Monday, 10 October 2011

HOW FASHION WORKS 1: PRICING

image source: unknown

In last weekend’s Sunday Times Style magazine, the restaurant critic A.A. Gill described the prices at London’s infamously expensive bread shop, Baker & Spice, as having been reached by “a happy necromancy of chutzpah and dares.” On the face of it, the same observation could be made of designer fashion prices – £900 for a pair of trousers? Are they having a laugh? – except there is a precise science behind the weighty price tags which hang from high-fashion clothes and accessories.

Let’s say you buy a designer jacket from a department store for £1000, and 20% of the price is tax, so we are left with £800. The standard retail mark-up for designer fashion is around 2.3x. In other words, the department store would have bought the jacket wholesale from the designer for approximately £348 and applied their 2.3x mark-up making the £800, before adding tax to reach the final retail price. This explains how retailers can sell things at over 50% off in the sales, and still make a profit. Happy days – except that multi-brand retailers face increasing competition, both online and offline, from brands choosing to sell directly to their customers, for example through lavish own-label boutiques which create an immersive ‘brand experience.’

For a fashion house or luxury brand, the main attraction of selling directly to customers rather than via a third party multi-brand retailer is clear: the brand pockets both the mark-up which they apply to their wholesale prices, and the 2.3x retail mark-up (since prices are kept consistent between own-brand retailers and multi-brand stores and websites). In reality, most fashion brands take a combined approach, recognising the benefits of both direct retail and selling via third party retailers: although the latter results in the brand taking a smaller % of the final selling price, they offer other benefits, like reaching a larger number of customers.

Consumer's Rest chair (1983) by Frank Schreiner (image from V&A)

So when you buy fashion, the majority of the price is comprised of mark-ups: retail mark-ups, and the mark-up which the brand applies to their wholesale price. If we say, for argument’s sake, that the brand’s wholesale price mark-up is the same as the retail mark-up, that would make the ‘true’ cost of the £1,000 jacket approximately £151 (£348 wholesale / 2.3). Of that cost, a significant amount would go towards raw materials and production (for the most part, designer clothes and accessories do cost more than mass market ones to produce), but an even more significant portion goes towards the brand-affirming marketing (expensive fashion shows, ad campaigns, celebrity product placement, etc) which is used to ‘justify’ high prices, and hence the profit-generating mark-ups.

The odd thing about designer prices is that they can actually help to generate demand by affirming the image of exclusivity, which the brands also seek to project using their vast marketing budgets. More precisely, the high price of a ready-to-wear dress, for example, helps to generate demand for less costly items like sunglasses, by conferring an air of exclusivity and fantasy onto the brand as a whole. £200 is a lot to pay for a pair of sunglasses, but buying them from a brand which also sells £2,500 dresses makes it seem a better deal. I was interested to read that for his upcoming Chanel boutique in London, the architect Peter Marino has reversed the traditional formula of putting more accessibly priced items, like wallets and fragrances, near the entrance of the store (so as not to ‘scare away’ customers), instead putting the highest priced items near the entrance and tucking the cheaper items away upstairs, to celebrate unashamedly the fact that the price point is partly what distinguishes luxury brands.

image source: unknown

If you think about the price of a ubiquitous luxury good, like a Louis Vuitton monogrammed bag (which incidentally varies from country to country quite significantly), there must be an incredibly fine balancing act taking place, weighing the benefit of lowering the price and selling more against the risk of compromising brand image and exclusivity. It is ultimately brands not retailers which set prices, since retail mark-ups are more or less fixed, by convention if nothing else (new designers who want to be taken seriously tend to base their pricing model on that of the existing luxury brands). Sales are where retailers have more flexibility: witness the outrage from brands when American department stores, gripped by credit crunch panic, slashed prices by 75% or more in the winter of 2009, leading some to ask if the ‘pricing dam’ had burst, with customers never again willing to pay full designer prices. That prophecy did not come to pass, and the curious model of designer pricing with all its associated pretensions and illusions continues to live.

***