Design may be the fun part, but costing is what makes sure your business is making enough money to cover your expenses, pay your people, and make a profit. It is important to think about costing early in the process and set target costs before you even have the information to calculate your actual cost. Target and actual costs each serve different purposes, but both work toward the same goal of keeping your customers happy and your business profitable.
Target costs are the ideal costs you set before you begin development on a particular style. They are calculated by working backwards from your target retail price for the style. You can read more about calculating costs and margins in this post here.
After you have your initial designs, you’ll use your past sales data, customer research, and research about similar styles from your competitors to set a target retail price range. This price should be in line with the other prices for your brand and a price that your target customer is willing to spend on that type of item. Looking at the prices of competitor brands that your target customer wears can be helpful in setting your target retail price as well.
Essentially, target costs are your goal costs that will be profitable at your target retail price. They give you a guideline for making decisions on final design, fabrics, and factories. Your patternmaker or factory can suggest certain finishes or construction methods based on your target cost that will match your customers’ quality expectations. You can also use your target costs to narrow down material and trim choices. If your design ends up too complex and the cost comes back too high, you can adjust the design elements to make it cheaper to construct to fit into your target cost.
The target costs are your budget. As you develop your products, that budget will make sure you aren’t surprised by a high cost that doesn’t make sense for your business or customers. Target costs serve as a checkpoint at each step to ensure you’ll fit your financial goals, or they will save you from investing time and money in a style that won’t.
Actual costs are exactly as they imply – they are the final total cost of producing your product after all elements have been accounted for. You won’t have this actual cost until the style is close to being done.
The actual cost includes the final materials, labor, and development cost to produce the product. Some of these actual costs you’ll have sooner than others. The material cost is pretty straightforward. Once you know all the materials your design will use, you multiply their prices by how much of the material each garment takes and then total them all up. Your patternmaker, grader, or factory will be able to give you the amount needed (called a yield) once the pattern is complete.
The cut and sew labor cost of producing your product will come from your factory. Once you have your pattern and tech pack, the factory will make a PPS, or pre-production sample, to test it out to give you a price for production. This price will also be based on how many garments of that style you are ordering, so you’ll have to wait until you have those numbers to get your final labor cost.
For your development cost portion, you average the cost of developing the style (fittings, samples, patternmaking, grading, etc.) over how many garments you will produce. If you are working with a patternmaker that gives a price upfront like I do, you’ll know the actual development cost before you begin. If they work hourly, you will total up the invoices to calculate the development cost after you’ve received the last invoice.
The purpose of going back and calculating your actual costs based on the final information is that it gives you a definitive view of the profitability of the style. With the final cost in hand, you can decide on the exact retail price and know exactly what profit to expect from selling the style. This helps to plan cash-flow for the season and helps you make decisions on which styles to reorder or carry over to next season.
The more data you have on the actual cost of your products, the better you’ll be at estimating target costs in future too!
Starting costing early and setting target costs will help you develop a style that fits you and your customer’s budget. Calculating actual costs once all the needed components are available lets you analyze the profitability of the style and better plan and budget for future development.