Calculating Your Budget, Quantity, Cost per Unit, and Retail Price
This section does take a bit more thought and that's totally fine! We created Projects to be a living breathing document. It's something that you can return to often and change. It's also a tool that as a brand, will help you think through the essential elements to not only successfully create and launch your product but to also communicate with factories effectively.
For this section in particular, it's okay to take your time. You may want to use a pen & paper or a spread sheet to calculate. Budget - Your budget should be the total price that you have allocated for your entire project.
It will not hinder you if the number is low it serves as a way to properly position yourself with the best factory. Some factories only prefer to work with smaller clients while others prefer the opposite. This will help you better align yourself with the factory that can meet your needs. Remember, you can always come back and change this number. Note that I have selected a budget for $10,000.
Quantity - This is the number of units you are looking to produce during the production phase.
This is important because it informs the factory of your production needs. While there are many factories that work with low quantities, there are some that only work in larger quantities that exceed 500+ units. This will also help you think about your budget and how to best align your sourcing needs. Remember, you can always come back and change this number. Note that I have indicated that I want to produce 100 units.
Thus far I have noted a $10,000 budget and want to product 100 units. This means that a maximum, the most I can afford to spend on the cost per unit is $100. (10,000 budget / 100 units = 100 cost per unit). If I want to produce 100 units of something and I have a $10,000 budget the most that I can spend per unit is $100.
Cost Per Unit - This is what you intend to spend on the production cost of each particular unit item. This is important when trying to effectively match your vision with your budget. This will also serve as a ballpark idea for factories. If this is your first time producing a product and you are not sure of what the price should be, you may want to consider the following:
- total fabric/material needed to make 1 product (fabric, buttons, wood etc)
- price per unit for materials (yardage, square feet, units etc.)
- labor
Let's take a look at this example with a trench coat. I start off by estimating the total yardage for my coat which I will estimate to be 4 yards. I've done a Google search at some fabrics and have seen that I should expect to pay $10 per yard for the nylon fabric that I want to go with. I will also need 12 buttons per jacket which are priced at 50 cents each, a 6 inch zipper priced at 25 cents. Lastly, I roughly estimate that it will take about $20 worth of labor to create one jacket.
Below is the breakdown of our total cost per unit
4 yards x $10 per yard - $40
12 buttons x 50 cents per button - $6
1 zipper x .25 cents per zipper - $.25
Labor estimate of $20 - $20
This leaves me at a total cost per unit of $66.25.
You can view the following video by Nick Veros on " pricing garments". Nick goes a bit further with margins and overhead cost but the process of pricing a garment is just about the same. This number doesn’t have to be exact, but it does serve as a great way for you prepare yourself before you speak with a factory.
Remember, you can always change these numbers and factories will not view your Project unless you send it to them.
Now that I have calculated by cost per unit to be $66.25 and I know that I want to produce 100 units, I am at a minimum of $6,625 budget. This is a great in that I'm about $3,000 away from total budget of $10,000. I will probably need some of this extra cash to create a pattern, sample, techpack, and source my materials if I have not done these steps already.
Retail Price - This is the price at which you intend to sell this product for. Once you have your costing down you can then measure the margin or percent of profitability that you have in mind.
Taking our trench coat example into account, I can calculate my retail cost by either basing it off a percentage margin that I want to achieve or by just picking a price segment I would like to target. Margin rates work on a percentage basis, so if I would like a 30% margin that is .30. In knowing that my cost per unit would be $66.25 and that I would like a margin of 50%, I can use the following formula to calculate my retail price.
Retail Price = Cost Per Unit * (1 + Margin Rate)
Example:
Retail Price = 66.25 * (1+ .50)
Retail Price = 99.37
I don't have to stick to this retail price number and can go however high or low as I would like. However what it does do, is give me insight into what my financials would look like for the product.
The formula also works in the other way in that if I know my retail price and know what type of margin I would like to have, I can then calculate my cost per unit. For example, I've done some online window shopping of my competitors and see that on average their coats are priced at $400. As a new entrant, I hope to make myself competitive with price so I will be going for a retail price of $350. At that price, I would like a margin of 30%
Cost per Unit = Retail Price / (1 + Margin Rate)
Cost per Unit = 350/( 1+.30)
Cost per Unit = 269
The 269 number tells me the maximum number that I can spend per unit in production to achieve at least a margin of 30%
Now that we've got some of our financials down, let's get some dates for Sample and Production delivery.