Monday, 10 October 2011

HOW FASHION WORKS 1: PRICING

image source: unknown

In last weekend’s Sunday Times Style magazine, the restaurant critic A.A. Gill described the prices at London’s infamously expensive bread shop, Baker & Spice, as having been reached by “a happy necromancy of chutzpah and dares.” On the face of it, the same observation could be made of designer fashion prices – £900 for a pair of trousers? Are they having a laugh? – except there is a precise science behind the weighty price tags which hang from high-fashion clothes and accessories.

Let’s say you buy a designer jacket from a department store for £1000, and 20% of the price is tax, so we are left with £800. The standard retail mark-up for designer fashion is around 2.3x. In other words, the department store would have bought the jacket wholesale from the designer for approximately £348 and applied their 2.3x mark-up making the £800, before adding tax to reach the final retail price. This explains how retailers can sell things at over 50% off in the sales, and still make a profit. Happy days – except that multi-brand retailers face increasing competition, both online and offline, from brands choosing to sell directly to their customers, for example through lavish own-label boutiques which create an immersive ‘brand experience.’

For a fashion house or luxury brand, the main attraction of selling directly to customers rather than via a third party multi-brand retailer is clear: the brand pockets both the mark-up which they apply to their wholesale prices, and the 2.3x retail mark-up (since prices are kept consistent between own-brand retailers and multi-brand stores and websites). In reality, most fashion brands take a combined approach, recognising the benefits of both direct retail and selling via third party retailers: although the latter results in the brand taking a smaller % of the final selling price, they offer other benefits, like reaching a larger number of customers.

Consumer's Rest chair (1983) by Frank Schreiner (image from V&A)

So when you buy fashion, the majority of the price is comprised of mark-ups: retail mark-ups, and the mark-up which the brand applies to their wholesale price. If we say, for argument’s sake, that the brand’s wholesale price mark-up is the same as the retail mark-up, that would make the ‘true’ cost of the £1,000 jacket approximately £151 (£348 wholesale / 2.3). Of that cost, a significant amount would go towards raw materials and production (for the most part, designer clothes and accessories do cost more than mass market ones to produce), but an even more significant portion goes towards the brand-affirming marketing (expensive fashion shows, ad campaigns, celebrity product placement, etc) which is used to ‘justify’ high prices, and hence the profit-generating mark-ups.

The odd thing about designer prices is that they can actually help to generate demand by affirming the image of exclusivity, which the brands also seek to project using their vast marketing budgets. More precisely, the high price of a ready-to-wear dress, for example, helps to generate demand for less costly items like sunglasses, by conferring an air of exclusivity and fantasy onto the brand as a whole. £200 is a lot to pay for a pair of sunglasses, but buying them from a brand which also sells £2,500 dresses makes it seem a better deal. I was interested to read that for his upcoming Chanel boutique in London, the architect Peter Marino has reversed the traditional formula of putting more accessibly priced items, like wallets and fragrances, near the entrance of the store (so as not to ‘scare away’ customers), instead putting the highest priced items near the entrance and tucking the cheaper items away upstairs, to celebrate unashamedly the fact that the price point is partly what distinguishes luxury brands.

image source: unknown

If you think about the price of a ubiquitous luxury good, like a Louis Vuitton monogrammed bag (which incidentally varies from country to country quite significantly), there must be an incredibly fine balancing act taking place, weighing the benefit of lowering the price and selling more against the risk of compromising brand image and exclusivity. It is ultimately brands not retailers which set prices, since retail mark-ups are more or less fixed, by convention if nothing else (new designers who want to be taken seriously tend to base their pricing model on that of the existing luxury brands). Sales are where retailers have more flexibility: witness the outrage from brands when American department stores, gripped by credit crunch panic, slashed prices by 75% or more in the winter of 2009, leading some to ask if the ‘pricing dam’ had burst, with customers never again willing to pay full designer prices. That prophecy did not come to pass, and the curious model of designer pricing with all its associated pretensions and illusions continues to live.

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34 comments:

  1. very interesting.

    I remember reading something similar (on nytimes?) about why some designer shorts are more expensive than their trouser counterparts. Worth a read.

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  2. this is very interesting indeed! thank you.

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  3. Please continue :)

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  4. I was quite compelled to reach the end, and I must say I'm particularly lazy when it comes to reading long blog posts! I'm guessing you know all of this (percentage of mark-ups etc.) because of your work in fashion, though I still don't know what you do at Mr Porter exactly! You're such an intriguing character Mr Henderson!

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  5. This was an interesting post but it is very oriented on the retail part.
    To really understand fashion pricing, it also interesting to cover relationship between brands and their suppliers.
    Small brands have low volume and therefore high and very variable cost of manufacturing depending on their order.
    Even if production cost accounts for 10-15% of the retail price, as you've shown, it's all about multiplication, and prices rise quickly.

    And by the way, even if they earn more by selling in their own stores, small and medium brands ship multi brands and department stores first :)

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  7. Thank you so much for this post! It was almost too short -- I'd love to learn more. I'd been hoping for a post from you about this topic for a while! :)

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  8. Very interesting post, I've always wondered about this topic.

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  9. Love this series so far. Please continue to share.

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  10. I work in retail management and have taken many marketing, so this is of great interest to me. I think it's important to know this part of the industry. Great read! Would love to hear more!

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  11. that is very interesting. I think that enother remark that can be done is that third party shops with their 3x mark up take all the benefits of big brands campains and efforts to make their name exclusive. They make a big income from designers without taking any risk of failure!

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  12. and one more thing,reading your article seems real price tag of designer pieces should be the one we pay when they are sold at H&M!

    You say that new designers to be taken seriously set high price tags, it's true and it's because of people's relashionship with money,money psychology, we often tend to think that high price tags mean more value

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  13. i was having the conversation with one of my close friends while on holiday in florida, as we were doing a lot of shopping (and going round some discount luxury department stores). i was explaining a few of these points to him but i will send him this. Do you know much about the breakdown of costs the account for in terms of logistics before it hits the shop, staffs wages (in store), these all account too right? or at least they could say they do

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  14. Thank you very much for this post and please continue! Having recently graduated from fashion school, to me this is not only interesting from the consumer perspective. Even though we had economy and accountancy classes, professors were more than vague when it came to putting an actual price on your work.
    This may be my first comment on here, but I've been reading for quite a while and have to emphasize how much I appreciate your blog exactly for those 'long texts' mentioned by POPTUCKSHOP. Sadly, well-spoken fashion blogs seem to have become a rarity.

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  15. fascinating. please write more!

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  16. Another +1 for more 'How Fashion Works'!

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  18. Any brand can do whatever they want as far as pricing because the hmm people will buy it. When they don't then they lower it accordingly. All I can think of is that they are all sucking the planet of resources, that's not attractive to me. I love your tweets! And yes I'd like to read more you have to say on this subject.

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  19. Very interesting post!
    Yes please continue on how fashion works... :)
    X
    Nina
    Trendsurvivor.com

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  20. That was awesome

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  21. This is definitely a learning experience for me, right now. Continuing right to part II!

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  22. As a future designer i wish to read more, as i was enthralled by reading your piece. I would love to learn more, plus how does quality and manufacturing intervene in the pricing. Is it all mere fallacies too ?
    Today I am somewhat disappointed knowing how much materials and the actual cost of making say a shoe or a bag is, and recently finding several overpriced poorly made shoes. Im particularly intrested in using the Birkin as an example. Thanks a lot. Keep it up. Otro fan.

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  23. I work in quality footwear and the margins you talk about at the manufacturing level are way too high. About 33% of the wholesale price is "mark up" but no profit is made until you have sold enough to cover the fixed costs - design, invoicing, sales cost (like trade fairs, agents fees).

    The retail mark up would be about 2.8 (2.3 plus VAT) but lets analyse this from a real case of a store I know of in Central London.

    For the typical shoe of 150 pounds

    VAT - 30 pounds
    Rent - 21 pounds
    Busines rates 6 pounds
    Staff cost 19 pounds of which 8 pounds is tax - both national insurances (employee plus employer plus income tax)
    Product costs 50 pounds
    VISA and bank charges 3 pounds
    The final margin at full price is 21 pounds when sold at full price.

    Tripling the price of the goods you´re lucky if you´re making 10% profit and most fashion retailers will make much less or will lose money in this market.

    Of course internet retailers csn sell cheaper - their cost per sale on rent and staff is much much lower.

    A barrel of crude oil costs the Saidis $6 a barrel to extract and goodness knows what beer or Coca Cola has as a mark up yet people always seem to think fashion products should have no mark up. and yet they want nice shops in the highest end areas where well dressed staff serve them in an unrushed manner.





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    1. Hi thanks for your post, i found it very interesting. I'm a designer and i'm currently having some bag samples made which i hope to sell.

      Ive been reading a book about the fashion business in order to get some info on pricing and markups. You mentioned that no profit is made until fixed costs are covered, however in my book it states that fixed costs ( or indirect costs as it calls them) are divided up and allocated across the entire collection, when added to the cost of goods and profit margin this then produces the wholesale price. To be honest i was a bit worried when i read this strategy as it could could bump up the wholesale price significantly. Your strategy seems more realistic....is this the usual method?

      Also i'd be very interested to know what markup online retailers use if anyone knows??...

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  24. yes please continue I am very fascinated with the business of fashion

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  28. I love this one, Thanks for sharing your informative tips. please post continue...

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  29. One of the best articles l've read on mark up.And given my 20 years in the industry I'm truly impressed. Keep up the great work.

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