Developing cost estimates: Wholesale and retail

In developing a line around their pricing strategy, fashion companies determine the target wholesale price and/or suggested retail price of items in the line and then work backward to target the costs for manufacturing the items.

The wholesale price is the price quoted to retail buyers at the market and is the amount the retailer will pay the fashion brand company for the goods. The wholesale price is the cost to manufacture the style plus the fashion brand company’s overhead and profit. The suggested retail price is the price for which the fashion brand company recommends that the item is sold at retail. A common strategy for wholesale and retail price estimates referred to as keystone pricing, is to double the manufacturing costs to estimate the wholesale price and to double the wholesale price to estimate the retail price (see Table 9.1). The term gross margin, or margin, refers the difference between the sales revenue and the cost of manufacturing (or at the retail level, the cost of goods sold).

The manufacturer determines the wholesale price to include overhead and profit. If keystone markup is used, then the estimated wholesale price paid by the retailer to the manufacturer will be double the cost to manufacture. The estimated suggested retail price is double the wholesale price.

For more information on estimated costs to manufacture a pair of cotton pants, please refer to the attachment titled Estimated Cost to Manufacture a Pair of Cotton Pants in the Download section below.

Costs of materials

Costs of trims and components

Labor costs

For a comparison of costs of producing a 96% cotton/4% spandex knit shirt in three countries (US$), please refer to the attachment available in the Download section below.

Other costs

When establishing the cost estimate, it is necessary to include other items that affect the cost. Some of these items include: packaging and/or hangers, hangtags, labels, and freight charges for a pair of cotton pants. If a style is manufactured offshore, other costs might include duty charges (tariffs) and fees to shipping agents and freight consolidators. In fact, large fashion brand companies that import merchandise from offshore contractors may change materials or the design to achieve more favorable tariff rates.

After determining a cost estimate, it’s imperative that you gain approval from the design team. We’ll look at this next.