The Price of Enlightenment

People don't like to be proven wrong. When Copernicus* theorized that all creation might not revolve around man, people didn't want to believe him. People don't like hearing that they may have made a mistake in creating their pricing systems either. They tend to resist different ideas. You need to open your mind to new ideas before we can continue. The fact that you keep changing the markup in your pricing structure to accommodate more expensive or less expensive garments sends exactly the same signal that the planets sent Copernicus. The planets were the clue that the Earth was not the center of the universe, and the changing markup percentages are your clue that a garment markup is not a component of a correct pricing system for garment decorating.

When you think about it, early people weren't stupid for thinking that the universe was revolving around them. They based this thought on their observation and related it to things they were familiar with - like the axle of a wheel. In a similar way, you based your pricing system on what you observed in somebody else's price list, and figured out a formula based on things you were familiar with. Retail pricing theory is pretty simple and well known. When creating your pricing system, you already knew that stores buy goods, mark them up to make a profit, and sell them. Including a markup in creating your pricing system wasn't ignorant - like early man, you were just using the ideas you already understood.

But why does a store use a markup? Why don't they just add a set dollar amount to each item? A key factor in the reasoning behind a markup has to do with the fact that a store does not make any kind of changes to the goods they sell. Adding an amount that is in proportion to the cost of the item is the best way to account for that item's value in creating a selling price. Think about this: Items that cost very little usually sell quickly, and the store has little money invested in stocking that item. They don't need to make a lot of profit per item sold. But expensive items tend to sell more slowly, and the investment in stock is large. The store needs to make more money per sale of the expensive item. A markup representing a percentage of the cost is the perfect way to price retail goods.

But you are not a retailer. You are a type of manufacturer - a finisher to be exact. Manufacturers rarely use the concept of a markup. Want proof? Consider the Dodge Viper and the Plymouth Breeze. Both have a fairly similar amount of steel and other raw materials in them. Both are made by the same corporation. If Chrysler motors used a markup of the raw materials to price these products, they would have fairly similar price tags. But they don't.

How do manufacturers arrive at prices for the goods they make? They use a process called Costing. They begin by determining the cost of manufacturing the entire product. In the case of a car, that includes the cost of the steel, the tires, the paint and every other component plus the cost of labor to assemble it. They also allocate a portion of their building payments, executive salaries, research & development and insurance premiums to the cost per car. Once they have gathered every cost associated with the car's manufacture - right down to the janitor's salary - into a single figure, they determine how much profit they want this car to contribute to the company's bottom line for the year, estimate how many of this car model will be sold, and tack on an appropriate profit.

You've probably already figured out where this is going. To arrive at a more perfect selling price, you could look at every order you sell, determine your cost of ink or thread, examine labor costs, allocate rents and insurance, and determine how much net profit each order must net. That would give you a selling price that actually means something. There are only two problems with that:

1. You would spend so much time working out prices that you would never print or embroider a shirt.
2. Even with your best diligence, your pricing would still be horribly inaccurate!

Let's examine that second statement first. It might seem illogical that costing every order you produce would render inaccurate results, but it is true. When you break down costs to such minute portions, the potential for error becomes enormous. Consider this: How many prints will a gallon of ink yield? That would depend on hundreds of factors. How many square inches of fabric will you cover? How thick will the deposit be? Did you really receive a gallon of ink in the first place? Will one shirt absorb as much ink as the next? Over the course of a 50,000 shirt order, one gallon of ink might last five thousand shirts and the next gallon will last for nearly six thousand. When converting the cost of a gallon of ink to the cost per shirt, the margin for error is enormous.

There is also the human equation. One day an employee can be the perfect decorator, embroidering hundreds of perfect shirts. The next day she might ruin an entire order. How can you account for that in your costing? - The same way major manufacturers do it, and it makes the costing process easy.   Click here to continue

*Copernicus is largely credited with breaking the thought of an earth-centric universe, but was actually not the first to suggest it.

© copyright 2010 Scott M. Ritter, all rights reserved