Pricing is a necessary evil in the retail industry. While it facilitates your ability to generate revenue, it can be tricky to determine the right value for your garment. In today’s post, I’ll break down the 4 most important components you should consider when determining your pricing strategy.
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The concept of margins is first on the list because everything else that follows contributes to the increase or decrease of this number. A margin is simply a measure of profitability, it quantifies the earnings or profit that is left after you subtract out the costs of what it took to produce your products. To calculate margin percentage, take the MSRP (manufacturer’s suggested retail price) – cost to manufacture the item/ MSRP. The margin percentage says, “When I subtract out the cost of the item, there is a x percentage of the retail price that I retain for profit.” On the other hand, marking up the cost of the item indicates how much you’re increasing the retail price by to earn a profit. Both concepts are two sides of the same coin.
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Example: If the cost to purchase/manufacture an item is $4.00 and the item is being sold at retail or to a retailer for $12.00, the margin percentage would be 67%. This indicates that the item is selling at a price that allows the manufacturer/designer to retain a 67% profit of the retail dollars charged to the consumer or retailer after subtracting out the cost of the item. Using the same cost and retail, the markup would be 200% above cost. This number is calculated by subtracting the retail from the cost, which is $8.00 and then dividing the $8.00 margin amount by the cost of the item. In simple terms, this means you’re charging the consumer two times above the “at cost” price of the item. Selling something “at cost” would mean charging $4.00; everything above that amount is considered your profit margin and can be discussed as a dollar amount or percentage.
Try this Formula:
Margin % = (Retail Price – Cost to Manufacture) ÷ Retail Price
2. Determining Your Base Margin
Now that you have an idea of what margin is, you have to decide what margin percentage will allow you to cover your expenses and eventually earn true or gross profit. When determining your base margin, consider the costs of doing business, which consists of many variables. Overhead is a word you hear a lot in business and is simply the basic costs of operating your business. These factors range from employee salaries, rent, office supplies and inventory, studio, and possibly retail locations. Marketing and sales are another category of costs to consider; whether you’re handling your public relations in-house or through an agency, there are necessary expenses required to get the word out about your brand. It is also important to understand raw material costs because prices of commodities such as cotton, leather, gold, silver, etc. fluctuate regularly.
Photography credit to Maker’s Row factory Gotham Textiles.
Changes in the costs to manufacture the item you’re selling will greatly affect your margins if the price of these materials increases or decreases. The margin percent that you choose should be high enough to cover your expenses and fair enough to actually generate sales. There needs to be a balance of low margin and high margin items in your assortment to average out at the base margin needed to successfully run your business.
3. Pricing Tiers
Pricing in retail is not created equally. Manufacturers don’t charge retailers the same prices even if they are all purchasing the same products. Volume, leverage, and relationships are factors that will determine what manufacturers charge retailers. Volume is king. Retailers who have the capacity to move the most units generally get the best prices for several reasons. If a retailer commits to purchasing significant volume in a product, they are making an investment and casting a vote of confidence in a brand’s performance. It also shows that they believe in a brand’s product and that they have a consumer base that aligns with the brand culture. For these reasons, they receive the benefit of the best price so that they can continue to buy in greater volume. Additionally, bulk retailers typically get the best prices because volume helps keep the costs down across the entire manufacturing chain. Raw material suppliers and producers will likely give a better price to a brand that’s completing a 20,000 unit order versus a 5,000 unit. Designers need to have high volume accounts that can consistently support that production size.
Lower volume accounts can serve a great purpose as well. They can help introduce your product to a new market, feature your product in a curated shop, or offer substantial qualitative value to consumers through your products. When negotiating prices, lower volume accounts might be charged more than a bulk retailer. Although your prices should always be fair, they need be a representation of how a retailer is able to expand your business. Smaller accounts that don’t buy high volume units may be charged a premium considering the cost of producing smaller quantities than larger volume.
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Relationships also play an important part in pricing. When you’ve built a friendship or rapport with buyers and retailers, negotiate better prices to strengthen the relationship. Determining price is a constant balancing act between charging accounts low and high volume prices, while keeping in mind the base margin you need to average out to in the end.
4. Market Values
The market determines costs. Although you can choose your prices and decide what costs you’re willing to pay, market conditions and consumers resistance or willingness to pay for an item at a certain price will dictate what retailers can sell your item, and what costs will work for retailers. The market is an ever-changing component to pricing that you have to stay on top of because it can directly impact your profitability. Research how your competitors are pricing products similar to your offering. This doesn’t mean you have to change your pricing, it means you have to understand where you’re placing yourself amongst the other manufacturers in your category. If you decide to price higher than the competition, you should have a firm handle on why your product is more valuable and be able to convey that message to retailers and consumers.
Photography credit to Maker’s Row factory Gotham Textiles.
On my blog, I expanded on the topic of luxury retail because there are tangible and intangible qualities that explain why a brand is worth more than other brands in similar markets. Trends also matter in respect to the market because consumer tastes change over time. Products that consumers were willing to pay premiums on lose value as new products are introduced or as a certain style or look goes out of fashion. You have to keep this in mind when pitching prices to retailers and be flexible to either move with the market or hold your ground and cater to the consumers that are devoted to your niche.
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All of these factors contribute to how profitable your collection will be. Fashion retail is a balancing act between aesthetics and commerce. You should aim to make a great product that’s interesting, fun, and useful while also having a strategy in place to generate profit and keep your business going.