Vanja Stace, The Fashion Darling, returns this week with 3 methods to consider in pricing your fashion line for profit. Make sure you select the method that works best for your product line and operations!
Pricing is incredibly important for fashion brands because it has a direct impact on the place your brand sits in the market, as well as on your profits.
The problem with pricing incorrectly
I have seen many designers think they are priced correctly, only to realize (once I go through their pricing structure) that they have been selling to the consumer at their wholesale price. Yikes! No wonder they couldn’t work out how to start a wholesale channel – there is no cut there for a retailer because the price is too low.
The problem with pricing incorrectly is that your audience gets used to your brand sitting in one part of the market, and if you try and double your prices in one fell swoop you will lose current customers.
You will also have problems gaining new customers, who can afford the new price, because they see you as a cheaper brand, since that’s what you have been so far.
Another problem with pricing incorrectly is that you are not making profit. I understand that you are in this business because you love it, and you’re not solely motivated by money, but wouldn’t it nice to be paid for your talent, ideas and time? Wouldn’t it be great to recoup all your costs and have money left to start marketing your line?
This is what profit does, it pays for your business to move forward, it pays for you and it keeps you in your business.
Which pricing method is for you?
There are numerous ways to price your garments, and I will cover a few of them off here.
1.Backwards pricing method
This is a great method to use when you’re trying to work out if a product is viable – i.e. if it’s worth producing.
You look at a product, for example an embellished one piece swimsuit, and you estimate that in the current market, with your brand and consumer in mind, the most you can get for that is $200. This is your RRP – recommended retail price.
Now you take that RRP and you divide it by 4 to get your cost price. If you think you can sell this swimsuit at $200, then your cost price of the finished product needs to be a quarter of that, which is $50.
Can you produce a quality product for $50? No? You need to review your design and manufacturing processes to make it work, or you need to not go into production.
2. Keystone markup method
The most common way of pricing fashion items is using the keystone markup method. This means that you multiply a price by 2 (sometimes up to 2.5) in order to get a price for the next level.
For example, you start with a cost price of the garment which is the sum of all of your manufacturing costs.
You then multiply this by 2 to get your wholesale price.
Then you multiply the wholesale price by 2 (and up to 2.5 to cover taxes) to get your retail price.
This is the most basic method and is commonly used by brands who need a simple pricing strategy.
3. Absorption pricing method
This is the method I recommend for my clients and students. It adds not only the production costs of each product, but also the overhead costs and expenses, and it adds a profit margin to each piece.
It has 5 stages:
- Cost price = cost of materials, trims and labour
- Overheads, admin expenses and design expenses = the cost of these expenses divided by the number of items produced in this style
- Profit margin = your profit %
- Wholesale price = add up stages 1+2+3 and this is your wholesale price
- RRP = multiply your wholesale price by 2 or up to 2.5 to get to your retail price.
In simpler terms, Cost price = Production cost per unit + ((Total overheads + admin expenses)/Number of units produced).
You then take the cost price, add your profit margin, and this makes your wholesale price. The wholesale price is then multiplied by 2-2.5 to get an RRP.
Where does your brand sit in the market?
When pricing your designs it is also important to know where your brand sits in the market.
If you sit in the premium end of the market your customer expects to pay a high price for an item of great (perceived) value – which means you can’t be cheap. Saving a couple of dollars does not motivate a premium customer, so don’t discount your goods.
Luxury pricing needs to be applied to this type of product, where the brand has an extremely high value (comparing to the actual cost of production). This part of the market is brand focused, and loyal.
Budget pricing – if you are perceived as a low-end, no-frills brand but your products are expensive, people won’t buy because they won’t see the value in buying a high price item from a low end brand.
The low part of the market is focused on price – they are not looking for goods that will last a lifetime or elevate their social status. They want something they can afford, and are happy to love it and throw it out soon after. This market segment is NOT brand loyal – they will buy based on price and won’t care who they buy it from.
Value-based pricing for the middle part of the market – this part of the market needs to see value for money – a careful mix of quality and price.
If you focus on long-term relationships this client is brand loyal but will need to see you cater to their needs, choosing quality materials and making your products affordable. They can justify the price if they see the value, so that needs to be your focus and talking point in your communication efforts.
Where does your brand sit in the market? And which pricing strategies do you currently use?
About the author
Vanja Stace is the founder and principle of The Fashion Darling School of Business.
The Fashion Darling was founded in 2015 and has helped many international designers. In July 2015 we won the Fashion Edupreneur 2015 Award, which recognises excellence in the delivery of educational programs in the fashion industry.
The Fashion Darling will be back next friday with tips for your fashion line. In the meantime, if you have any questions for Vanja, reach out to her on www.thefashiondarling.com.