Creating an effective price structure always brings problems. There are people who enter the fashion industry with the aim of undercutting what products are already on the market; However small businesses often struggle to compete in this way. Furthermore, selling at a reduced market price can sometimes create a negative impact and mean a loss of sales in the long term. When creating a price structure, there should be several factors that a business must consider:
- What is the average market price for the garment? You need to find a fine balance; Selling at a low price could lead to customer assumptions that your product is a poor quality while overcharging could mean pricing yourself out of the market.
- What is the scope of your raw material cost? It is important to understand exactly how much you are budgeting for the materials themselves, even down to small details like thread and zips. Buying at a discounted rate or in bulk can be beneficial if you have repeat custom, however, always make sure you use an average or estimated value for these discounted items. If you want to try wholesale, you also have to figure out a wholesale pricing.
- How much do other items in your fashion range cost? We as customers do not like inconsistency; If you have one item that is labelled at a really low price, but a similar item at a much higher price, this could be questioned – Why are they not price the same? What makes item 1 so much cheaper than item B? In most instances, you should look at increasing the price of the least expensive item.
- What was the average time spent to produce each item? It is important to keep track of the hours you put into the business and provide yourself with a wage that allows you to live comfortably. While there may be instances where you will have to make do with less than the minimum wage, the work you put in will reap benefits in the long run.
- A final factor to consider is the overheads of your business; this includes things like electricity and rent that are not directly related to production but still need to be accounted for. To calculate these costs you can work out your weekly or daily cost totals and then divide this by the total number of items you create in the same timeframe. For example, if your electricity bill costs $50.00 per week, and you create on average 100 garments per week, the sum would be 50/100 resulting in a cost of $0.5 per item to allow for.
The profit margin in Fashion
Once you have all of these costs accounted for, you can then determine an effective minimum selling price. This selling price should cover all of the associated costs, and then on top of that, a small profit margin should be added – This profit can be then used for investing further in your business. Always remember to take note of any taxation that may be taken from profits you earn.
If you are selling your products to a retailer and not directly to the customer in a shop front, the retailer will add their own profit margin on top of your price. This margin can vary greatly from as little as 5% up to as much as 50% and can also have a great impact on the final selling price and how competitive your garment is. If your own margin is too high, coupled together with the retailer’s margin, this could create a product that is priced too high for the market or uncompetitive. For retailers, charging a smart level of margin is not an easy matter.
Clothes and fashion are generally seen as a luxury item; they are not a necessity (obviously, you need clothes for work, and for day to day wear, but we mean new outfits for evenings out etc). In times of economic recession, the retail industry often experiences a downturn in business. To anticipate this and stay competitive in difficult times you should always look at adjusting your margins depending on current economic climates. On the flip side, during times of economic boom when your business flourishes, make sure you save as much as possible and maximise your profitability. Also, try and anticipate changes in the market and fashion trends – prices continually change as do fashions, you need to react to these changes and ensure you garments are priced accordingly. To have a clear view of the fashion value chain, don’t hesitate to check this clever Forbes article.
The fashion industry and exclusivity
The fashion industry thrives on exclusivity and perception – The rich and famous will pay high-end prices for products that are deemed to be exclusive or one of a kind for example. Often items like handbags can appear to be priced in excess to what they are actually worth purely because of the designer label they are attached too – Comparative Gucci and Topshop handbags could vary greatly in price, but actually have cost not much different to produce, the reason for the price difference is that Gucci has the perception of being the more exclusive, higher quality brand.
New businesses do not have the luxury of benefitting from an established brand; it takes time, experience and a host of good reviews to build up your identity and customer base. Putting that aside, there are still many ways into different markets such as luxury goods; you simply have to have something creative and bold to bring to the table. New ideas, instincts, and trendsetting fashions can allow you to stand out from competitors and charge a premium for your products.