How margins work in fashion, from factory to shop floor
From the factory cost to the price on the swing tag: how landed cost, wholesale markup and retail markup combine, and why markdowns decide what margin is really earned.
KEY TAKEAWAYS Summary by the editors
- Fashion margin is built in layers: product cost, landed cost, wholesale price, retail price and finally the price at which the item actually sells.
- Markup and margin are different measures, and confusing them is one of the most common errors in pricing discussions.
- Landed cost includes freight, duties, insurance and handling, and ignoring these lines overstates brand margin.
- The retailer's markup must cover rent, staff and the markdowns needed to clear the season, which is why it looks large on paper.
- Realised margin, after discounts and returns, matters far more than the initial margin planned at pricing.
A shirt leaves a factory at one price and sits on a shop rail at several times that figure. To an outsider the gap looks like profit. To anyone who has run a fashion business, it is a chain of costs, risks and markups, each one earned by someone carrying part of the journey. Understanding that chain is essential for pricing, negotiation and channel strategy.
What is the difference between markup and margin?
Markup is the amount added to cost, expressed relative to cost. Margin is the profit expressed relative to the selling price. The same transaction produces two different percentages. For example, an item that costs 50 and sells for 100 has a markup of 100 percent but a gross margin of 50 percent. Retailers usually think in margin, many product teams think in markup multiples, and negotiations go wrong when the two are mixed.
How is the price built from factory to shop floor?
The illustrative waterfall below shows the layers for a single garment. The figures are for example only and are not industry benchmarks; real multiples vary widely by segment, category and market.
| Stage | Example value | What it covers |
|---|---|---|
| Factory (FOB) cost | 20 | Fabric, trims, labour, factory overhead and profit |
| Landed cost | 25 | Plus freight, duty, insurance, handling |
| Wholesale price | 55 | Brand's design, sampling, sales, marketing, overhead and profit |
| Recommended retail price | 130 | Retailer's rent, staff, markdowns, overhead and profit, plus VAT where included |
| Average realised price | Lower than RRP | After markdowns, promotions and returns |
In this example the brand's gross margin on wholesale is the difference between 55 and 25, and the retailer's initial margin is the difference between 130 (net of any sales tax) and 55. Neither party keeps those amounts as profit: they fund everything else the business does.
Why does landed cost matter so much?
Brands that calculate margin from the factory price alone flatter themselves. Freight, import duty, customs brokerage, insurance, quality control, warehousing and inbound handling all belong in landed cost. Duty in particular varies by product classification, fibre composition and country of origin, so two similar garments can carry different landed costs. Accurate landed cost is the foundation of any wholesale price list.
- Freight and its volatility, especially for air versus sea.
- Import duties and any trade preference rules that apply.
- Agent or sourcing office commissions.
- Testing, inspection and compliance costs.
- Currency effects between purchase and sale.
Why does the retail markup look so high?
Retailers need their initial margin to pay for physical space, staff, systems and, crucially, the markdowns required to clear the parts of each season that do not sell. A fashion retailer rarely sells the whole buy at full price. If initial margin is set too thin, end-of-season discounting turns a planned profit into a loss. That is why buyers push hard on wholesale prices and on terms such as markdown support or returns.
The same logic explains why retailers care about terms as much as the price itself. Delivery windows, the right to cancel late shipments, exchange or returns allowances and contributions to markdowns all change the retailer's risk, and therefore the margin it needs at the outset. A brand that offers stronger support after the season can sometimes hold a higher wholesale price, while a brand that offers no support may need to leave more room at the start.
What is realised margin and why is it the real number?
Initial margin is a plan. Realised margin is what remains after the season: full-price sales, discounted sales, promotions, returns, shrinkage and staff discounts. Two brands with identical price lists can end the season with very different results depending on sell-through. For a brand, realised margin also includes the cost of discounts given to retailers, chargebacks, samples and free-of-charge goods.
- Calculate landed cost per style, not per category average.
- Set wholesale prices that leave room for the retailer's required margin at the intended RRP.
- Track sell-through by account to see where realised margin is eroded.
- Report margin after discounts and returns, not only at list price.
For the brand, the equivalent discipline is to look at margin by account and by channel, not only at collection level. A large account that demands extra discounts, generous payment terms and markdown support may generate impressive revenue but a disappointing realised margin. Visibility of these deductions, season by season, is what allows sales and finance teams to negotiate from facts.
Frequently asked questions
What is keystone pricing in fashion?
Keystone pricing means setting the retail price at roughly double the wholesale cost. It is a long-standing trade shorthand, but real retail multiples vary by market, category, positioning and whether sales tax is included in the price.
What is the difference between initial margin and realised margin?
Initial margin is the planned margin at the original selling price. Realised margin is what is actually earned after markdowns, promotions, returns and other deductions, and it is the number that determines profitability.
What does landed cost include?
Landed cost is the full cost of getting goods to the warehouse: the factory price plus freight, insurance, import duties, customs fees, inspection, agent commissions and inbound handling.
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