‘Look after the cents and the dollars will take care of themselves’
Why does a dress cost $300? Is a cotton shirt worth $75? The sticker price of that dress you’re considering or the shirt you are saving for can depend on the complexity of the design, the status of the label and whether the clothing is made overseas or domestically. What goes into the clothes you buy can sometimes make the sticker price as high as a luxury vacation or as low as a pizza and a movie. The answer is layered in the long, complex journey a garment makes in the process of creation, production, testing and shipping that brings it, finally, to the retail store. It also reflects the retailer’s overhead costs, for security, real estate, technology, etc.
Understanding how to correctly cost a garment will be the key to your company’s success. One small miscalculation can be devastating to your profit margins and could undermine the survival of your start- up business. Once you have determined the market and price bracket that your company will be in, you will have to strive to maintain the quality of styling and construction within the set price structure. For a small start- up company it is very difficult to be competitive with bigger manufacturers in moderately priced and budget clothing. Unless you are investing a few hundred thousand to start your company, the higher price category is usually the best place to start. There is a higher profit margin to the manufacturer and to the retailer in ‘betterwear’. Granted the orders will be smaller, but it is hard to find financing for large orders when you are a start-up company. Most start-ups will not be able to afford to produce large quantities at first, without borrowing money. Start with small orders. When mistakes are made it will not be too devastating to the company both financially and emotionally. You will be able to learn by your mistakes.
Major Costs
The major costs involved in manufacturing any garment are fabric, trims, labor, and operational costs. Becoming familiar with labor costs takes experience in understanding the over-all work involved in the completion of the garment. Direct labor for sewing will be negotiated with the contractor. Marking and grading may be done by one company, cutting done by another, (or in some cases) your contractor may be able to take care of all these steps in producing your product. All these costs must be calculated by the number of garments made. For smaller orders there will be a higher price to pay. The more garments sold or the bigger the order, then the labor price decreases. Other labor costs to be considered are design development, first patterns, production patterns, quality control, bookkeeping and shipping. Overhead costs or fixed costs should not be forgotten including rent, electricity, etc.
Chargebacks & Markdown Refunds One of the more controversial factors in apparel prices is retailers’ request for ‘chargebacks’ or ‘markdown’ money. Chargebacks can be demanded by a store for late deliveries or for a variety of other reasons. If too few garments sell at full price, sometimes department stores go back to the manufacturer to ask that they share in the losses from discount sales. Ironically, markdown money, or credit demanded by a retailer adds to the manufacturer’s overhead costs and may boost the original retail price of the garment. Another cost that retailers expect the manufacturer to share is the cost of advertising, promoting the product in store flyers and newspaper advertisements.
Smaller specialty stores are less likely to make such requests, but they have less buying power with the manufacturer. Markdown and chargebacks have become a very sensitive issue
and many manufacturers are refusing to do business with larger department stores because of this problem. The wise manufacturer calculates both of these into the costing of the garments
Importance of Correct Costing Incorrect costing can result in losses that will eventually bankrupt the company. If the costing for cutting, sewing, or trims is incorrect, or if the yardage has been under-calculated, then the costing for that garment will result in major losses. Costing is done before the orders are written so it can be difficult to calculate how big the order will be. Therefore, it is important that start-up companies project the size of production and the money available to produce the orders. You could be out of business in a very short time without an experienced costing person filling in the cost sheets. It is also crucial to have an accurate fabric yield and a precise production cost. Never guess your costs!
Market Research
When starting a new company, it is important to assess the market, shop your competition and find out the critical price points of similar products in the market place. To cost products too high could mean no orders and to charge too little could result in no profits. Know the three stages of costing:
- ‘Actual cost’ of production: This is more or less a fixed price and can only be reduced by modifying or changing the garment.
- Cost plus your markup percentage: Deciding on the mark-up will be determined by a couple of factors: How much do you need to make in order to make a profit? What will the market price will bear?
- Retail-selling price: Having a realistic understanding of the price structure of the market place will help when costing.
Costing for the Start-Up
A simple method of costing for start-up manufacturers is to make the price you sell to the retailer at least twice your cost. This should give you a 100% mark-up, which is a necessary profit
margin when you first begin to manufacture and have small orders. The term used for this is ‘keystoning’. However, be careful for any hidden costs. This method is not the most reliable or accurate.
Example If your basic cost is $20, you will sell your garment for $40. This is ‘keystoning’ which equals a 100% mark-up. If you go back from the
$40 to the cost price of $20, that will equal a 50% gross profit margin. Understanding these basic terms will help you understand how they should be used.
Never go below 35% gross profit margin, or you will be giving the garments away! Subjective thinking will come into play sometimes when you have to take a smaller mark-up on the pricing of certain styles in order to keep a group together. Hopefully, this will make the group more saleable. Conversely, there will be times when you will mark-up a garment more than 100% to keep the garment in the correct price category. If you do reduce the profit by lowering the wholesale price of a garment, make sure that if the garment sells well and the store wants to reorder, you then adjust the price higher. If not, you may find that this garment will end up losing money for you season after season. Only compromise the cost of a garment if it is to keep a group together and you feel that removing it would harm the overall sales of the group. Your goal is to try and keep the garment at the right price point for maximum sales and profit. To do this you may have to rework the particular garment with the production pattern maker to make it fall in the right price range.
Mass Production
For manufacturers producing mass production on a large scale, the mark-up percentage is usually smaller and pricing more competitive, due to the large quantities produced. They can safely work with a 30% profit margin – you cannot! Retailers such as Forever 21, The Gap, Old Navy, Banana Republic, Limited and Ann Taylor have a price edge because they can deliver their goods directly from the factory to the public without the independent middleman. This is known as
vertical production or manufacturing.
(Discount chains such as T.J.Max, Ross or Marshall’s usually take lower profits in place of such perks as sales help, personal shoppers, carpets and fancy dressing rooms. Manufacturers often have discounted goods left in stock after the season is finished that needs to be moved rather than added to their inventory Discount chains can buy this merchandise at a low cost for sale in their stores ).
Custom Made Clothing
When costing a ‘one-off’ garment it is important to establish an hourly worth of the designer/ producer. Only when you know this can you begin to estimate the costs involved of producing a unique, one-of-a-kind, wearable piece of art.
Once you have established your hourly worth, double it and add it to all other expenses. This will give an approximate cost of the wearable art piece. If the custom- made piece has been commissioned, it is a general rule to ask for fifty percent up-front, since it is often impossible to sell to anyone but the original buyer. If you know the buyer, it may not be necessary to ask for fifty percent up front, but otherwise protect yourself from being left holding an unclaimed garment. To guarantee payment upon completion, finished pieces may be shipped either COD or Pro forma. It is a good idea to take a credit card payment before you ship. Then make sure that the payment goes through before shipping.
Computer Programs
With all the new computer programs available for managing your business, it is advisable to get a program customized to your own specifications to cover all the fixed costs of your garments. Then, the yardage, labor costs and fixed costs can be calculated, fed into the program and a correct costing made of each style. Once programmed to your specifications, these programs will calculate the gross profit margin and the net profit margins of each garment. Remember, the computer is only as good as the user, so be sure that the information programmed into the computer is correct.