We are in a new year and there has never been a better time to revise your pricing if you’ve been doing it wrong. Pricing is a very touchy subject for a lot of fashion business owners today. I have had this post sitting in my drafts for the longest time. Somehow I found a way to insert it into my content calendar for February. Yay!
This is one of my most sort after topics so you might want to pay close attention. This isn’t one of those posts you read in a hurry. At the end of this post you’d be able to select the method that works best for your fashion business!
What You Should Know About Pricing Incorrectly
A lot of fashion business owners complain to me about their inability to figure out their prices. It’s either they don’t think anyone will be willing to pay them what they deserve. Or they don’t want to lose current customers.
If you also feel that way, I see you.
I understand that you started your fashion business because you are passionate about fashion. And not only because of money. However, it is necessary to get paid for your time and effort. Isn’t it? Your business will never grow if you don’t make enough profit to put back into the business and expand.
Pricing incorrectly is not good for business because of the following reasons;
- You will lose the customers you already have if you try to abruptly increase your prices because they are already used to your low prices
- You will not make any reasonable profit. This will make you keep running on the hamster wheel without actually growing and expanding because you make just enough to keep you from folding up so there’s no money to invest in expansion and growth.
- You will have a problem with gaining new customers who can actually afford your products because they already see you as a cheaper brand. Yes, this is a thing. Some people will never buy from you because your items are too cheap for them.
Growing a business requires profit so that the business can pay for its expansion. There is no fulfillment in a business that keeps sucking your account dry without actually putting money in it. This is what profit does, it pays for your business to move forward, it pays for you and it keeps you in your business.
Okay, maybe you are already pricing correctly. But I’ll tell you this for free. I’ve seen many fashion business owners who could swear they were pricing rightly only for me to go through their pricing structure and money on the table.
So if you feel like you have everything sorted, congratulations! But I’d still recommend you read this to the end so you are absolutely sure you are pricing correctly.
Discover Where Your Brand Currently Sits In The Market
This is one important step if MUST go through if you want to price for profit. Remember when I said some people will not buy from you just because your prices are too low? This is where that point comes in. So if you are a high end brand and your customers expect to pay a huge amount of money for a product, they’ll feel like your products are below their class if they are cheap.
Pricing Strategies Based On Where Your Brand Sits In The Market
- Luxury pricing: This is a kind of pricing used when the brand has a very high value. So they price their products based on the value of the brand instead of the cost of production. Their customers are very loyal.
- Value based pricing: This kind of pricing is at the middle. Brands in this level have customers that want high quality products that are and affordable. They simply want value for their money. Their customers are also loyal.
- Budget pricing: This kind of pricing is for you, if your brand is at the low end. The customers here only care about price. They don’t need you to convince them about the value of your product, they still won’t buy. They aren’t looking for long lasting products or products that will elevate their social status. They are totally fine with the rainbow colored Aba made shirts that everyone on their street has. Customers at this level are not loyal. They’ll leave you as soon as you increase your prices.
From this can you say for sure where your brand sits in the pricing spectrum?
How to price your products for profit
There are a lot of ways you can price your products for profit. So this isn’t an extensive article. Instead I’d focus on a few of them. You can join the waiting list for my e-course to learn more about other methods.
Backwards pricing method
This is the go-to method when you are testing your minimum viable product. Testing your minimum viable product is simple checking if you should go ahead and produce that product or not. Pick a product from your collection and estimate how much it’d cost in the market with your target customer in mind.
Let’s assume you choose a Kimono. And kimonos cost a maximum of 4,000. To get your cost price, you have to divide 4,000 by 4. If your kimono costs 4,000 then your cost price can only be a quarter of 4,000 (i.e. 1,000). If you can’t produce a kimono for 1,000, then you need to go back to the drawing board or abandon the kimono collection at once.
Keystone markup method
This is the most common method of pricing your products. It is commonly used by brands who need a simple pricing strategy. The keystone markup method works by multiplying the price of your product by 2 in order to get the price for each level.
For instance, the cost price (production cost) of your kimono is 1,000, you’d have to multiply 1,000 by 2 to get your wholesale price (2,000). Then your whole sale price multiplied by 2 will give you your retail price (4,000).
Absorption pricing method
I recommend this pricing method for my clients. It covers everything. From cost of production each product, to overhead costs and expenses. Then the profit margin to each product. It leaves nothing to chance. Like the keystone markup method, it is easy to use, but it is more flexible because it lets you choose a different profit margin on every product.
Stages of absorption pricing:
- Calculate your cost price = cost of materials, labor, logistics etc.
- Overheads, admin expenses and design expenses = the cost of these expenses divided by the number of items produced in this style
- Profit margin = Add your profit %
- Wholesale price = add up stages 1+2+3 and this is now your wholesale price
- Recommended Retail Price = multiply your wholesale price by 2 to get to your retail price.
In simpler terms, Cost price = Production cost per product + (Total overheads + admin expenses)/Number of units produced).
You then take the cost price, add your profit margin, and this makes your wholesale price. The wholesale price is then multiplied by 2 to get your Recommended Retail Price
Pricing is very important for fashion businesses because it has a direct impact on the place your brand sits in the market, as well as on your profits.
Which leads me to this questions – how do you set your prices? Which pricing strategies do you use? Did you find this information useful?