Pricing in Fashion

8/17/2019 Pricing in Fashion

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Pricing in Fashion


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Customers are becoming increasingly pricesavvy all the time and therefore are unlikely tobe fooled by false value claims and deliberateprice confusion.

- Martin Parker

Managing Director , Urban Outtters !"urope#


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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 (!, !" or "!"# is willing to pay for

a product or service. $n this sense price is directly linked to value. The price paid by an end%

user consumer for a product is known as the &etail 'elling Price (&'P#.

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

Fast%fashion encourages fashion retailers to clear stock as they go, to make way for new

product ranges. "onseuently, the pressure to achieve sales targets uickly means that

stock can be sold or marked down during mid%season or, failing that, cleared as )terminal

stock* in the seasonal sales.

'ome online and catalogue retailers ad+ust their &'P according to demand. This results in a

smoother and less dramatic use of mark%down when clearing slower%selling products.

n 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. $t is

common for such stock to supplement the current season*s ranges to boost the amount ofstock trading in the sale period.

The framework


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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 'hop will pay a cost price ("P#for fashion products that they have ordered from suppliers. The price will obviously be a

selling price from the perspective of the supplier. The "P paid by Top 'hop will have a

mark%up (or profit# added to achieve its &'P. The notion of the &'P value as perceived by

Top 'hop*s consumers will be influenced by the benefits that are built into the product by

both the supplier (e.g. product uality and design# and Top 'hop (e.g. the status of the

brand#.

$n !--, 'tuart &ose, the "/0 of 12', explained his success in improving the fortunes of

the company by uoting a formula3 price x uality 4 value. Price is a clear and tangible

criterion for consumers to evaluate. 5uality is also tangible but many consumers are willing

to trade uality for a lower price so long as the product achieves a minimum performance

and standard of manufacture. "onsumers have different priorities, experiences and reference points, and each perceives

value very differently. 6nderstanding why some consumers are prepared to spend several

thousand rupees for top%end, branded +eans, whilst others make do with a pair for &s. !--

from a mass market, is an essential element of all fashion organisations* ongoing consumer

research. ldo 7ucci, the son of the founder 7uccio 7ucci, observed, )5uality is

remembered long after price is forgotten and this is the ultimate truism of all good fashion%marketing management*.

The framework8


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The /xternal Factors influencing Pricing decisions


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The ability to control costs s 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. 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 export9demand for the cold countries.

The $nternal Factors influencing Pricing decisions


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1. Cost-plus pricing methods

2. Market-based pricing methods

3. comparison of markups and markdo!ns

". #iscounts

$. %reak-e&en calculations

Main methods of setting prices


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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.

"ost%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 fullprice. $f the retailer is determined to clear stock, but not to sell below the cost of

any item, then the lowest )sale* price will be :.;- plus


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1. Cost-plus pricing methods'


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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 +ersey,

if the item is priced at :=!.?? (including


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3. A comparison of markups andmarkdowns

Bere a markup on cost of !CD is the same as a markdown on selling price of !-D.

'imilarly a markdown on selling price of .;D is euivalent to a markup on cost of !--D.

'ometimes fashion retailers use a simple formula to calculate a retail selling price, including


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For the manufacturer, selling large uantities to fewer buyers means lower

delivery and other overhead costs.

&etailers naturally appreciate such advantages for both manufacturers and

wholesalers and will press within negotiations for the largest uantity

discounts possible.


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central concern of marketing personnel in the fashion industry is balancing the

relationship between price and volume. For example, a clothing manufacturer may

manufacture !-,--- skirts and wish to know how many must be sold to covercosts. $n other words, at what point will the manufacturer break even and begin to

earn profitsE

The first example assumes the manufacturer is in a relationship where prices are

fixed by fierce competitive pressures and tough negotiating from retail buyers.

lternatively, 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.

reak%even analysis can show the relationship between fixed costs, variable or

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

$. %reak-e&en calculations


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

as the volume of purchases or production changes.

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

wages and salaries for security staff.

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

for manufacturing.

$f these variations can be set aside, then a simple techniue that can give a fairlysound guide to setting price level can be found in break%even analysis.


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The relationship between the various variables is as follows3 *e&enue + ,rice x olume + Total costs ,rofit

Ghen revenue is less than total costs, a loss (or negative profit# will result while Total costs + /ixed costs (ariable cost per unit x olume)

,rofit + ,rofit per unit x olume

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

revenue. Bence *e&enue + /ixed costs (ariable cost per unit x olume)

or ,rice x olume + /ixed costs (ariable cost per unit x olume)

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

euations where F" 4 Fixed costs


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$hus %e kno% that at the break-even point& (P x V) = FC + (VC x V)

Or, (P x V) - (VC x V) = FC

Or, V x (P - VC) = FC

Or, V = FC / (P - VC)

%hile, !P - 'C# is really the gross prot per unit.

$o calculate the break-even volume, %e divide the (ed costs by the

di)erence bet%een the price and the variable cost per unit.

*f %e %ished to kno% the minimum price at %hich all the output %as soldand covered all costs, i.e. the break-even price point, the formula iscalculated as follo%s&

+e kno% that at the break-even point& (P x V) = FC + (VC x V)

Or, P = (FC / V) + VC

$he value given here for price is the minimum that must be charged if the

entire volume is sold and no prot is earned. *n practice, a seller %ould%ish to charge higher prices and earn some prot. $he formula does at

$. %reak-e&en calculations (Contd.)


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Market skimming This strategy is to charge high initial prices and then only reduce them gradually, if at all.

skimming price policy is a form of price discrimination over time and several conditions must bemet for it to be effective .

First, the demand for the garments must be relatively inelastic. $nelastic 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. 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. 'uch 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. $t also depends upon potential customers being price sensitive about the

particular item and perhaps not perceiving much difference between brands.

0electing a pricing strategy


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Pricing ob+ectives 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.

'uch strategies may also be linked to ob+ectives concerned with building and

maintaining the loyalty of other parts of the distribution chain. iming 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.

,rice leaders and follo!ers $n the case of the follower, the firm identifies a target market and sets prices in line with

competitors who are serving the same market. firm with limited marketing resources may simply

shadow a competitor.

Githin fashion retailing it is uite common for sales assistants to visit other stores to monitor the

price points for garments and accessories. 1onitoring the competition is an essential part of any

market research, but copying one*s 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.

,ricing strategies to match the competition


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,rice fixing 0vert 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.

1anufacturers 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 /6 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.

Bowever, in =??@, the French perfume industry was able to claim a victory in the /uropean "ourt

by winning the right to exclusive distribution of perfumes, thereby protecting the margins of outlets

against the so%called grey imports.

$n !--=, the battle over exclusivity and free competition in the setting of prices continued with a

legal case between Tesco, the supermarket group, and Hevis 'trauss over the distribution and

pricing of +eans in the 6I with Hevi 'trauss winning the case for exclusive distribution. Bowever, there are strong pressures with the /6 to review legislation in line with GT0 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.

,ricing strategies to match the competition (Contd.)

P i h


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Price changes

1uch damage to customer goodwill can be done by lack of care in announcing price

changes. 7iven 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.

'


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Pricing decisions are3

sub+ect 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 firm*s overall marketing strategy and the competition.

'ummary

Pricing in Fashion

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