Download Cost of Goods Sold

4.0 Understand the
marketing of fashion.
Objective 4.02 Understand pricing
strategies in the fashion industry.
The Supply and Demand Relationship
 Price
levels respond to the forces of supply and demand.
 People
will pay more for something that is in short
supply.
 If
there are only a few of an item, customers will pay a
higher price for it.
 Companies
that make and sell that limited item can
charge a higher price for it and make more profit.
 More
companies then start to supply that product, it
becomes more widely available and the price goes
down.
The Supply and Demand Relationship
 When
a product is in high supply, sellers have
to settle on less profit per item because they
are having to sell it at a lower cost.
 If
there is high demand for a product, people
will pay a higher price for it than if demand is
low.
 When
demand goes down, the price of an item
goes down because not very many people want
it.
Inventory Cost Calculations
 Cost
of Goods Sold (COGS): indicates the dollar
amount spent on goods that have been sold to
customers during the period.
 Formula:
Beginning Inventory at Cost + Cost of Purchases =
Cost of Products offered for Sale
Cost of Products offered for Sale – Ending Inventory
at Cost = Cost of Goods Sold
Gross Margin
 Gross
margin is the money available to cover
expenses and generate a profit.
 Formula:
Total Sales - Cost of Goods Sold = Gross Margin
Types of Expenses
 Selling
Expenses: payroll (wages) for the sales
staff, advertising costs, delivery costs, etc.
 Administrative
Expenses: management
salaries, office supplies, postage, etc.
 General
Expenses: rent, utilities, and other
operating overhead.
Profit/Loss
 When
expenses are deducted from the gross
margin figure, the resulting number shows net
profit (loss).
 After
taxes have been deducted, the final
number shows the after-tax profit (or loss)
from sales.
Pricing Calculations: Markups
A
markup is the amount added to the cost of merchandise
to determine the selling price.
 Expressed
as a percentage, not a dollar amount.
 What
the retailer hopes to receive in payment from
customers.
 Retail
markups are calculated one of two ways.
 Markup
% of Cost = Dollar Markup (retail price–cost) / Cost
 Markup
% of Selling Price = Dollar Markup / Selling Price
A
keystone markup is doubling the cost to arrive at the
retail price.
Pricing Calculations: Markdowns
A
markdown is the difference between the previously
marked selling price of an item and the reduced
selling price.
 Price
reductions are used to stimulate the sale of
merchandise.
 Retail
markdowns are computed either as a percent
of the original ticketed price or a percent of the
marked-down selling price.
 Markdown
percent of the ticketed price is often
advertised to customer.
 Ex:
20% off an item
Pricing Strategies
 Odd-figure
pricing is the retail pricing of
merchandise a few cents less than a dollar
denomination, such as $1.99 or $199.95
 Psychologically
customers will consider the
items to be priced lower than the next higher
dollar amount, thus seeming less expensive.
 Gives
the impression the retailer works hard to
keep prices as low as possible.
Pricing Strategies
 Loss
leaders are low-priced articles on which
stores make little or no profit.
 Popular items promoted at a reduced price to
attract shoppers into the store.
 Retailers then hope that shoppers will also
purchase other regular priced items.
 Employee
discounts are also given to encourage
employees to purchase and wear apparel from the
retail store. The typical employee discount is
between 10% and 30%.
Price Market Categories of Apparel
 All
fashions start as designs.
 Each
design is created for a specific price range,
design level, and target customer.
 The
price of garments depends on:
 The
quality of materials.
 The
type and amount of labor used.
 The
complexity of the style and construction.
 The
reputation of the designer or manufacturer.
Price Market Categories of Apparel
 Fashions,
particularly women’s garments
are grouped around five main price levels.
 Designer
 Bridge
 Better
 Moderate
 Budget
Designer
 “Prestige”
 This
fashions created by name designers.
apparel is also called couture.
 Custom,
made-to-order for each client at high
prices.
 The
garments have:
 Distinctive
styling.
 Made
of expensive fabrics.
 Sewn
with attention to detail and finish.
 Top
quality look and fit.
Bridge
 “Secondary”
lines of well-known designers.
 High prices but not as high as couture.
 Are the most expensive ready-to-wear apparel
produced.
 Retailed
through fashionable dress shops or special
designer sections of upscale department stores.
 These garments have:
 Expensive
fabrics.
 Fine details.
 Produced in small quantities.
 Sportier and more career oriented.
Better
 High
quality but a more reasonable price.
 More
accessible to consumers and retailers
than high fashion designs.
 Retailed
in selected specialty and
department stores and have familiar design
store names.
Moderate
 Medium-priced
merchandise with wellknown brand names, such as Gap and
Wrangler.
 Widely
available and worn by most people.
 Mass
produced under a manufacturers
name.
 Retailers
sell higher-volumes of this level
than the more expensive categories.
Budget
 Lowest-priced
category of apparel.
 Found on retail racks and shelves for the mass
market.
 Almost no original designing is done at this level.
 Copying is done of other garments, resulting in
downscaled knockoffs (copy of a higher priced
garment).
 Created with less expensive materials, fewer
details and cheaper trims.
 Manufactured mostly overseas in low-wage
countries, inexpensively and in large numbers.