How to Calculate Target Cost for Start-Up Fashion and Apparel Brands

February 6, 2016

Everyone knows the traditional maxim for setting prices in the fashion industry: double the cost for the wholesale price, and multiply the wholesale price by 2.0 to 2.5 for the retail price. However, for new brands, this exercise can be frustrating because its difficult to get good cost estimates early in the process.

That’s why for new brands we recommend working backwards. Instead of starting with target cost, start with target retail price. It’s easier, faster, and will help you make better decisions.

Let’s say you wanted start a line of casual button-up shirts, similar to a $125 BOSS shirt from Nordstrom’s. To get the estimated cost, we divide $125 by 2.5 (retail mark-up) for the estimated wholesale price of $50, and then divide $50 by 2 (wholesale mark-up) to arrive at the estimated target cost of $25, inclusive of import duties and logistics costs.

So now the big question, why is this even important? Here are just a few examples of how this information can help:

  • Help frame your material choices: Fabric and materials make up a substantial portion of a product’s total cost. By knowing the estimated cost, a you’ll have a gauge of which fabrics to source within your price range.
  • Picking a manufacturing location: Labor is the other primary component of a product’s cost. Based on the target cost, a you can determine the most appropriate manufacturing location.
  • Have a reference point for costing: Cost, at its most simplistic, is a component of 3 things: quality, quantity, and location. When you work backwards from an existing product, you’ll be equipped with an approximation of all three components. This can help you understand changes in cost, depending on your specific situation. For example, if you want the same quality and location, but your quantity is much lower, you’ll be able to anticipate your product’s cost will be higher.

Conclusion: Calculating your estimated target cost is one of the first exercises you should do when starting your first line. Not only will this help you create a budget for your first line, it’ll also help you make educated decisions, better understand your own priorities, and give your brand a higher chance of success.

Have another tip for doing early product costing? We’d love to hear about it in the comments!