Fashion industry profit margins for newbies! Since the question of how to figure out margins comes up a lot with my clients I thought I would try to explain it in a way that a beginner would get it.
First what is a profit margin? A profit margin is the difference between sales and expenses and is shown as a percentage. For example: If you have a dress company and your sales for the year is $500,000 and your expenses (including cost of goods sold “COGS”) is $400,000 than your profit is $100,000. Your profit margin is 20%.
In order to get to your profit margin you need to calculate your margins on the way. Gross margin is the difference between sales and cost of goods sold, or COGS, also shown as a percentage. If you have a t-shirt that cost $10 to make and you charge $20 then your gross margin is 50%.
Ideally when you plan your margins you want to make sure that there is enough gross margin to cover the cost of goods sold and the overhead of running your business. I say “ideally” because that doesn’t always work out. I have seen owners price their line without considering whether their customer will pay the price. Recently I spoke with a potential new client who priced her line based on production costs. Unfortunately the price was three times the price of her competitors. Of course that was a problem. Further more the garments did not warrant the price.
What should you do when that happens?
- Step one — revisit your production and make sure you are not overpaying.
- Step two — reevaluate the item and see if you can make it cheaper by using different materials or taking something out of the garment.
- Step three — rethink the style and whether you should drop it from the line.
Understanding and planning your numbers is key to success. If you are still confused, email me at email@example.com and I will help you figure it out.