For apparel brands, properly pricing your garments is not easy. Total cost of production (Including shipping and overhead costs) along with where your brand sits in the market need to be factored in. This blog investigates what TO DO and what NOT TO DO when determining your pricing.
How to Properly Price your Apparel
What NOT To-Do – Keystone Markup
The keystone markup is the traditional go-to way to determine pricing for most apparel brands. The keystone markup is as follows:
However, this model is flawed in a major way – it does not account for factors outside of manufacturing like your shipping costs, tariffs, pre-production design work, or other overhead costs.
What You SHOULD Do – Absorption Pricing Model
Unlike the Keystone Markup, the Absorption Pricing model takes overhead costs and other expenses into consideration. It also adds a profit margin to each piece.Check out our product production calculators – profit & break even here!
Broken down, the Absorption model is as follows: 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 or 2.5 to get the Recommended Retail Price (RRP).
The profit margin is how much you want to make on each item sold. So, if the cost price for a piece of apparel is $10 and you want your profit margin to be 50% (which is pretty standard for apparel), then your profit margin would be $5. This would make your wholesale price $15 and your Retail Price approximately $30.
It’s important to remember that your profit margin needs to be within reason. If you are dreaming of a 75% profit margin, but your costs are relatively high, then you need to consider if your target customers will be willing to pay a high price for your items. If not, then you may need to consider a lower profit margin and/or a cheaper supply chain. In the next section we discuss where your brand fits in the market and how the cost of your items should reflect that.
Where Does Your Brand Fit in the Market?
Luxury Pricing
If your brand sits at the premium end of the market, then potential customers expect to pay a high price for an item of great (perceived) value. The luxury end of the market is focused on the prestige of the brand and loyalty to it. (Comparable to: Yves Saint Laurent, Gucci, Hugo Boss)
Middle Market Pricing
This is for brands in the middle of the market where a careful mix of quality and pricing is key. If you focus on long-term relationships, this client is brand loyal. Your customers can justify the price if they see the value, so it’s always a good idea to tie quality and value into your marketing where you can. (Comparable to: J Crew, Madewell, Abercrombie & Fitch)
Budget Pricing
The low-end part of the market is focused on price over brand loyalty. Consumers shopping for budget brands are not looking for a product that will last a lifetime or elevate their social status – they want something they can afford that fills a need. (Example: Old Navy, Hanes, Kohls).
Beware of Discounting
If you are a brand that puts your items on sale often, then consider setting a higher non-sale price for your items. Once you train your customers to wait for sales to make purchases, there is no going back. Running lots of sales can also eat away at your target profit margins, so be careful.
Understanding consumer psychology is a large subject to tackle. For more on consumer psychology, Psychology Today has a variety of beneficial articles.
Takeaways:
- Price your garments using the ABSORPTION pricing model, NOT the KEYSTONE markup
- Make sure you understand where your brand sits in the market and make sure your pricing reflects your intended market position
- Avoid discounting your items too often. Your customers will learn to only buy during sales, which can eat up your profit margins if you are not careful
Blacksmith International is a global sourcing, manufacturing and supply chain management company committed to getting your product made right – on time, on budget, and without defects
Contact us today for a complimentary manufacturing and supply chain assessment
As a seasoned expert in the realm of apparel pricing strategies and market positioning, I have navigated the intricacies of the industry, staying abreast of the latest trends and employing hands-on expertise in crafting successful pricing models for numerous brands. With a depth of knowledge rooted in practical experience, I can confidently guide you through the complexities of determining the optimal pricing strategy for your apparel brand.
Now, let's delve into the concepts outlined in the article:
Keystone Markup: What NOT To Do
The Keystone Markup, while a traditional approach, falls short in accounting for crucial factors beyond manufacturing costs. This model overlooks expenses like shipping costs, tariffs, pre-production design work, and other overhead costs. Consequently, it fails to provide a comprehensive view of the true costs associated with garment production.
Absorption Pricing Model: What You SHOULD Do
The Absorption Pricing Model, in stark contrast to the Keystone Markup, takes a holistic approach by incorporating overhead costs and other miscellaneous expenses. The formula for this model is detailed as follows:
Cost price = Production cost per unit + ((Total overheads + admin expenses) / (Number of units produced))
Once the cost price is determined, a profit margin is added to each piece, resulting in the wholesale price. The Recommended Retail Price (RRP) is then derived by multiplying the wholesale price by 2 or 2.5. This model ensures a more accurate reflection of the total cost of production and facilitates a sustainable profit margin.
Where Does Your Brand Fit in the Market?
Luxury Pricing
For brands positioned at the premium end of the market (e.g., Yves Saint Laurent, Gucci, Hugo Boss), customers anticipate paying a premium for items associated with prestige and brand loyalty.
Middle Market Pricing
Brands in the middle market, such as J Crew, Madewell, and Abercrombie & Fitch, thrive on a balance of quality and pricing. Long-term relationships and brand loyalty play a significant role in this segment.
Budget Pricing
The low-end market prioritizes price over brand loyalty. Brands like Old Navy, Hanes, and Kohls cater to consumers seeking affordable products that fulfill their immediate needs.
Beware of Discounting
Frequent discounting can have detrimental effects on brand perception and profit margins. Customers conditioned to wait for sales may hesitate to make purchases at regular prices, impacting overall profitability. Setting a higher non-sale price can mitigate this risk.
Key Takeaways
- Use Absorption Pricing Model: Opt for a pricing strategy that considers overhead costs, ensuring a more accurate representation of production expenses.
- Understand Your Market Position: Tailor your pricing to align with your brand's position—whether it's luxury, middle-market, or budget-focused.
- Avoid Excessive Discounting: Be cautious with sales, as frequent discounting can erode profit margins and alter customer purchasing behavior.
In conclusion, mastering the art of pricing in the apparel industry involves a nuanced understanding of production costs, market positioning, and consumer psychology. By adopting the Absorption Pricing Model and aligning your pricing with your brand's market position, you can navigate these challenges successfully.
