As in any business, retail clothes companies are concerned with the bottom line: profits. With many, detailed financial calculations necessary to determine how much profit a company nets, one of the most important is the profit margin. With many apparel companies competing for the same dollars, pricing strategies can be an important tool to make more sales; as long as profit margins are high enough to show profitability.
What is a Profit Margin?
The profit margin on any retail product is the amount of money the company pockets after accounting for the costs, expressed as a percentage of the total sales. The simple equation is sales minus costs equals profits, and profits divided by sales equals profit margin. For example, if you sell a shirt for $100, and the total cost to you was $70, the profit is $100 minus $70, or $30. The profit margin is $30 divided by $100, or 30 percent.
Profit Margin Vs. Markup
Profit margins often get confused with markups. They are similar in that they reflect an amount of money greater than the cost of the item, but the difference is that the profit margin is an equation based on sales, whereas the markup is an equation based on price. If the cost of pair of jeans is $20, and you mark it up to $40, that's a $20, or 100 percent markup. If you sell that pair of jeans for that price, the profit margin is 50 percent.
Fixed and Variable Costs
The profit margin is ultimately based on how much it costs you to produce an item. The fixed costs are those that don't change regardless of how many items you make, such as rent, utilities and some salaried workers. Variable costs are those that change depending on how many items you produce, such as supplies and materials. In order to increase profit margins without increasing the sale price, it's typically recommended to cut variable costs, which affect sales at any level.
Profit Margins in the Clothing Industry
Profit margins for retail clothes are generally within a range of 4 percent to 13 percent according to industry analysts. Markups often seem high as compared to cost of goods sold, another term for variable costs. When all costs are considered, the profit the clothing company actually earns is much lower, and in order to stay in business, clothing retailers need to sell a high volume of merchandise. Another strategy to stay ahead is to sell goods that have a higher markup, such as jewelry, hats and scarves.
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