Joseph Tsidulko | Content Strategist | October 27, 2023
The dollar amount attached to any consumer product answers some obvious questions: Can I afford it? Is it a good deal? Is it worth the expense? But with clothing and accessories, the tag says something more. When fashion brands decide what they charge for a pair of jeans, belt, blouse, or blazer, they’re conveying a message about how they want shoppers to regard that product—and how they think their customers regard themselves.
Despite these intricacies, many retailers have long used simplistic methods to set prices for fashion items, relying on basic markups applied universally across product lines. Inflationary pressures now motivate more sophisticated strategies to preserve profit margins. Suppliers and retailers use software, including advanced data analytics platforms imbued with artificial intelligence, to precisely set wholesale and retail markups as well as promotions and discounts on individual items.
Pricing is how a business determines what to charge for a good or service. It sounds simple enough, but the process that ends in pegging a dollar amount to a specific product can involve precise calculations and sometimes balance competing concerns. Pricing decisions are among the most consequential in driving sales and forging brand perception.
These decisions happen at various stages throughout the distribution channel. The producer sets a wholesale price to sell its goods in bulk directly to retailers (or to a distributor acting as an intermediary). The retailer then needs to determine—and often adjust—the final sticker price presented to consumers.
To maximize profits, producers and retailers analyze supply and demand dynamics in their particular markets, ingesting many data points from competitors and market surveys. They use methods including break-even analysis, in which they tabulate fixed and variable costs to determine how much inventory must be sold to avoid taking a loss; residual demand elasticity, to estimate how different prices will affect the quantity sold; and conjoint analysis, to understand how customers value different components or features of their products.
It’s important to remember that prices aren’t static—they often change throughout a sales cycle. A new item that piques consumer interest can command a higher wholesale and retail price, but when a trend fades or a season ends, markdowns are inevitable.
Businesses implement a strategy for setting prices for their products that encompasses their financial goals and reflects the intended positioning of each product as set out in a marketing plan. Such a pricing strategy involves many considerations, incorporates many data points derived from pricing analysis, and can apply various formulated methodologies.
Companies ultimately try to maximize profits, but they can do that in ways that involve different short-term approaches. They can focus on shipping the most goods, uniquely positioning their brand in a market niche, or taking market share from a competitor. These goals all play into setting an overall pricing strategy.
Fashion pricing strategies should weigh and balance all financial and market-position goals while also being sensitive to how the price feeds into the consumer’s sense of brand identity and self-identity. The strategy must consider the entire lifecycle of the product since fashion items tend to go out of style or season faster than utilitarian products.
Fashion prices are determined by both the brands that design, manufacture, and market clothing and the retailers that sell it. The relationship between these two entities can vary. Some brands sell exclusively through their own retail outlets while some retailers order private-label brands from contracted manufacturers. Most brands sell through selected independent retailers.
As the producers, fashion brands have the biggest influence on prices. They typically sell their products in bulk to retailers at wholesale prices, though in some cases distributors serve as intermediaries, buying directly from a brand at a manufacturer’s price and selling at a higher wholesale price to retailers. Fashion brands also provide brick-and-mortar and online sellers with a suggested retail price, which usually comes close to what ends up on the sticker. But retailers set the final price by implementing their own desired markups, as well as any subsequent promotions and discounts to ensure they sell through their inventories.
Fashion brand and retailer pricing strategies strive to drive profits through an optimal combination of sales volume and desirable margins. These companies aim to offer prices consistent with the market segment in which they want to position the product line. Targeting a segment limits the range of prices—and shapes consumer perceptions.
For both fashion brands and retailers, assigning prices in targeted segments involves calculating unit and overhead costs and estimating sales at various price points—as well as potential losses from heavily discounted or unsold inventory—across all retail channels. They use techniques such as conjoint analysis to assess what potential customers would be willing to pay, break-even analysis to determine the price that will cover all expenses, and an assessment of cross-price elasticity that motivates customers to switch to or from competitors.
In the fashion market, pricing decisions also factor in the fact that products are more susceptible to the impact of trends and seasonality, shortening the window in which to drive sales. A line of jeans or a leather jacket could be all the rage today but fall out of style by the end of the year and end up in a clearance sale.
Pricing decisions are crucial to the success of a fashion line. Attaching the right dollar amount to a specific product at a specific phase of the sales cycle can make the difference between meeting or falling short of sales targets, generating profits or incurring losses, pleasing or frustrating customers.
But fashion brands and the retailers that carry their clothing and accessories often struggle to consistently set prices that give them the best chance of realizing their business goals. A pricing strategy guides these decisions by incorporating financial imperatives, marketing plans, and data on consumer trends in a particular segment of the fashion market.
The right pricing strategy, properly executed, makes it most likely these businesses maximize their profits and clear inventory while imparting a sense of value to their customers. The wrong strategy, or lack of any strategy, will leave money on the table and could harm the brand’s and retailer’s image and undermine customer loyalty.
Fashion brands calculate their costs per unit, from design to production to shipping, as well as total costs that include expenses such as marketing and keeping the lights on. These calculations are tricky, and they’re only a starting point. Brands also assess their production capabilities so they can set revenue targets according to the number of units they hope to sell across channels—brick and mortar, ecommerce, and direct-to-consumer.
Teams of product managers, merchandisers, and pricing analysts consider these costs, potential sales volumes, and desired margins. They also factor in consumer demand and brand image before selecting a pricing strategy. Informed by this strategy, the fashion brand sets or negotiates a wholesale price at which it sells merchandise in bulk to retailers or intermediaries.
Fashion brands suggest to retailers a target price to competitively position their items in stores—brands need to be especially sensitive to how a sticker price can affect consumer perception of their products. Pricing too high might soften sales, but underpricing could blemish the reputation of a well-known designer.
While retailers share these concerns, as their success is closely aligned with that of the brands that supply their products, they have unique business imperatives that lead them to select their own, more multifaceted, pricing strategies. Retailers start from the wholesale price and volume at which they buy products from the manufacturer, or in some cases a distributor, and they consider the suggested retail price. But they typically implement dynamic markups determined by a full-price strategy for the initial stage of the sales cycle, a promotional strategy to spur flagging sales with selective discounts, and a clearance strategy to avoid holding unsold merchandise.
Because so many variables and contingencies affect wholesale and retail sales, it’s important for brands and retailers to estimate potential losses if product lines fail to find traction or market conditions change.
A lot of calculation, analysis, and intuition goes into setting a sticker price. Fashion retailers rely on time-tested strategies to compete in their highly competitive markets.
1. Backward. A simple but effective pricing strategy is to set prices at what you think customers will be willing to pay for the product. That determination can stem from consumer surveys, the prices of successful competing products in the same category, and statistical evaluations that consider specific product features and benefits. After that comes a process of working backward—carefully calculating production and overhead costs to make sure the product that sells at the price determined by assessing buyer demand will leave profit margins in line with both the producer’s and retailer’s business goals. If the price can’t deliver desired margins, the producer needs to lower costs by trimming expenses or negotiating down retailer margins, or otherwise abandon that product. Retailers engaging in backward pricing might also try to negotiate down prices with a supplier or decide against stocking the product.
2. Psychological. Suppliers sometimes adopt a pricing strategy that tries to play on the psychology of potential customers. That often manifests itself as a “just below” price on the tag, such as one ending in 99 cents, as consumers tend to pay attention to the digits left of the decimal point rather than round up. Another form of what industry insiders call “charm pricing” involves setting penny amounts to the right of the decimal point that convey markdowns and sales prices, planting the idea of a “good deal” in the customer’s mind. Other psychological pricing strategies lead companies to raise the price of an item to convey a sense of prestige and investment in superior quality, display a discount from the suggested retailer price on a store tag, or create a sense of urgency by messaging a time constraint, such as a “one-day-only sale.” These psychological strategies can spur sales and direct buyers to prioritized items, but they also risk appearing deceitful.
3. Competitive. Some retailers set their prices by looking first at what others selling comparable products are doing. This pricing strategy prioritizes certain competitive goals: undercutting rivals to establish a new line in the market—called “penetration pricing”; matching their average prices while trying to differentiate a product based on quality or features; or exceeding competitors’ prices while drawing attention to added value delivered in a unique setting, such as a specialty boutique that offers high-touch services and personalized advice. A competitive pricing strategy can build or preserve market share, or it can boost profit margins by instilling confidence in raising prices. But it risks following competitors into bad pricing decisions.
4. Keystone. This might be the simplest pricing strategy—basically, a 2X markup on costs. Keystone pricing has long been used by retailers because of its simplicity, but it doesn’t factor in market demand or price pressures unique to individual products. Pricing professionals prefer to apply their insights and experience to identify prices that maximize demand and profits for specific products, empowering retailers to offer better deals overall while still achieving their business goals. Software applications that employ advanced data tools to suggest granular markups are making keystone pricing obsolete.
5. Absorption. This pricing strategy—sometimes called “full costing”—involves calculating all the fixed and variable costs that go into bringing a product line to market: materials, shipping, equipment, utilities, and so on. The company then sets a price that attains the desired profit margin. This contrasts with a “variable costing” strategy, which, by ignoring fixed overhead costs, provides a less-complete picture of the actual cost per unit, potentially yielding smaller margins than had been anticipated. The weakness of absorption pricing is that it fails to factor in competitive market pressures or customer demand. By ignoring those factors, companies adopting this strategy may end up charging too much or too little—in both cases leaving money on the table.
Fashion products fall into many market segments and niches based on their cost, quality, and target customers. These are the three broad categories.
1. Budget. Budget fashion brands and retailers aim to appeal to price-conscious shoppers. Although they offer mass-market apparel at the low end of the pricing spectrum, budget doesn’t mean—and sellers shouldn’t convey—low quality. While budget pricing fosters a perception of affordability, budget brands succeed when they demonstrate a commitment to delivering solid products at lower price points.
Because budget brands typically sell at low prices, these suppliers must move inventory in large volumes to bring in enough revenue to cover fixed costs.
2. Luxury. Luxury brands appeal to shoppers more concerned with quality and prestige than price. In this segment of the fashion market, where you find premium products, including haute couture, charging more can actually drive up sales. That’s the theory behind “prestige” pricing—increased prices convey exclusivity, differentiated quality, and elite status. But luxury brands don’t succeed just by being expensive. Most luxury items carry unique traits: They’re made in small numbers, sometimes entirely by hand, by skilled craftspeople using uncommon materials. And they often have a logo or design that associates them with a fashion house, or a specific designer, with a celebrated reputation.
Luxury items are costly to produce due to the use of quality materials and craftsmanship. Costs are further elevated because they’re not produced in large scale. Because of the low volumes, luxury suppliers require higher margins per item to be profitable.
3. Value. Many fashion brands strike a balance between price and quality. They incorporate high-quality materials and craftsmanship, which add to manufacturing costs. But these items still need to be priced so they can be sold in relatively large numbers.
Value pricing appeals to shoppers willing to pay more for a quality product. These consumers might not care so much about the prestige imparted by a designer logo, but they want to know that their clothing and accessories were manufactured to perform well and hold up under frequent use.
The fashion industry challenges pricing professionals with its unique psychological dynamics, multistage sales cycles, and swiftly evolving trends. Below are some examples of how fashion brands and retailers make pricing decisions.
The retailer looks to shift to a dynamic pricing strategy in which it raises or lowers prices on specific products based on demand forecasts and competitor pricing changes. To help determine and quickly execute these granular price changes, the retailer adopts a merchandising and price optimization application.
When bringing new fashion and apparel products to market, an optimal pricing strategy will attract new customers and retain current ones, establish or reinforce the brand’s image, and increase profits without stifling demand. Below are steps to take in choosing the right pricing strategy.
Fashion brands and the retailers that sell their lines face new competitive pressures, complicated by inflation, across every segment of the apparel and accessories market. Sophisticated and dynamic pricing methods are key to spurring sales without sacrificing margins. These companies want to forecast demand accurately and adjust prices accordingly; price inventory granularly to maximize profits; and detect and react quickly to competitor actions. They also recognize that regularly updated cloud-based merchandising applications featuring advanced analytics can help them transition to such rules-based pricing strategies.
Oracle Retail Pricing, part of the Oracle Retail Merchandising Cloud Services application suite, empowers retailers to easily and effectively implement rules-based pricing. The software offers tools that identify pricing trends by evaluating information from the merchandising system along with competitor pricing data, and then forecast demand based on those trends. With those capabilities, retailers can confidently set and continuously adjust prices in line with their financial targets across stores and settings.
Oracle Retail Pricing suggests pricing changes across the introduction, promotion, and markdown stages of the sales cycle—and it executes them in integrated point-of-sale systems used in stores.
How is the fashion industry unique when it comes to pricing?
Fashion is a unique market in that apparel and accessory purchases often reflect each buyer’s personal tastes, values, and lifestyle. These attributes complicate the process of setting prices. The brands that supply these products at wholesale and the retailers that set the final store price must consider not only their business goals when setting prices, but also how those prices shape consumer perceptions and brand image.
What are some common pricing strategies?
Backward pricing starts at what fashion brands think customers will pay for their products and then works backward to see if that price will leave room for adequate profits. Psychological pricing looks to game consumer psychology. Competitive pricing sets prices in relation to how a brand wants to position itself against competitors. Keystone pricing is simply a 2X markup on costs. Absorption pricing first calculates total costs to produce an item, then sets a price by adding desired margins.
What role do fashion suppliers play in setting sticker prices?
Many fashion brands sell their products in bulk directly to retailers, so they set the wholesale prices that get marked up to the sticker price. The brands also provide a suggested retail price that they think competitively positions their products to consumers. Fashion brands balance many factors in setting prices, including their production costs, estimated sales, market segment positioning, and brand image.
What role do fashion retailers play in setting sticker prices?
While retailers often follow the suggested retail price provided by the suppliers of fashion products, they ultimately decide on the sticker price. For retailers, prices typically change throughout the sales cycle: a full price stemming from the initial markup from wholesale, promotional discounts to spur sales, and a clearance price to avoid holding unsold merchandise.
How can IT optimize fashion pricing?
Advanced IT tools can help fashion companies apply dynamic pricing based on demand signals and stages of brand development. These rules-based applications, using advanced data analytics, inform pricing strategies to maximize sales, profit margins, and other goals of both brands and retailers.