packaging that directly encloses a product. It is crucial for product integrity, safety, and consumer usability.

Types of Primary Packaging

Bottles & Jars – Used for beverages, pharmaceuticals, cosmetics, and condiments.
Blister Packs – Common in pharmaceuticals, consumer electronics, and toys.
Pouches & Sachets – Used for single-serving foods, personal care items, and medical supplies.
Tubes – Found in cosmetics, adhesives, and toothpaste.
Cartons – Used for dry goods like cereals, frozen foods, and pharmaceuticals.
Stick Packs – Popular in beverage powders, vitamins, and nutraceuticals.

Why Use Contract Packaging for Primary Packaging?

✅ Cost Savings – Eliminates the need for in-house packaging machinery and labor.
✅ Compliance & Quality Assurance – Ensures adherence to industry-specific regulations (e.g., FDA, GMP, ISO).
✅ Scalability – Easily adjust production volume for demand fluctuations.
✅ Speed to Market – Faster turnaround time compared to setting up in-house packaging operations.

Typical Pricing for Primary Packaging

Blister Packaging: $0.05 – $0.20 per unit
Bottle Filling: $0.03 – $0.10 per bottle (varies by liquid or solid content)
Pouch Filling: $0.02 – $0.15 per pouch
Cartoning: $0.05 – $0.25 per carton

Prices depend on material costs, volume, customization, and compliance requirements.

Secondary Packaging

Secondary packaging is used to bundle primary-packaged products for retail presentation, ease of handling, and added protection.

Types of Secondary Packaging

Shrink Wrapping – Used to bundle multiple products (e.g., beverage multi-packs, snack packs).
Cartoning & Box Packaging – Used for cereal, cosmetics, and electronics.
Retail-Ready Packaging (RRP) – Display boxes designed for store shelves.
Clamshell Packaging – Rigid plastic enclosures for electronics and small consumer goods.
Sleeve Packaging – Paperboard sleeves wrapped around a primary package for branding.

Why Use Contract Packaging for Secondary Packaging?

✅ Branding & Shelf Appeal – Professionally designed packaging enhances brand image.
✅ Efficiency & Automation – Contract packagers use automated machinery for consistent and high-speed production.
✅ Cost Reduction – Outsourcing eliminates the need for specialized in-house equipment.
✅ Retail Compliance – Ensures adherence to store display requirements (e.g., Walmart, Target shelf-ready packaging).

Typical Pricing for Secondary Packaging

Shrink Wrapping: $0.02 – $0.10 per unit
Cartoning & Box Packaging: $0.05 – $0.30 per unit
Retail-Ready Display Packaging: $0.10 – $0.50 per unit
Clamshell Packaging: $0.15 – $0.40 per unit

Prices depend on design complexity, materials, and order volume.

Tertiary Packaging

Tertiary packaging is the final layer used for bulk shipping and storage. It protects products during transportation and ensures efficient warehouse handling.

Types of Tertiary Packaging

Palletizing – Products stacked on pallets and wrapped for shipping.
Crate Packaging – Wooden or plastic crates for fragile or heavy items.
Bulk Bins – Large containers for food ingredients, industrial supplies, and agricultural products.
Stretch Wrapping – Plastic film wrapped around palletized goods for stability.

Why Use Contract Packaging for Tertiary Packaging?

✅ Logistics Optimization – Streamlines shipping and distribution processes.
✅ Reduced Handling Costs – Protects against damage and loss during transit.
✅ Compliance with Freight Standards – Ensures shipments meet industry and carrier regulations.
✅ Efficiency in Storage & Distribution – Maximizes warehouse space with stackable solutions.

Typical Pricing for Tertiary Packaging

Palletizing & Wrapping: $3 – $10 per pallet
Crate Packaging: $20 – $50 per crate
Bulk Bin Packaging: $15 – $40 per bin
Stretch Wrapping: $2 – $5 per pallet

Pricing depends on the type of product, weight, and special handling requirements.

Specialized Packaging

Specialized packaging is designed for unique product needs, such as temperature control, hazardous materials, and high-end custom packaging.

Types of Specialized Packaging

Cold Chain Packaging – Insulated packaging for temperature-sensitive items like pharmaceuticals and perishable foods.
Hazardous Material Packaging – UN-certified containers for chemicals, batteries, and medical waste.
Custom Luxury Packaging – Premium boxes, rigid setups, and specialty printing for high-end products.
Anti-Static Packaging – Used for electronic components to prevent static damage.
Tamper-Evident Packaging – Security seals for pharmaceuticals, food, and personal care items.

Why Use Contract Packaging for Specialized Packaging?

✅ Regulatory Compliance – Ensures adherence to health, safety, and environmental regulations.
✅ Technical Expertise – Specialized materials and processes require experienced professionals.
✅ Brand Differentiation – Custom and luxury packaging enhances product value.
✅ Product Safety & Protection – Prevents contamination, spoilage, or damage.

Typical Pricing for Specialized Packaging

Cold Chain Packaging: $5 – $50 per unit (varies by insulation level)
Hazardous Material Packaging: $10 – $100 per unit (depends on regulatory requirements)
Luxury Custom Packaging: $2 – $20 per unit (premium materials increase costs)
Anti-Static Packaging: $0.05 – $1 per unit
Tamper-Evident Packaging: $0.05 – $0.50 per unit

Pricing varies significantly based on customization, materials, and regulatory requirements.

What Steps Are Involved in Contract Packaging?

Contract packaging is a comprehensive process that transforms raw products into consumer-ready goods. It involves multiple steps, from understanding a client’s needs to delivering a fully packaged product that meets regulatory and market demands. The steps involved in the contract packaging process can vary depending on the specific requirements of the project and the contract packaging provider. Below, we’ll break down each stage of the contract packaging process, along with real-world examples to illustrate how businesses benefit from outsourcing their packaging needs.

1. Initial Consultation and Needs Assessment

The initial stage of any contract packaging partnership is a consultation. This will help the co-packing provider understand the needs of your business. Things like product specs, packaging requirements, and quantities will be discussed to ensure they are the right fit for your needs. The process begins with an in-depth consultation where the contract packager evaluates the client’s packaging requirements. This stage includes:

Key Activities:

Understanding the product type and packaging goals
Assessing target market and industry regulations
Determining budget and production volume
Discussing packaging design, materials, and sustainability concerns
Establishing timeline and logistics

Example:

A startup beverage company consults a contract packaging provider to package its new line of organic juices. The discussion covers bottle size, label design, regulatory compliance (FDA approval), and distribution needs.

2. Design and Prototyping

Once the needs are defined, packaging engineers and designers create prototypes to test functionality, aesthetics, and durability. In instances where the co-packer has an internal design team, they can help refine or even create from scratch your packaging design. This stage is also used for prototyping to test that the packaging fits well and meets all agreed-upon requirements.

Key Activities:

Creating 3D mockups and digital renderings
Developing prototypes for testing
Conducting focus group evaluations
Ensuring design meets branding and retail requirements
Testing product fit and compatibility with packaging materials

Example:

A cosmetics brand launching a new moisturizer works with a contract packager to design a sleek, airless pump bottle. Prototypes are tested to ensure they dispense the correct amount of product while maintaining a premium look.

3. Material Selection

Choosing the right materials is crucial for durability, compliance, and sustainability. Contract packagers select materials based on product requirements, cost, and environmental impact.

Common Packaging Materials:

Plastic (PET, HDPE, PP) – Used for bottles, pouches, and blister packs
Glass – Preferred for high-end cosmetics, pharmaceuticals, and beverages
Paper & Cardboard – Common in secondary packaging and sustainable options
Aluminum & Metal – Used for canned beverages, aerosols, and medical supplies
Biodegradable & Recyclable Options – Growing demand for sustainable packaging

Example:

A snack food company opts for compostable pouches instead of plastic to align with eco-conscious consumer trends.

4. Production

At this stage, the actual manufacturing of packaging materials takes place. This includes print material production and plastic packaging production. In cases where the packaging design requires any print materials such as manuals or literature cards, the co-packer will produce these materials prior to the actual packaging process. This stage also encompasses the production of any thermoformed components like blister packs, trays, or any other special packaging needed for the company’s packaging requirements.

Print Material Production

Printing labels, boxes, and flexible packaging
High-resolution graphics and brand logos
Compliance with labeling regulations (FDA, EU, etc.)

Plastic Packaging Production

Injection molding for custom plastic bottles and containers
Thermoforming for blister packs and trays
Flexible film manufacturing for pouches and wrappers

Example:

A pharmaceutical company requires blister packaging with child-resistant labeling and tamper-evident seals. The contract packager produces high-quality, FDA-compliant printed materials and plastic trays.

5. Package Assembly

Once packaging components are produced, they are assembled into the final form, ready to enclose the product.

Key Activities:

Filling bottles, pouches, or blister packs with the product
Attaching labels, stickers, and barcodes
Securing tamper-proof and child-resistant mechanisms
Bundling multi-pack items (e.g., promotional packs)

Example:

A protein powder company sends its bulk product to a contract packager, which fills pre-printed pouches, seals them, and applies labels before boxing them for distribution.

6. Quality Control and Compliance

Thorough quality control (QC) and inspection process are in place prior to the final sealing of the packaging to ensure the product’s appearance requirements are met. Ensuring that the final packaged product meets industry regulations and quality standards is critical.

Key Activities:

Weight checks to confirm correct product quantity
Seal integrity testing to prevent leaks
Label verification for accuracy and compliance
FDA, GMP, ISO, and industry-specific compliance checks
Shelf-life and stability testing for food and pharmaceuticals

Example:

A pharmaceutical company requires blister packs for prescription drugs. Each unit undergoes automated vision inspection to ensure correct pill count and barcode readability before FDA approval.

7. Finishing and Sealing

After quality control, the final step in the production line involves sealing and finalizing the package for sale or shipment. Any final labeling of products will also be executed in this step.

Key Activities:

Heat sealing, shrink wrapping, or vacuum sealing
Adding tamper-proof seals or security bands
Folding and gluing cardboard boxes
Final visual inspection before packaging for transport

Example:

A beverage company uses heat-sealing machines to apply shrink sleeves to energy drink bottles, ensuring a secure and branded final product.

8. Warehousing and Distribution

The products are now finished! They will now be organized and stored in the warehouse where they will await final shipment. Contract packagers often provide warehousing and logistics support, and depending on the contract terms, the contract packager may also be the distribution partner as well. The contract packager will send the final batches of product to storefronts or end-consumers.

Key Activities:

Storage & Inventory Management – Climate-controlled warehouses for perishable goods
Order Fulfillment & Kitting – Pre-packaging subscription boxes and promotional kits
Palletizing & Bulk Shipping – Arranging products for easy transport
Supply Chain Coordination – Managing third-party logistics (3PL) for final delivery

Example:

An e-commerce beauty brand partners with a contract packager to assemble and store subscription boxes, which are then shipped directly to customers via 3PL logistics.

What Equipment is Used in the Packaging Process?

Co-packers typically have a large array of machines that help with the operation, helping businesses avoid the large upfront cost of equipment and labor needed to run and maintain them. The equipment used by each co-packing partner will vary depending on their specific packaging competencies and size.

Filling Machines

Liquid fillers: Used for filling liquids like beverages, sauces, and cleaning products into bottles or containers.
Powder fillers: Used for filling powdered products like spices, supplements, and detergents.
Solid fillers: Used for filling solid items like snacks, candies, and pills.

Sealing and Closing Machines

Capping machines: Applies caps or closures to bottles, jars, or containers.
Heat sealing machines: Seals flexible packaging materials like pouches and bags using heat.
Induction sealers: Seals products with tamper-evident or leak-proof seals using electromagnetic induction.

Labeling and Printing Equipment

Label applicators: Applies adhesive labels to products or packaging.
Inkjet printers: Prints date codes, lot numbers, and other information directly onto packaging.
Thermal transfer printers: Prints high-quality labels with barcodes, graphics, and text.

Wrapping and Packaging Machines

Flow wrapping and Overwrap machines: Creates sealed packages by wrapping products in flexible film.
Shrink wrapping machines: Encases products in shrink film and shrink it using heat.

Blister Packaging Equipment

Blister formers: Creates plastic blisters that hold individual products.
Blister sealers: Seals the blister packs with a backing card, often used for pharmaceuticals and electronics.

Cartoning and Case Packing Machines

Cartoners: Automatically erects, fills, and closes cartons or boxes.
Case packers: Packs product into larger cases or cartons for shipping and distribution.

What Are The Typical Cost Considerations in Contract Packaging?

Understanding the pricing structure for contract packaging is essential for maximizing value. Costs vary based on packaging type, order volume, materials, and labor. This section explores pricing models, hidden costs, ROI considerations, and negotiation strategies to help businesses make informed financial decisions.

Pricing Models in Contract Packaging

Contract packaging costs can be structured in different ways, depending on the project scope and provider. The most common pricing models include:

Per-Unit Pricing

Cost is based on the number of units packaged.
Ideal for small to medium production runs or custom packaging.
Pricing Example:
- Blister Packaging: $0.05 – $0.20 per unit
- Pouch Filling: $0.02 – $0.15 per unit
- Bottle Filling & Labeling: $0.03 – $0.10 per unit

✅ Best for: Businesses with predictable demand and standardized packaging needs.

Bulk Pricing (Volume-Based Discounts)

Lower cost per unit for large orders.
Encourages higher production runs to achieve economies of scale.
Pricing Example:
- 10,000 units: $0.12 per unit
- 50,000 units: $0.08 per unit
- 100,000+ units: $0.05 per unit

✅ Best for: High-volume manufacturers or wholesale brands.

Service-Based Pricing (Hourly or Project-Based Fees)

Includes costs for labor, machine setup, and operational expenses.
Used for custom or highly specialized packaging (e.g., luxury packaging, hazardous material handling).
Pricing Example:
- Machine Setup Fees: $500 – $5,000 (one-time charge)
- Hourly Labor Rates: $15 – $50 per hour

✅ Best for: Businesses with unique packaging needs that require specialized expertise.

Hidden Costs and How to Avoid Them

Even with a clear pricing model, unexpected costs can arise, leading to budget overruns. Here are some common hidden costs and ways to mitigate them:

Packaging Material Waste

🔹 Issue: Excessive material usage due to miscalculations or inefficient production.
✅ Solution: Work with a contract packager that optimizes material usage through automated precision and eco-friendly solutions.

Machine Setup Fees

🔹 Issue: High initial setup costs for small production runs.
✅ Solution: Consolidate multiple product variations into a single production run to reduce changeover costs.

Regulatory Compliance Costs

🔹 Issue: Unexpected costs due to non-compliance fines or the need for retesting.
✅ Solution: Partner with a contract packager that specializes in regulatory compliance (FDA, GMP, ISO, etc.) to ensure all standards are met from the start.

Storage & Warehousing Fees

🔹 Issue: Additional fees if products are stored beyond the agreed timeframe.
✅ Solution: Clarify warehousing terms upfront and use just-in-time (JIT) inventory strategies to avoid unnecessary storage fees.

Freight & Shipping Costs

🔹 Issue: Unexpected logistics fees, especially for international shipping.
✅ Solution: Opt for bundled logistics services offered by contract packagers or negotiate flat-rate shipping agreements with carriers.

ROI and Cost-Benefit Analysis

Investing in contract packaging should be evaluated based on return on investment (ROI) and cost-benefit analysis.

How to Calculate ROI

Use this formula to measure the financial impact of contract packaging:

ROI Formula

$$ ROI = \frac{\text{Revenue Gain} - \text{Cost of Packaging}}{\text{Cost of Packaging}} \times 100 $$

Example ROI Analysis

Factor	In-House Packaging	Contract Packaging
Equipment Costs	$500,000 (machinery)	$0 (outsourced)
Labor Costs	$50,000/year	Included in service
Material Costs	Higher (small orders)	Lower (bulk discounts)
Time to Market	Slower (training, setup)	Faster (pre-established systems)
Compliance Costs	High (certifications)	Lower (expert oversight)

✅ Conclusion: Contract packaging reduces upfront investment, speeds up production, and minimizes risk, often leading to a higher ROI than in-house packaging.

How to Negotiate Better Rates

To maximize cost savings, businesses should negotiate effectively with contract packagers. Here are some strategies:

Commit to Higher Volumes

- Why? Higher production runs reduce per-unit costs.
- Negotiation Tip: Lock in tiered pricing to secure better rates as demand increases.

Bundle Multiple Services

- Why? Combining packaging, labeling, fulfillment, and logistics can lead to bulk discounts.
- Negotiation Tip: Ask for an all-inclusive pricing package to cut costs.

Compare Multiple Providers

- Why? Competitive pricing ensures you get the best deal.
- Negotiation Tip: Request quotes from at least three contract packagers and leverage competitor pricing.

Long-Term Contracts for Lower Pricing

- Why? Contract packagers offer better rates for repeat business.
- Negotiation Tip: Secure a multi-year agreement to reduce costs.

Avoid Unnecessary Add-Ons

- Why? Extra services inflate costs if not essential.
- Negotiation Tip: Stick to core packaging needs and add services only if needed.

What Regulations and Compliance Considerations Are There For Contract Packaging?

Regulatory compliance is a critical aspect of contract packaging, ensuring that products meet industry standards for safety, quality, and legality. Businesses across various sectors must navigate a complex landscape of regulations, including industry-specific guidelines, labeling and sustainability mandates, import/export laws, and overall safety standards. A reliable contract packaging partner helps companies remain compliant while optimizing packaging processes.

1. Industry-Specific Regulations (FDA, GMP, ISO, etc.)

Different industries have unique regulatory requirements that govern packaging processes. Failure to comply can lead to fines, product recalls, or market restrictions.