Pricing in Fashion

Customers

are becoming increasingly price

savvy all the time and therefore are unlikely to
be fooled by false value claims and deliberate
price confusion.
- Martin Parker
Managing Director , Urban Outfitters (Europe)

The framework

To explain the concept behind pricing and how fashion businesses use it as both a strategic
tool and a tactical element within the marketing mix.

The principal aims of fashion retail pricing are to optimize sales revenues, maximize profits,
provide value to consumers and reflect the brand positioning of the fashion business.

Price refers to the amount of money that a customer (B2B, B2C or C2C) is willing to pay for
a product or service. In this sense price is directly linked to value. The price paid by an enduser consumer for a product is known as the Retail Selling Price (RSP).

Fashion products are normally full-price during the season and then gradually marked down
or reduced if they do not sell.

Fast-fashion encourages fashion retailers to clear stock as they go, to make way for new
product ranges. Consequently, the pressure to achieve sales targets quickly means that
stock can be sold or marked down during mid-season or, failing that, cleared as terminal
stock in the seasonal sales.

Some online and catalogue retailers adjust their RSP according to demand. This results in a
smoother and less dramatic use of mark-down when clearing slower-selling products.

An exception to stock entering the retail business at anything other than full price is special
purchase stock, normally slow-selling brands or manufacturers lines. This normally refers
to products or lines that are bought by fashion retailers specifically for the annual sales. It is
common for such stock to supplement the current seasons ranges to boost the amount of
stock trading in the sale period.

The framework

The word price and cost are sometimes interchangeable in business, as companies
negotiate prices among themselves.

For example a fashion retail buyer from a brand such as Top Shop will pay a cost price (CP)
for fashion products that they have ordered from suppliers. The price will obviously be a
selling price from the perspective of the supplier. The CP paid by Top Shop will have a
mark-up (or profit) added to achieve its RSP. The notion of the RSP value as perceived by
Top Shops consumers will be influenced by the benefits that are built into the product by
both the supplier (e.g. product quality and design) and Top Shop (e.g. the status of the
brand).

In 2006, Stuart Rose, the CEO of M&S, explained his success in improving the fortunes of
the company by quoting a formula: price x quality = value. Price is a clear and tangible
criterion for consumers to evaluate. Quality is also tangible but many consumers are willing
to trade quality for a lower price so long as the product achieves a minimum performance
and standard of manufacture.

Consumers have different priorities, experiences and reference points, and each perceives
value very differently. Understanding why some consumers are prepared to spend several
thousand rupees for top-end, branded jeans, whilst others make do with a pair for Rs. 200
from a mass market, is an essential element of all fashion organisations ongoing consumer
research. Aldo Gucci, the son of the founder Guccio Gucci, observed, Quality is
remembered long after price is forgotten and this is the ultimate truism of all good fashionmarketing management.

The External Factors influencing Pricing decisions

The Internal Factors influencing Pricing decisions

The ability to control costs

As costs can be decreased so either profitability can be enhanced or the ability to

compete at low prices can be strengthened.

Other elements of the marketing mix

The company competing directly on price to achieve high-volume distribution at low

margins is in a very different position from the company setting out to create an image
of high quality at premium prices.

The product range

The breadth and depth of product lines and the price relationships between items in
those lines are factors that must be considered when setting prices. A warm lining for a
raincoat sold separately will need to be assessed not only in terms of individual cost,
but also for the impact it has upon the total demand and profitability of the raincoat and
lining together for export/demand for the cold countries.

Main methods of setting prices

1.

Cost-plus pricing methods

2.

Market-based pricing methods

3.

A comparison of markups and markdowns

4.

Discounts

5.

Break-even calculations

1. Cost-plus pricing methods

A cost-based method aims to ensure that no product is sold at a loss.
The practice is common where the product is non-standard, such as designer

wedding gowns, or where there are many small independent retailers supplying
the market.
Cost-plus pricing is also used with tender proposals, for instance, when a clothing

manufacturer makes a proposal to supply uniforms to a large corporate client.

The ensuing example assumes that all of the zip-up tops will be sold at the full

price. If the retailer is determined to clear stock, but not to sell below the cost of
any item, then the lowest sale price will be 6.70 plus VAT. If the retailer sells at
VAT exclusive prices of between 6.70 and below 11.06 then the technique of
contribution analysis is being applied.
Contribution analysis is a variant of cost-plus pricing and works on the idea that

any excess of price over cost enables a contribution to be made to the cost of
capital to run the business simply put, some profit is better than no profit.
Clearly, the whole of a companys pricing cannot be based on covering costs

alone, as fashion companies need to do more in order to survive and grow. More
sophisticated variants of contribution analysis can be used to link price setting to
several financial ratios.

1. Cost-plus pricing methods

2. Market-based pricing methods

These methods rely on a good knowledge of consumer price sensitivity and

awareness levels.
For example, market research may indicate that buyers in a certain target

market may respond very favourably to a hooded top made of cotton jersey,
if the item is priced at 12.99 (including VAT).
If the retailer enjoys considerable purchasing power then the retail price of

12.99 can be used as a base to determine target buying prices for the
retailer. The example in Table 7.2 shows how with a starting price of 12.99
the target retailer buying price or manufacturer selling price is determined.
Similarly, the manufacturer may then use the selling price of 3.87 as a

target to challenge designers, pattern cutters and production staff achieve

certain economies.
In practice, many large retailers work very closely with manufacturers to

decide prices that attempt to match consumer expectations.

3. A comparison
markdowns

of

markups

and

Here a markup on cost of 25% is the same as a markdown on selling price of 20%.
Similarly a markdown on selling price of 66.7% is equivalent to a markup on cost of 200%.

Sometimes fashion retailers use a simple formula to calculate a retail selling price, including
VAT, given a particular quotation from a manufacturer. The retailer wanting a markup of
120% and knowing that VAT is charged at 17.5% may simply multiply the quoted cost price,
excluding VAT, by 1.375 to arrive at a tax inclusive retail selling price.

4. Discounts
For the manufacturer, selling large quantities to fewer buyers means lower

delivery and other overhead costs.

Retailers naturally appreciate such advantages for both manufacturers and

wholesalers and will press within negotiations for the largest quantity
discounts possible.
Variations on the simple quantity discount are the cumulative and non-

cumulative discounts available.

Some negotiations may result in extra discounts becoming available

should the buyer purchase certain minimum quantities over a fixed period,
say one year.
This extra discount may then become available as a rebate or credit

against future purchases.

The main aim of cumulative discounts is for the seller to encourage loyalty

to the supplier and to induce small buyers to purchase more.

5. Break-even calculations
A central concern of marketing personnel in the fashion industry is balancing the

relationship between price and volume. For example, a clothing manufacturer may
manufacture 20,000 skirts and wish to know how many must be sold to cover
costs. In other words, at what point will the manufacturer break even and begin to
earn profits?
The first example assumes the manufacturer is in a relationship where prices are

fixed by fierce competitive pressures and tough negotiating from retail buyers.
Alternatively, a designer who owns a retail outlet may have considerable discretion

over price levels, but wonder about the profitability of the different volumes that
could be sold at different prices.
Break-even analysis can show the relationship between fixed costs, variable or

marginal costs, total costs, sales revenue and output or volume.

5. Break-even calculations (Contd.)

Fixed costs are those costs incurred by the fashion company that do not change

as the volume of purchases or production changes.

Some examples of fixed costs include business rates, purchase of a computer for

wages and salaries for security staff.

In practice, many fixed costs are variable in the long term, such as costs of plant

for manufacturing.
If these variations can be set aside, then a simple technique that can give a fairly

sound guide to setting price level can be found in break-even analysis.

Variable costs are those costs that are directly affected by the level of output;

some examples are the amount of material used, the direct labour costs in pattern
cutting, making up and tailoring, and packaging costs.
Total costs are the sum of fixed costs plus variable cost per unit multiplied by the

output or volume.
Sales revenue is simply price multiplied by volume sold.
In practice, the price taken for the calculations is one that is exclusive of VAT.

5. Break-even calculations (Contd.)

The relationship between the various variables is as follows:

Revenue = Price x Volume = Total costs + Profit

When revenue is less than total costs, a loss (or negative profit) will result while

Total costs = Fixed costs + (Variable cost per unit x Volume)

Profit = Profit per unit x Volume

At the break-even point, no profit is earned and all costs are covered by sales

revenue. Hence

Revenue = Fixed costs + (Variable cost per unit x Volume)

or

Price x Volume = Fixed costs + (Variable cost per unit x Volume)

To determine the break-even point we can do some simple simultaneous

equations where

FC = Fixed costs
VC = Variable cost per unit
V = Volume
P = Price

5. Break-even calculations (Contd.)

Thus we know that at the break-even point:

(P x
Or,
Or,
Or,

V) = FC + (VC x V)
(P x V) - (VC x V) = FC
V x (P - VC) = FC
V = FC / (P - VC)

while, (P - VC) is really the gross profit per unit.

To calculate the break-even volume, we divide the fixed costs by the

difference between the price and the variable cost per unit.

If we wished to know the minimum price at which all the output was sold
and covered all costs, i.e. the break-even price point, the formula is
calculated as follows:

We know that at the break-even point:

(P x V) = FC + (VC x V)

Or, P = (FC / V) + VC

The value given here for price is the minimum that must be charged if the
entire volume is sold and no profit is earned. In practice, a seller would
wish to charge higher prices and earn some profit. The formula does at

Selecting a pricing strategy

Market skimming

This strategy is to charge high initial prices and then only reduce them gradually, if at all. A
skimming price policy is a form of price discrimination over time and several conditions must be
met for it to be effective .
First, the demand for the garments must be relatively inelastic. Inelastic demand only really exists
for essential items that are in short supply or items that have a degree of exclusivity and a
significant number of buyers who are relatively unconcerned about price. A limited edition luxury
handbag by Furla would be an example of such an item. For the supplier the unit costs of
producing a small volume must not be too high.
Finally, the high-profit margins on each item in a skimming policy will attract competitors unless the
seller can protect the garments from being copied. Such a situation usually applies to haute
couture and to a lesser degree to designer ready-to-wear ranges.

Market penetration

This strategy is the opposite of market skimming and aims to try to capture a large market share
by charging low prices.
The low prices charged stimulate purchases and can discourage competitors from entering the
market as the profit margins per item are low.
To be effective this policy relies upon considerable economies of scale in either manufacture or
retailing or both. It also depends upon potential customers being price sensitive about the
particular item and perhaps not perceiving much difference between brands.

Pricing strategies to match the competition

Pricing objectives in relation to the competition include, as both active and

reactive positions, an attempt to maintain price leadership, to stabilize prices or to

discourage others from entering the particular market.
Such strategies may also be linked to objectives concerned with building and

maintaining the loyalty of other parts of the distribution chain. Aiming for stable
prices while recognizing the traditional margins in the channels of distribution are
the characteristics of the marketing activities of many fashion marketing
companies.
Price leaders and followers

In the case of the follower, the firm identifies a target market and sets prices in line with
competitors who are serving the same market. A firm with limited marketing resources may simply
shadow a competitor.
Within fashion retailing it is quite common for sales assistants to visit other stores to monitor the
price points for garments and accessories. Monitoring the competition is an essential part of any
market research, but copying ones rivals actions without a clear long-term goal is another matter.
The leader in such a situation is usually the firm with the lowest costs and best profit margins.
Followers hope to avoid a price war by stressing non-price aspects of competition such as a
higher customer service level.

Pricing strategies to match the competition (Contd.)

Price fixing

Overt or covert price fixing by sellers is illegal in most of the countries unless a defence can be
made that such action is not against the public interest.
Manufacturers are sometimes able to use pressure relating to the supply or withholding of
products or financial incentives to exert influence over retail prices and effectively inhibit
competition.
The EU has an aim of free movement of goods within and between the member states and the
intense competition within the fashion market works strongly against price fixing tendencies.
However, in 1993, the French perfume industry was able to claim a victory in the European Court
by winning the right to exclusive distribution of perfumes, thereby protecting the margins of outlets
against the so-called grey imports.
In 2001, the battle over exclusivity and free competition in the setting of prices continued with a
legal case between Tesco, the supermarket group, and Levis Strauss over the distribution and
pricing of jeans in the UK with Levi Strauss winning the case for exclusive distribution.
However, there are strong pressures with the EU to review legislation in line with WTO principles
of free trade.
The role of online purchasing in international trade is another factor that is undermining the ability
of retailers to control prices via exclusive distribution.

Price changes

Much damage to customer goodwill can be done by lack of care in announcing price
changes. Given the practices of a minority of unscrupulous retailers, many consumers
approach sales with a healthy degree of scepticism.
Thus care is needed to avoid a small oversight being construed as a deliberate
attempt to mislead.

Summary

Pricing decisions are:

subject to a wide variety of influencing factors, internal and external;
a strategic matter, and not to be approached in a short-term reactive way;
to be made within the wider framework of a clear understanding of the target

market, the firms overall marketing strategy and the competition.