You’ve decided to start a clothing line. Dream and designs in hand, you’re about to enter the world of wholesaling, retailing, and ecommerce. Whatever channel you choose, the biggest question facing you right now is, what do I charge?
Pricing is complicated for both service and product businesses, established owners expanding their business and entrepreneurs starting one. It requires both cold calculation and a sensitive intuition. The best pricing strategies use a clear understanding of basic financials as a springboard for experimentation and deeper knowledge of the market. There’s no one right way to price your clothing, but several principles apply.
Positioning Your Brand
5 common pricing strategies. Pricing a product is one of the most important aspects of your marketing strategy. Generally, pricing strategies include the following five strategies. Cost-plus pricing—simply calculating your costs and adding a mark-up; Competitive pricing—setting a price based on what the competition charges. Product Pricing Strategies – Choose Wisely Cost Plus. Calculate what a product costs then add a markup. This internal method of focusing on pricing doesn’t really take into account what the value is to the customer, but it’s a way to ensure the profit that you desire for each unit of the product that is sold. Pricing strategy is a way of finding a competitive price of a product or a service. This strategy is combined with the other marketing pricing strategies that are the 4P strategy (products, price, place and promotion) economic patterns, competition, market demand and finally product characteristic.
Pricing Strategies Planning For Brand And Profit Maximization
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. 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.
New pricing plans attract customers by providing ownership options, mitigating uncertain value, offering price assurance, and overcoming financial constraints. Offer product versions. One of the easiest ways to enhance profits and better serve customers is to offer good, better, and best versions – or bronze, silver and gold if you prefer!
Industry standards and competitors’ prices are benchmarks, not rules. If you position your line as a luxury or niche brand, pricing using average markups may put off potential customers. Other customers (particularly online bargain-hunters) are put off by high pricing. 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. Make sure your pricing is consistent with your unique selling proposition, whatever it is.
The Famous Keystone Markup
Markups are the cornerstone of pricing in the industry. It refers to how much a seller “marks up” a product from its previous cost. In apparel, keystoning is applying a 100% markup—or, in other words, doubling the price. Keystone markups have historically simplified pricing in a volatile industry, making it easy for wholesalers and retailers to markup products to a profitable level.
It works like this: A designer produces a shirt for $5. That shirt wholesales for $10 (a 100% markup from the original price). A retailer picks it up and sells it to consumers for $20 (a 100% markup from the wholesale price).
Keystone markups have traditionally been 100%, or 2 times the production cost. Recent changes in the industry, however, have put pressure on brands to use markups under 100% and on retailers to use markups above 100%. The market average right now is to price products somewhere between 2.1 and 2.4 times the production cost (rather than 2 times). But how do you determine your production costs?
Pricing Strategies Planning For Brand And Profit Organizations
How to Calculate Cost, Profit & Margin
As the name suggests, cost-based pricing requires understanding your expenses. 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.
COGS is the sum of all the direct expenses involved in making products, namely: materials, labor, factory overhead, and production supplies. It does not include overhead. Gross profit is what you have left when you’ve subtracted COGS from your revenue. Gross profit margin is the ratio of profit to revenue. 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.
- COGS = materials + labor + factory overhead + production supplies
- Gross Profit = Revenue – COGS
- Gross Profit Margin = (Revenue – COGS) / Revenue
For comparison, the gross margins of apparel retailers industry-wide is around 47%. Though ecommerce is growing, online stores tend to have much lower margins, with averages in the ballpark of 30%. Amazon’s gross margins are just over 20%! One major reason for these lower margins is the incredibly high rate of return to ecommerce sellers (4 times that of returns to brick-and-mortar retailers).
With all these pricing elements in mind, consider that you are making pants that cost $62 to make. You want to price them at $100. Where does that put you in terms of profit?
Revenue: $100
Cost of Goods Sold:
$50 First Cost
$2 Inbound Freight
$4.50 Tax & Duty
$5.50 Warehouse Fees
Total COGS = $62
Gross Profit: $38 ← Revenue ($100) – COGS ($62)
Gross Margin: 31% ← Gross profit ($38) / Revenue ($100)
Knowing the direct costs and profit margins of each piece you sell is the rational foundation of a creative pricing strategy.
Keep Reading See all articles
Take your business further.
There are lots of branding and marketing consultants who might want to change the title of this post from …Branding Strategy to …Marketing Strategy.
I would beg to differ.
You see, most people see pricing as a marketing tool—something that reels people in and helps them to make comparisons among brands.
Pricing Strategies Planning For Brand And Profit And Loss
I believe, instead, that a well-planned pricing structure should work to build your brand.
Allow me to explain…
A Branding Strategy Supported by Price Structure
I've said it before, and I'm going to say it again: A price war is no way to win business.
So, let's get that straight: Slash your prices in order to compete, and you'll be competing for all the wrong people's business. Plus, the effect of that price reduction will only be temporary. Then what are you left with? No profit and nowhere to go.
Now that we've gotten that out of the way, I'd like to talk about price structure, which is totally different than price point.
Pricing structure (or pricing strategy) is a system designed to deliver messages about your brand and its offerings. Different price structures are useful for saying things about your products and services at different stages of launch, as well as in different stages of brand development.
Choosing the right price structure means that you're sending all the right messages, and creating the right feelings, in your ideal customers…moving them toward conversion.
Here are some examples of pricing structures and their common applications in brand strategy:
- Introductory Pricing: This is the type of pricing strategy cell phone companies use to get people to switch to their services. It's lower than what you would typically charge, and will not produce sustainable profit in the long run. If you decide to utilise this pricing structure, be prepared to ensure that the customers you acquire will be around for awhile; you've got to recoup the profit you lost with that great deal. The message this structure sends is that you're so confident in the quality of your service that you're willing to give them something for very little because you're confident they'll want to stick around. Be cautious with this pricing model. Too much at one time can create a huge burden on your bottom line. Do the math, and only proceed if you're able to prove that the cost of acquisition is far outweighed by anticipated profit.
- Bundle Pricing: Bundled pricing is all around us: entrée, side and drink combos; two tickets for the price of one; numerous sessions at a discounted rate; free haircut with the purchase of a colour. This pricing strategy exposes customers to more of your products for a longer period of time, giving you greater opportunity to engage and upsell. As with Introductory Pricing, be careful not to cut too deeply into your profits; the bundle has to be beneficial for everyone involved.
- Premium Pricing: When your prices are significantly higher than your competitors', you're sending a distinct message: My Brand is Better. It's true that consumers do shop around, and that some are concerned with price; however, overwhelmingly, they do believe they get what they pay for and that reviews and referrals from family and friends are far more valuable than any bargain. If you choose to go with this pricing strategy, be prepared to deliver. Your customers have paid more, so they're going to expect more.
- Tiered Pricing: This pricing structure is all about options. What many brand builders don't realise is that when a 3-tier structure is presented, the goal is for the majority of customers to choose the mid-priced option—so this should be your most desirable price point. Three tiers are recommended because when only one option is presented, price objections are common. When there are two, the less expensive option is usually chosen. However, when three are offered, the middle-of-the-road option is the customary choice. This strategy gives your potential customers a sense of control, so they're not boxed in, feeling the compulsion to escape your sales It also sends positive messages about your brand, including that you trust your customers' decision-making power and that you're focussed on creating an experienced catered to their needs.
Pricing structure plays a huge role in the building of your brand strategy, and no matter what kind of brand you're building, it will contribute to perceptions of your brand, customer experience, and trust for your brand.
Not sure what pricing structure will be the most effective in the implementation of your brand strategy? Let's schedule a One-Hour Intensive Brand Audit, where we'll talk about your corporate values, your vision and mission…and what pricing structure will be most impactful.