As a fashion business owner, you are probably thinking about the money side of things often. Design may be the fun part, but at the end of the day, your business needs to make money. You’ll need to consider the cost to make your designs and set prices that will make you a profit. Costing apparel products can seem like a moving target, but there are some formulas you can use to calculate costs and prices so you can make informed money decisions.
Work backwards from the retail price
The key to costing your apparel products is working backwards from your desired retail price. Once you’ve decided what categories of items you will be releasing in your next collection – say 3 blouses, 2 day-time dresses, and 1 pair of pants – you can start to set your target prices. Do you have a usual price range for these types of items? If you have past sales data, it can be helpful to analyze what sold the best and see if a certain price point has been successful in those categories.
Look at the competition
Also look at what other brands in the same market are selling similar products for. This will not only give you insight into what your competition is for these styles, but also see what prices your target customer is willing to pay for similar items. If you want to dive in really deep, you can even read reviews of similar products and see if any customers have commented on how the product met their expectations based on the price.
Target cost formula
Once you’ve looked at your own brand’s prices, sales history, and competitors’ prices for similar items, you can work backwards to see what your cost to make the item should be. The basic formula for calculating margins and pricing is to double your cost to get the wholesale price and double the wholesale price to get your retail price. Since we are working backwards, this means that your cost to make the style should be around one quarter of what your target retail cost is.
For example, using this basic margin formula, if you want to sell a dress for $100 retail, your cost should be around $25 and you’d sell it wholesale for $50. Starting with this simple formula, you can adjust it to meet your business needs. Some brands customize this formula to increase the margin while some offer slightly cheaper wholesale prices for large-quantity orders. Find what works for you and your business model.
Wholesale versus DTC margins
If you are selling direct-to-consumer only, you may be tempted to “cheat” the 2x, 4x margin because you don’t have the wholesale middle man. You can certainly do this, and some DTC brands do, but don’t go so low as to set your retail prices where wholesale prices should be. This limits your option to introduce wholesale later and sets your brand up for smaller margins in the long run. Cheaper is not always better. Price your products what they’re worth to your customer, which is not always directly tied to what they cost you to make.
So for our $100 dress example, we know that with basic margins, it should cost you around $25 to make. But what goes into that cost and how is that broken down? That cost should include all the costs directly associated with making that product. That includes fabric and trims, labels and hang tags, shipping (sending materials to the factory, importing finished garments), and the cost you pay your factory to cut and sew the garments. I also recommend including the cost of development, patternmaking, and sampling (dividing that development cost over the number of garments you are making the first year you sell the style). If you don’t include the development cost here, make sure it is included in your general overhead costs.
Breaking down the cost
There is no general formula for how the cost to make the item should be broken down. You could be making a style that is simple to cut and sew using an expensive fabric. Or you could be making a complex style with a relatively inexpensive fabric. Depending on where in the world your factory is located compared to you, your cutting, sewing, shipping, or import costs can vary as well and take up a different percentage of that item’s cost.
Designing for the target cost
So how do you know if your design fits in your price point before you place a production order? If you are working with a full-service factory that is doing the fabric sourcing and development for you, you will need to approach the factory with your design and your target cost. While they can’t provide an exact price until they make a sample, they will be able to look at your design and tech pack and tell you whether it is within the ballpark of your target cost.
If you are working with a cut/make/trim (CMT) factory that is only doing the cutting and sewing for you, you should have your fabric already picked out and be working with a patternmaker who can give you an estimate of how much fabric the design will use. That way you can start to add up the material costs and have a rough idea of what the cut & sew cost will need to be to hit your target cost. Again, approach the factory with your design and target costs so they can offer feedback on whether your target cost is realistic.
As a fashion business owner, it is important to know how to cost your products profitably and balance the creative vision with realistic money matters.