![]() ![]() Gross Profit Margin = (Revenue – COGS) / Revenueįor comparison, the gross margins of apparel retailers industry-wide is around 47%.COGS = materials + labor + factory overhead + production supplies.On a unit-by-unit level, once you know production cost (COGS), you can play with the revenue (price) and gross profit margins to find the numbers you like. Gross profit margin is the ratio of profit to revenue. Gross profit is what you have left when you’ve subtracted COGS from your revenue. After you determine the cost of goods sold (COGS) for each item you sell, you can decide how much to mark up that number to make a certain amount and percentage of profit.ĬOGS is the sum of all the direct expenses involved in making products, namely: materials, labor, factory overhead, and production supplies. But how do you determine your production costs? How to Calculate Cost, Profit & MarginĪs the name suggests, cost-based pricing requires understanding your expenses. The market average right now is to price products somewhere between 2.1 and 2.4 times the production cost (rather than 2 times). Recent changes in the industry, however, have put pressure on brands to use markups under 100% and on retailers to use markups above 100%. Keystone markups have traditionally been 100%, or 2 times the production cost. A retailer picks it up and sells it to consumers for $20 (a 100% markup from the wholesale price). That shirt wholesales for $10 (a 100% markup from the original price). It works like this: A designer produces a shirt for $5. Keystone markups have historically simplified pricing in a volatile industry, making it easy for wholesalers and retailers to markup products to a profitable level. In apparel, keystoning is applying a 100% markup-or, in other words, doubling the price. It refers to how much a seller “marks up” a product from its previous cost. Markups are the cornerstone of pricing in the industry. Make sure your pricing is consistent with your unique selling proposition, whatever it is. The ecommerce store Everlane has positioned itself as a consumer-centric, radically transparent brand that cuts out the middle man and shares its savings with customers. Other customers (particularly online bargain-hunters) are put off by high pricing. If you position your line as a luxury or niche brand, pricing using average markups may put off potential customers. Industry standards and competitors’ prices are benchmarks, not rules. But before we talk about how to calculate these costs and mark them up for a profit, know that your business goals can and should affect your pricing strategy. Most businesses in the apparel world use a cost-based pricing strategy, in which the final cost to the consumer ultimately comes from the cost of producing that product. There’s no one right way to price your clothing, but several principles apply. The best pricing strategies use a clear understanding of basic financials as a springboard for experimentation and deeper knowledge of the market. It requires both cold calculation and a sensitive intuition. Pricing is complicated for both service and product businesses, established owners expanding their business and entrepreneurs starting one. Whatever channel you choose, the biggest question facing you right now is, what do I charge? Dream and designs in hand, you’re about to enter the world of wholesaling, retailing, and ecommerce. ![]()
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