I’m going to look at this in two ways: small/medium businesses, and major retailers.
Note: I am not going to look at the high-end, label-heavy designers because their pricing is easy: inflate the price based on your label’s hype.
Note2: this is extremely high level and leaves out quite a few steps… but I’m just going to simplify the process as much as possible.
Large Retailers (e.g. JCP, J. Crew, Brooks Brothers, etc.)
Any large retailer worth their salt is going to use a value pricing methodology for their products. These companies have people (like myself) who work in marketing and/or finance and/or product management (possibly under marketing) whose sole job is to price things. They know the cost to make a product, but they probably ignore that when discussing price. Let’s say we’re selling a JCP OCBD. There is a senior product manager that is in charge of Men’s clothing, and perhaps a junior product manager in charge of the JCP line of clothing. The PM team will work with marketing and finance to evaluate the market of whatever product they’re trying to price. Now, realistically, they should have done this market analysis before they even started production so they would know whether or not they can compete at $X target price and still make money… but then when it’s time to actually put the product in the store, they dust off their strategic plan and re-evaluate the marketplace and pricing model.
To actually set a price, they mostly look at these things:
- Customer base: willingness to pay
- Competitors: price-to-value ratio (this can get quite artibrary– how do you quantify “value”?)
- Psychological pricing effects
- Planned sale strategy (JCP’s constant sales strategies… what’s their actualtarget price after the sale discount?)
Now why isn’t cost included? Because cost shouldn’t affect your price. If you try to quantify all the costs of doing business into a single OCBD you’re going to WAY skew your pricing. Cost is considered when doing the original business case for the product– before JCP started offering its OCBD’s, someone did some high-level analysis to determine whether the line would be profitable based on estimated sales figures and an estimated price. JCP knows the cost of maintaining their business (indirect/fixed cost) and they know the cost of making the shirt.
The indirect costs are usually identified as an overhead (percentage) that you add onto each product’s variable cost (not in the accounting, but only for the viability/profitability analysis). This allows indirect costs to essentially be ignored during the pricing decision process, because they say “OK, based on the price we’ve come up with by using value pricing methodology, we’re making 30% gross margin (price minus COGS) on our OCBD’s, and we know our fixed cost are approximately 20%, so we’re covering and making a net 10% net profit.” High level, but that’s how indirect/fixed costs are looked at.
So after those 4 bullet points are considered (there is no “formula” for those things– they are quite intangible) and they can confirm they’re making a reasonable profit, they list it.
Small/Artisan Businesses (e.g. Rancourt, ToJ, Gitman, etc.)
Admittedly I know less about this, but my family does own a small business (not in the clothing industry), so I will try to apply the same thought process.
I think there are two distinct pricing models in the small/medium/artisan (henceforth known as “small businesses”) clothing industry: the first is cost-plus pricing, and the second is value pricing.
The cost-plus model used by most small businesses is done by taking the cost of materials & labor (COGS) and putting a profit on it. They know that beyond the COGS they have other costs like rent, utilities, some advertising maybe, perhaps some full-time people like an accountant or something… and just like major retailers, they know what percentage of the profit will be eaten up by indirects. This is directly related to the OP’s question: the labor + materials for a high-quality product will therefore yield a high price.
Edited for [rant] I wanted to add here that the cost-plus model is used by most small businesses because they typically don’t know any better. I’m not trying to be rude, but even my own family business has this mentality… “OK, cost plus a 25% mark-up will give us 8% net profit? sounds good to me! Apply it to everything we sell!” It’s fine as long as you stay in business… but chances are you’re leaving money on the table, and money left on the table is not only lost take-home profit, but if you want to grow you will have a larger capital base to do it with. If you are only making a small profit every year and you’re fine with that- cool! But many businesses want to grow and don’t realize their pricing is one area where they can improve.[/rant]
The value pricing model is less intense than the larger companies’ models– it’s sort of a combination of historical and market pricing, and also willingness to pay based on both unsavvy and savvy consumers. Example: Allen Edmonds. Their shoes are all the same price (they have different tiers of quality). The cost to make the shoes fluctuates between the models, but in the end, a Park Avenue is the same price as a Strand. $345 has been a price point which has proven to bring in enough sales to sustain and grow the business. They know they sit just below Alden on the value curve, but above brands like Florsheim and J&M. They are positioned well.