The value of your product in front of your customer’s eyes is key to your fashion business success. It all begins with determining costing and an adequate pricing for your garments. And as the business landscape is becoming more and more challenging in today’s dynamic and changing digital world, we’ve decided to dive into these two different but intricately related aspects of financial modeling.
Cost can be defined as the economic value placed upon the resources consumed to make a product.
In fashion manufacturing, this means the process of estimating and then determining the total cost of producing a garment or item. It generally includes raw material cost, construction of the garment, trims, packaging, shipping and operating expenses and manpower, among others.
Just fabric alone, (which is part of raw materials) requires many calculations. Then there are minimum order quantities (MOQ) and other materials like trims buttons and more which have an important impact on final cost. There is a lot more to learn
The fabric cost constitutes 60 to 70 percent of the total garment making cost.
According to Fibre2Fashion
These are the two most common ways to determine the Cost of Manufacturing (CM) for a particular style/order.
1. Standard Time (SAM) of the product: Standard allowed minute or Standard Minute Value is used to measure the time a qualified worker takes to execute a certain operation (construct a garment, for example), following the standard for the best procedure, at the standard performance. How is that calculated?
2. Daily Production Average This method focuses more on the average quantity of items produced by a factory on a daily basis and the operational costs involved in that production. It takes into account cost of using machines and manpower too. More details here.
Whether you're sourcing in your own country or abroad, the transport logistics of your goods from the factory to your warehouse imply additional costs. These are usually known as freight and shipping and to better understand how each works, let's imagine take-out dinner scenario:
CIF: Cost Insurance Freight
Let’s say you call your favorite Chinese take-out and ask them to deliver dinner to you (considering they charge a delivery fee). From that moment it's the restaurant's and their delivery guy's responsibility to ensure your food arrives on time or that your dumplings are not missing, for example.
It works in a similar way with Cost Insurance Freight, the factory making your garments is responsible for the goods until they reach your port of destiny. And there will be a surcharge for that service. Of course it’s not as simple as Chinese take-out, you can learn more about CIF here.
FOB: Free or Freight On Board
Imagine this time you've asked not to have the food delivered to you. Instead, you'll pick it up yourself or have somebody of your choice do that for you. From the moment the order is collected, you become responsible for the food and its delivery.
In the same manner, with FOB the factory or seller is responsible for the goods until they are loaded on the vessel. From then on, the buyer assumes all of the responsibilities for the shipment. If only arranging garment shipping where this easy! here you can learn more.
Tech Packs are a great, if not the best, tool to determine costing of garments as they communicate all the details of the product including all of the components which gives the estimate of the costs that will be incurred during production.
This is where the BOM (Bill of Materials) comes in! As garment expert Chris Walker states: the last thing you want is for the factory to say, “oh, you want a button there? That will cost you an extra five cents.”
With tech packs, both factories and designers have a common reference point. With a complete document with all of the of the product’s details upfront included the factory can make an accurate estimate of costs, allowing you to compare like-for-like prices and quality of workmanship.
Learn more about why tech packs are essential in this process.
T-shirt with dollar label
Costing is included in Pricing. The latter is determined by your profit margin, and varies when you're retailing direct to your customers Vs selling as Wholesale to other retailers.
In this article by Vanja Stace you can learn more about the three most common methods to determine pricing:
Backwards pricing: This includes working your way back from an estimated average retail price. For example:
Imagine you're looking to sell an embellished one-piece swimsuit for $200 (recommended retail price RRP) for your target market.
Divide the RRP by 4 to get your cost price which is $50. Can you make a quality piece at cost and sell it for $200? If not you’ll need to review your design and manufacturing processes.
This is the most common method and it uses cost as a starting point. For example:
Let's say the cost price of your garment is the sum of all of your manufacturing costs. Then multiply this by 2 to get your wholesale price.
Finally, multiply the wholesale price by 2 (and up to 2.5 to cover taxes) to get your retail price.
This one adds the manufacturing costs of each product + the overhead costs and expenses, and it adds a profit margin to each piece.
For easier understanding it's divided in 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.
To learn more about this method read the full article here.
Pricing strategies serve to differentiate your brand and gain competitive advantages in the marketplace. Understanding the following price ranges can help you identify the ideal strategy for your business:
Luxury pricing is applied to products of extremely high value (compared to the actual cost of production). Brand customers tend to be loyal and purchase these products to elevate their social status.
Budget pricing refers to low-end, affordable products. Customers will buy based on price, therefore, customer loyalty is low. Serving this segment can yield significant sales volume at the expense of lower per-unit profitability.
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. This pricing strategy sits somewhere between the budget and luxury segments.
This is a simple explanation but you can go in depth here.
With the digital era in full bloom retailing has dramatically changed the environment and has required a reevaluation retailers’ pricing strategies and capabilities.
This article by McKinsey focuses on key value categories (KVCs) and key value items (KVIs) and the relevance and evolution of these in pricing strategy in today’s digital retail environment and why it’s important to know:
The traditional role of key-value categories and key value items in retail price strategy.
How today’s digital retail environment is changing the game
The key implications for creating a winning price strategy
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