Costing for the Fashion Industry
It might look easy to design a clothing line, sell it to retail stores and watch happy consumers buy everything you produce. However, if you don't control your costs, based on what you know the consumer will pay for your clothing, your line might end up too expensive or provide too little profit to fund your creation of next season's line. Start with researching retail prices in your target market, wholesale prices and manufacturing costs before you begin designing.
Fashion designers producing for the retail marketplace, rather than custom or couture, know that their direct costs, such as raw materials and manufacturing, plus their indirect costs, such as financing, marketing and administrative costs, must add up to a number that allows them to make at least 10 to 20 percent profit on their wholesale price. The wholesale price must also be low enough for the retailer to make a profit on the price the customer is willing to pay. Then they design their lines to meet those cost requirements.
If you create a shirt design you expect will sell in a store for $40, the wholesale price will have to be no more than $20 per shirt. Keystone, or standard retail markup, is 50 percent of the expected retail price, which is double the wholesale price. It might be higher or lower depending on the type of clothing and store, but since this is an important part of your costing, check the practices in your target market. If you are a start-up or small designer, you might be selling directly to the customer or to boutiques, without a wholesaler. This practice can cause problems later if you decide to expand your business reach by distributing through wholesalers. Either the retail price will rise or your profits will suffer when the cost of the wholesaler is added.
Wholesale reps can add anywhere from a 10 percent commission on sales to a wholesale markup of double your unit price. So if your retailer is buying your shirt at $20, the wholesaler might pay you $10 for the shirt. Out of that $10, your cost of design, manufacture, shipping and business overhead should total approximately $8 per shirt to leave you with a 20 percent profit. Figure that for every $2 of retail price, your cost should not exceed $0.50 per unit. If you are dealing in volume exceeding 15,000 units, you might qualify for discounts to help your profit margin.
Manufacturing includes pattern making, the cost of the textiles, cutting, sewing, finishing details, labels, tags, hangers and protective bags. Learning about the individual manufacturing costs helps you control the cost of producing your garment by altering the design or choosing different textiles and finishings, such as decorations, buttons, fasteners, zippers and belts.
If you are wholesaling garments bought from an overseas manufacturer or designing garments to be produced by a manufacturer, the manufacturer will give you a price per unit, free on board, which means delivery to a port is included in the price. Landed duty paid is another popular unit price quote, which includes delivery to a port and all costs of customs and taxes. When you obtain quotes from offshore manufacturers, make sure you understand what the quote includes.