Price & Power
Margretta Sowah explores the notion of fashion and pricing; from attaining a healthy profit to complying with your brand’s DNA; there’s more to pricing than meets the eye…
In today's politically charged atmosphere of 140 characters and things like Sienna filters, it is no surprise Fashion is wrapped in this fray. The American FLOTUS's Fashion choices, or lack their of, is a source of analytical contention. Questions like; Can privilege be bought? Is price indicative of this? Tom Ford was famously quoted saying his clothing was “too expensive for a First Lady to wear because they have to 'relate to everybody." Be that as it may, start-up brands and young designers can learn a lot about pricing themselves accordingly.
Price and Privilege
To be honest, when researching this flashbacks of my Undergrad surfaced; lectures and tutorials dedicated to the rising cost of raw materials, COGS and markups. In Fashion, as any business and serious relationship, there is a give-and-take. A mutual agreement. This is the financial exchange made between the brand, retailers and consumers. Profit comes from markups, which determine the RRP (recommended retail price). Markups allow for 'breathing space', permitting more units to be produced and therefore a greater chance for more volumes to be sold. This increases your profit and ultimately satisfies any shareholders and stakeholders; especially for retail chains and luxury brands.
In BOF's article on the rapid rising cost of Fashion it's stated; "Gross margins for luxury companies typically hover around 65 percent — that sounds like a lot, but it’s what shareholders now expect. It also means that a $3,500 bag costs roughly $1,225 to produce and bring to market, all the way from materials to sale. There are many steps along the way that contribute to the final price. There are the costs of raw materials, design, manufacturing and fulfillment. Then, at retail, there’s the cost of prime real estate and sales staff. And finally, there’s marketing: those glossy fashion adverts cost a pretty penny to produce, let alone to place. Over the past 10 years — and particularly since the end of the recession — many of these costs have increased dramatically."
There are three main structures of the fashion system when sectioning yourselves to the market. These are Luxury, Fashion and Premium, according to marketing heavyweight and academic Professor Vincent Bastien in his article for Entreprenuer Middle East.
The luxury strategy aims at creating the highest brand value and pricing power by leveraging all intangible elements of singularity- i.e. time, heritage, country of origin, craftsmanship, man-made, small series, prestigious clients, etc. The fashion strategy is a totally different business model: here, heritage, time, are not important; fashion sells by being fashionable, which is to say, a very perishable value.
The premium strategy can be summarized as “pay more, get more.” Here the goal is to prove -through comparisons and benchmarking- that this is the best value within its category. Quality/price ratio is the motto. This strategy is, by essence, comparative.
Taking these models into account it is very important that brands knows where they stand on the proverbial totem pole of the retail mix of ROI. Another article on Forbes also accurately stated; "One of the main problems with the launching a new brand is that you have absolutely zero pricing power - meaning that you have the market setting the price within a narrow range & subsequently have a high cost basis to manufacture product. This begins the most challenging part of this stage - the tweaking of materials to levels that deliver sufficient quality right up to the monetizable equilibrium between the quality of the materials, construction of the product, and the customer’s willingness to pay for these costs. Keep in mind that $0.50 in manufacturing costs equals about $2 at retail (2x markup to wholesale and 2x markup to retail)."
In business, profit is the main aim of the game. When composing your pricing strategy it is imperative you know the value of your product versus the cost of it. A bar of chocolate is valuable to many (myself included, believe me!) but to produce is a much smaller cost – per bar, pre-market. Cost of raw materials and staff required (yes, cheap labour is still rampant): $1.15 including tax. Value: $5+ for the average consumer. Taking these numbers into account you have a profit of $3.85 per bar. Once you understand your cost versus your value as per product, you can add other variables such as brand cache, customer demand and scarcity of product.
There is power in being truthful with your core objectives because it means when leverage does present itself (because of your great price strategy) the benefits; whether monetary or socially, will have a longer effect. This will also aid in communicating with your retailers, wholesalers and stockists.
Profit and Personality
When we talk about 'personality' we mean traits that make up your behaviour. I have a 'playful' personality; meaning I can be a bit cheeky… perhaps even a little silly. Can you think of a brand with a similar personality? Moschino Cheap and Chic comes to mind. House of Holland. Mary Katrantzou. Kate Spade. Charlotte Olympia. Even Taco Bell is good at cracking a few jokes. Your personality, in branding, is what distinguishes you from your competitors, not unlike in real life. These traits are organically part of the brand's DNA. The power in personality can be seen in the steady increase of profit margins.
Having a flexible, dynamic and profitable pricing strategy is an ongoing measurement; constantly in need of revision and reworkings. If numbers are not your thing (such as myself) then hire or have those around you that you trust and who are knowledgeable in finance – even if it's your immediate family to begin with. Your team is paramount to your success in the eyes of the public.
Some of the world's most valued and loved brands hire hundreds of people all over the globe to research market fluctuation and value of raw materials, trend forecasting and political/social issues. All have a bearing on your pricing strategy. Price, psychologically, can be differentiated by the archaic yet still relevant class system – the haves and the have nots, though with the introduction and seamless integration of the internet and technology, this gap is becoming more and more ambiguous.
We can look at the Engineering Triangle as a basic example of the beginning stages of a 'pricing strategy' – if its good and cheap, its not fast. If it’s fast and good, it’s not cheap. If it’s fast and cheap, it’s not good. Does this apply to your business model and pricing strategy? If so ask yourselves how good are you to your customers if your item is fast and cheap? If you give products to your customers cheap, how good and fast can you accumulate profit? If its fast, how cheap and good will raw materials be? When we say 'good', we mean valuable and of quality.
All of these are valid questions that your core customers will care about… the ones who choose you over the others largely due to a perceived and curated personality, which most likely reflects your pricing strategy. To put it in Fashion terms; Hermes cannot be calling you Bae. In the same way a high street brand like Topshop cannot be trying to sell you a facetious fantasy because the two worlds are different and that's okay. The Topshop woman can still be a Hermes woman; she just needs to be reached in different ways for different purses. Most of us in the industry have a basic understanding of this. The challenge is focusing on a flexible yet profitable pricing strategy while maintain that gleeful exuberance unkempt creativity allows us.
The truth is, you have to be true to your product, not expectations.
By Margretta Sowah