The Science Behind Clothing Price Points

Friday, June 27, 2014, by Erika Graham

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Image via Getty

We've all experienced it—that punch in the gut when you plunk down the money for a dress that's just begging to be bought, only to be shanghaied by a 50%-off discount a month later. Retail price points are fickle at best and often hard to justify (wait, so this bag is $1,200 because it's leather?) when it seems as though there's always a better deal waiting to be had.

In an effort to understand the method behind the madness, we turned to experts within the field to get an inside look at pricing strategies for retailers across the nation.

"What [retailers] account for in the cost of the goods is what it costs them to get the goods from the manufacturers to the store or to the customers' hands—if it's a direct ship item or something they're selling through the internet that they deliver," Dan Butler, a VP of the National Retail Federation, told Racked. "They also account for things like the space it takes in the store, the time it takes for people to handle the merchandise. All of that is considered in the equation for how much they mark it up."

Image via Getty

Another factor that comes into play is the profit margins among the different retail categories. Not surprisingly, the margins can vary significantly across the board. "The markup is really different from category to category based on the cost of the merchandise and the cost of the goods," Butler told Racked. "For example, cosmetics has a higher profit margin because they're able to sell it and merchandise it and make it work. The selling cost on electronics is a lot higher so the profit margin on electronics is much lower."

Buyers will also negotiate with vendors on "markdown allowances" before the item even hits the sales floor. "Retailers know how much they're going to sell at full-price and how much they're going to sell it for at the first markdown, the second markdown, and the third price.," Butler told Racked. But the typical pricing model is always evolving. "There are a lot of new pricing strategies that are a lot about regional price strategies and strategies where a company might have different prices at different times of day and different products online."

While specific pricing strategies are generally considered trade secrets among retailers, one company has made it their mission to publicize their mark upfrom start to finish. Everlane, an apparel startup based out of San Francisco, built their business on circumventing a lot of the added work that goes into traditional mark ups. "Let's take our basic Women's V-Neck Tee - $3.84 for materials, $3.30 for labor, $0.11 for transportation makes the total cost of the shirt $7.00," Michael Preysman, Everlane's founder, told Racked via email. "At Everlane we sell that shirt for $15.00 (about a 2x markup), whereas any other traditional retailer would typically sell it for $45.00."

A $60 cashmere sweater on Everlane.com

Although traditional retailers aren't giving out any concrete numbers regarding their mark ups anytime soon, Preysman cited industry averages to compare when setting the price point at Everlane. "Most traditional retailers are selling their goods wholesale to stores, who then apply their own markup on top of cost," Preysman told Racked. "So you have an item that the designer spent $5making, was sold to the wholesale store for $12.50, and presented to consumers at $31.25 (assuming all retailers are using a standard 2.5 markup). There is now $26.25 added to the original cost of the garment because the customer is purchasing through a middleman."

Considering that mammoth mark up process along with the fact that retailers have already pre-set multiple markdowns on their products before they are ushered out to the sales floor, wouldn't it always be better to wait for the discounts? Not necessarily.

While some retailers like Gap and Sears run discounts and promotions so oftenthat it feels like there's never not a sale going on, most retailers are rotating merchandise in and out so fast that chances are slim that the most wanted items will make it to the sales rack. "In some categories, I always tell people that if it's something you really like you should really get it because there's not a guarantee now that it's going to be there six months or a year from now," Butler told Racked. "Newness drives sales in retail."