Costing components and mark-ups

This comes in response to the many pricing and costing questions which many of you have. Also, this isn’t so much an answer as it is things you need to think about.

Most companies are pretty good about calculating costs based on yardage but I find that the same companies aren’t so good about the other components (elastics, thread, buttons, plastic bags etc). The first step is to make sure that you figure the real costs of all your components. The reason I say this is that most companies -and I do mean most- fail to take everything into consideration when figuring component costs. The item most people overlook is freight, better known as what your suppliers or freight companies charge you for shipping and handling. If you haven’t been calculating this cost, you may find that over the ensuing months your costs will be increasing and you won’t know why so get a handle on the cost of shipping before record gas prices take you by surprise. This may add a substantial amount to the cost-per-unit price.


While it’s true that you can just add a percentage to your overall product cost for overhead (for example, 30%, 40%, etc.) because it makes things easier, the problem is that you really need to know exactly what each factor in your product is costing you in order to make informed decisions. If you find that your costs of managing and handling inputs is high and you know those costs, you’ll have a better idea of how you may go about reducing them. However, if you don’t know the intangible costs of inputs, your overhead could be unnecessarily large and unwieldy.

Since many of you are working from small spaces it may be that you’re renting storage space for your components (or finished products) so be sure to add that as well. One advantage of lean production means not needing to store inventory but I realize you may not be there yet. Similarly, if you are hiring someone to handle the components, manage their inventory or move them around, you have a labor cost in there as well. While none of these costs may make a big difference on cost-per-unit on the quantities which you purchase, they are still costs which you incur. An easy way to do this after the initial calculations is to determine what percentage of the actual component cost the added costs amount to (for example, 8%). Using this percentage for future pricing should keep you “in the ballpark” and make this part of costing easier to figure. The summary of this is that your 25 cent per button cost may actually be closer to 28 or even 30 cents so it is the latter cost (supplier invoice plus incidentals) that should go on your product costing sheets.

As far as the mark-up percentages are concerned, rather than specify an exact amount (such as two or three times the cost) I prefer to mark-up to what the market can handle. Using this method you will probably have a variety of mark-up percentages (or levels) in your product line. What I like about this method is that it allows you to enter and generate sales in markets where pricing would not meet your “minimum” mark-up standards (but you would still have a mark-up) while allowing you the opportunity to get bigger than normal mark-up in other markets.

An example of this would be if I were making men’s and women’s jackets. It could be my women’s wear would only tolerate 2X cost but my men’s wear would tolerate 4X cost (if you read Paco Underhill, you’d know that men are less fickle than women regarding pricing) and while the women’s wear wouldn’t meet my mark-up standard, the men’s wear would compensate for it. In other words, don’t limit yourself or your earnings by sticking to “set-in-stone” mark-up amounts. Be flexible because each market is unique and it is only through experimentation that you’ll learn to take advantage of this.

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7 comments

  1. MW says:

    Hey, Kathleen, also want to add two other costs designers don’t often consider–

    financing interest costs, loans, credit cards, factors
    sales rep commissions (most start out without sales reps and can’t absorb their commissions when they get one)

  2. Bob says:

    Despite the fact that one piece of advice is: “don’t limit yourself or your earnings by sticking to ‘set-in-stone’ mark-up amounts,” I have this question. Is/are there any “standard” mark-up as designated by industry? As an example, we are in negotiations with a company that manufacturers health food supplements. They manufacture and we are supposed to be their distributor. They have given their product a 100% mark-up. It supposedly costs them ninteen cents per unit to manufacture. They are offering ot charge us 100% of that amount, which is thirty-eight cents per unit. We were told that their mark-up should [instead] be approximately 5% over their costs. We are assuming all marketing and sales costs. Would it be unrealistic [to propose] that they sell to us at 5% above their costs, “based on standard/established practices?” Does any list exist that we can refernece in support of our argument? Any advice is welcome.

  3. Kathleen says:

    We were told that their mark-up should [instead] be approximately 5% over their costs. We are assuming all marketing and sales costs. Would it be unrealistic [to propose] that they sell to us at 5% above their costs, “based on standard/established practices?

    5% over costs? Oh my word. Who told you that? Could they possibly have meant 50% (of retail price)?

    Every industry is different. In apparel, the wholesale price is the cost doubled, if not tripled. One third is cost, a third is overhead (sales function is in here) and a third for profit and continuing investment in the firm. In apparel, we typically do not have distributors. Still, I think that 5% over costs is unreasonable.

  4. Big Irv says:

    Bob,
    I think some still use the rule that if you don’t make at least 10%, leave it in the bank. In the apparel/sewn products industry, you have to cover your costs/overheads and pay yourself and 100% markup is quite standard. I’ve seen it go to 80%.
    You may be lucky you are only getting marked up 100%.I have friend in the vitamin/bodybuilding/ supplement game and he tells me the general markup is more like 400-500%. He is the product manager at one of Canada’s largest supplement companies. His previous profession. Chartered Accountant.

  5. J C Sprowls says:

    Bob,

    Generally speaking, a wholesale margin of 5% isn’t something I’ve seen very often – even for manufacturers who produce in lots of 1M, or greater (e.g. a hardware mfg (washer, for ex)).
    I find this advice you’ve received to be suspicious and would suggest that you test it before you digest it.

    Acid test:
    What inputs are required from you to bring this product to market?
    At the wholesale price this manufacturer is asking (plus markup of inputs you use) will you stand to achieve a fair margin at market?
    How much of this product will you need to sell to break-even on your investment?
    How much effort is required to break-even?
    Is there another manufacturer of a similar product that you can compare the end-cost against?

    Rules of thumb:
    As a distributor, your markup is the equivalent of commissions (betw: 15-20%). Sometimes the market will bear more.
    As a retailer, your markup is the lion’s share because you have more risk and expenses involved in bringing the product to market, typically between 80-135%. More, if the market will bear it.

    The manufacturer is responsible for managing the costs to produce goods for market. As a distributor, you only need to determine if you can bring their product to market for a fair price. If you find you’re losing sales because a competing distributor is placing their product at a lower price, then you have some legitimate questions (and evidence) to carry back to the manufacturer to renegotiate a level playing field.

    It’s hard being on the bleeding edge because you’re defining the field for play.

  6. J C Sprowls says:

    Rules of thumb:
    As a distributor, your markup is the equivalent of commissions (betw: 15-20%). Sometimes the market will bear more.
    As a retailer, your markup is the lion’s share because you have more risk and expenses involved in bringing the product to market, typically between 80-135%. More, if the market will bear it.

    I caught a mistake… in lieu of ‘markup’ use ‘margin’. In other words, the distributor’s factor is between 1.15 and 1.20 (e.g. $100.00 X 1.15 = $115.00, or $15 margin). Likewise, a retailer’s factor can range from 1.8 to 2.35 (e.g. $100.00 X 2.35 = $235.00, or $135 margin).

  7. julia says:

    I have a question about components, I am working with a sewing contractor who says that he can provide most of the components (except for some of the items that I have selected that he does not have in stock, but he could get for me). I have located most of these items myself prior to hiring this guy, as it is part of my design process. He has told me that he can get the leather,lining fabric and hardware ( I am designing handbags) for a better cost to me. My question is this, is it more cost effective for me to do my own sourcing because I am assuming that the contractor whould add a mark up on these items, (which I do not have a problem with, as he is probably buying in large quantities)if I can buy some of the less expensive items in large quantities should I do this to keep the unit cost down, even though I am spending more money upfront (buying bulk). And I must admit that I feel bad about shopping for leather and then taking the samples to him to match, assuming he can get a better price for it, (we are not yet at the stage were I can check prices). I can also see an advantage of him doing the sourcing as he will have everything at his place ready to put it all together. I was just wondering how others source components and if this is an acceptable practice.

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