Retail Pricing Demystified: Why Clothes Cost What They Do

I recently went to a pretty fabulous seminar about clothing production and manufacturing (exciting!), where the really fun takeaway was an insight on the clothing production cycle and how it affects what you pay for the clothes you are wearing as you read this.

Let’s use a Diane Von Furstenberg Marisa gown (below), currently retailing on Shop Bop for $1,600 (here). It also retails on DVF’s own online store, also for $1,600 (here). Remember this fact.

Now lets start at the beginning. When Lady Di designs (or her design team designs) produces this dress, they factor in the following costs:

  1. Materials & Trims (anything from the cost of the fabric to the sequins)
  2. Supplies (the pricetag, care label, and all of the things you immediately snip off)
  3. Operating (the cost of designing, marketing and all of those unglamorous things like things like rent)
  4. Shipping & Duty (getting it to stores and paying international taxes)

Then they build in a certain profit per garment on top of those costs. Of course the manufacturer, typically the factory that makes the garment, also needs to make some money. So they must build that cost in as well.

At long last, they are ready to merchandise the garment: sell it to boutiques, department stores and online retailers who will turn around and sell it to customers. Naturally they are wanting to make money as well.

That’s a lot of different parties hoping to make money from one garment. And really, from the end buyer: you. So what does that mean for the price? And what did it actually cost to make the garment? Well, let’s work backwards.

  1. Final Sale Price
  2. Subtract the retailer’s mark-up, which is usually double the wholesale price
  3. Wholesale Price
  4. Subtract Shipping and Taxation costs
  5. Subtract the designer’s profit
  6. Subtract the manufacturer’s profit
  7. And now you’re down to your basic material, supply and labor costs!

So! Here goes the math (and forgive me for this, but math has never been a strength):

1600/2 = 800 … the amount of the retailer’s mark-up.

800/2 = 400 … the designer’s mark-up to ensure a profit. Designers want to hit a gross margin of around 50% to cover all costs

400 * .8 = 320… the cost of materials, production, manufacturer’s profit et al before 20% import duties

320 * .9 = 288… the cost of materials and production, after we take out the 10% manufacturer’s profit

288 * .66 = 190… the actual cost of materials, once you take out the production cut/make/trim cost, which is typically around 50% of materials (in this case, abut $98).

So what does all of this mean? That the dress that is currently retailing for $1,600 is really about $200 worth of materials and trim, $100 in labor costs to produce, and another $100 of taxes, shipping and overhead. So basically, all-in, the dress cost about $400 to make and deliver to its seller. The other $1,200 are mark-ups so that sellers and designers can turn a profit. NO WONDER people get into retail!

Bonus round: remember how the dress retails for $1,600 on both Shop Bop and DVF’s own site? Well, since DVF isn’t selling to a retailer when she sells the dress on her own site, she gets to collect the retailer’s mark-up of $800 along with her own mark-up of $400. Smart lady, that Diane, as she’s making a profit of $1,200 on a $1,600 dress.

Are you turning a shade of blue and thinking “I’m never buying anything ever again” yet? This feeling will pass, but it does help to keep one’s wallet in check while online window shopping!

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One response to “Retail Pricing Demystified: Why Clothes Cost What They Do”

  1. Nicole says :

    Merin, I see where you’re going with this and I love it.

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