Costing & Pricing

When a sample goes into production, the designer must complete a cost sheet that provides basic information on the sample. The designer should carefully fill in the information about fabric, interfacing, trims, and so on. Then the same sheet will be reworked by the production person to determine labour costs and the amount of fabric the garment will require when it is cut from the production marker. The production person usually completes the cost sheet and works with management to determine the final cost of the garment. In many cases an anticipated cost sheet is made at the time of finalising the order, taking into account the same criteria.

An ideal cost sheet would contain the following information:

·  Date – important in determining if the fabric/ trims price on the cost sheet is still accurate.

·   Description – a word description of the style as sometimes the designer might nick-name the style.

·      Size range – sizes in which the style will be offered.

·     Colours- colours in which the style will be offered.

· Style number – for each garment, manufacturers develop a numbering code that represents the season, fabric and pattern.

·      Season – the selling season of the garment, not when the garment was designed.

·     Selling price – the garments selling price is usually determined before production costs.

·      Marker – specifies the width of the marker.

·   Marker yardage and allowance – the total marker length is average to determine the amount of fabric needed to cut all sizes.

·    Material – the name and price of the fabric used as the shell fabric or lining or in any way in the garment as per the styling.

·   Trimmings – trims include fabric treatments such as applied trims, pleating, topstitching and added elements such as zippers, belt and snaps.

·   Labour – this area of a cost sheet is usually completed by a production person with current knowledge of production costs.

Price refers to what customers who buy the product will be charged. According to economists, price is the point at which exchange buyer and seller takes place, where supply and demand is equal.

The price levels for a product range selected by an organization can, along with other elements of the marketing mix, decide the success or otherwise in attracting certain target markets. Setting price levels too low may send confused messages and alienate some buyers who feel that the product may be poorly made. Excessive prices may inhibit other people who may feel other products, while not similar, offer better value for money. Others may feel that high prices are solely a premium for immediate ownership and that waiting for a short period may yield price reductions. Therefore price decisions help to determine who buys and how much they buy.

There are many ways of setting prices, but most are variants of the two principal methods, namely cost-plus pricing and market-based pricing. Cost-plus pricing is simply calculating the cost of raw materials, labour and overheads such as administration and adding an amount to cover profit to arrive at the selling price. Market-based pricing is founded on market research to find the optimum selling price which the acts as the main driving force on cost containment via design and quality control.

The final price for a product may be influenced by many factors which can be categorized into two main groups:

• Internal Factors - When setting price, marketers must take into consideration several factors which are the result of company decisions and actions.  To a large extent these factors are controllable by the company and, if necessary, can be altered.  However, while the organisation may have control over these factors making a quick change is not always realistic.  For instance, product pricing may depend heavily on the productivity of a manufacturing facility (e.g., how much can be produced within a certain period of time).  The marketer knows that increasing productivity can reduce the cost of producing each product and thus allow the marketer to potentially lower the product’s price.  But increasing productivity may require major changes at the manufacturing facility that will take time (not to mention be costly) and will not translate into lower price products for a considerable period of time.
• External Factors - There are a number of influencing factors which are not controlled by the company but will impact pricing decisions.  Understanding these factors requires the marketer conduct research to monitor what is happening in each market the company serves since the effect of these factors can vary by market.

Market skimming 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 fir it to be effective several conditions must be met. On the other hand, market penetration 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.

A few terms that are important to know while doing costing for a garment or setting the retail price and unfortunately many-a-times overlooked;

• Mark-up Factor - is a number, which when applied to the prime cost, will result in the appropriate wholesale selling price. Simply put it is the amount added to the cost to account for the overheads and profit.
• Overheads - all indirect expenses incurred in the operation of the business. A portion of these expenses will be apportioned to the wholesale selling price of each product.
• Return On Investment (ROI) - the amount of money the owners (or investors) would like to make on their investment in the business as profit. 
• Intrinsic Value (I.V.) - the amount of money added to the prime cost, overhead and return on investment objective of the product, for a perceived (by the customer) value to be found in the product. Example of I.V. are licence or use of a designer name.
• Selling expense - the amount of money added to the prime cost, overheads, return on investment, I.V. (should it exist), trade discount, to pay a salesperson's commission, and all other costs which assist in the sales of each unit of the merchandise.
• Trade discount - the amount of money added to the prime cost, overhead, return on investment, I.V. (should it exist) and any other cost which assist in the sale of each unit of the merchandise, to cover discounts offered to the retailer. Usually it is intended to influence rapid payment for merchandise, or may be used as an incentive for volume purchases.
• Carrying cost - the final cost which reflects goods and services paid for, but not sold when work-in-progress and/or the finished product is held in inventory. This may be computed as 50% of inventory value annually for typical facilities with a 12 week production cycle from cutting to shipping. 

Calculating costs:

• Wholesale selling price

Prime cost   X    Mark-up Factor = Wholesale Selling Price {PC   X    MU    =    WSP}

• Whole sale selling price formula 

unit prime cost + overhead per unit + return on investment obj./unit + sales expense + trade discount + carrying cost + intrinsic value

PC  +  OH  + ROIO  +  SE  + TD  +  CC  +  IV  = WSP

The steps in price setting include:

1. Examine Company and Marketing Objectives

2. Determine an Initial Price

3. Set Standard Price Adjustments

4. Determine Promotional Pricing

5. State Payment Options