Juggling benchmarks, expenses, and everything else in your retail business can be overwhelming. However, profit margins are one aspect that you must recognize. Calculating your current profits and setting target profit margins will set your clothing brand up for success in the future.
A business calculates profit margin to see what percentage of its sales have turned into profit. There are three types of profit margins.
- Gross profit margin: The measure of gross sales revenue minus direct expenses (i.e., cost of wholesale orders, etc.)
- Operating profit margin: The extent of gross sales revenue minus indirect expenses (i.e., operating costs).
- Net profit margin: The percentage obtained from dividing net income by revenue.
Profit margins are a standard benchmark used to measure business success and performance. One of your goals when establishing your brand is to increase your profit margins while providing quality products to your customers.
Here are some tips for creating fair profit margins for your brand.
Set Your Price
Pricing is one of the trickiest aspects of running a retail business. Inefficient product prices will hurt your brand’s profit margin and lead to business failure.
You want to price your products reasonably and drive away potential customers. But on the other hand, heavily discounting quality products to keep up with competitors is detrimental to revenue.
Pricing Strategy vs. Price Point
To appropriately set your prices, you must consider your brand’s pricing strategy and price point.
- Pricing strategy: A pricing strategy is a method to calculate an ideal price and set price points. There are different methods, but cost-plus pricing is the most straightforward. For example, if your goal is a 20% profit margin, cost-plus pricing incorporates that target into the prices of your apparel and will maximize the chances of reaching that goal.
- Price point: A price point is a point on a scale of possible prices for a product. Research supply and demand curves for your apparel products and price proportionally. For example, if there’s a high demand for custom streetwear, place a pullover hoodie wholesale order and sell your branded products at a higher price point on the scale.
Setting the ideal price for your products takes time. Therefore, it’s essential to be open to trial and error and adjust when necessary.
Calculate Direct & Indirect Expenses
It’s a given that any retail brand has to spend money to make money. However, profits are not a guarantee. Many small businesses struggle to profit in the first few years of operation, often operating at a loss.
Tracking and strategizing expenses is an integral part of maximizing profits. Knowing where and how you spend money is vital to create fair profit margins for your brand.
Always keep track of these two types of expenses:
- Direct expenses: These are expenses for a specific product. They fluctuate with production volume, directly affect product price, and are easy to track. Direct expenses include the cost of raw materials and labor.
- Indirect expenses: These expenses are trickier to track. Indirect expenses are the costs of maintaining your business and running it day-to-day. Examples of indirect expenses are rent, equipment maintenance, and marketing.
Profits can increase when you manage expenses properly. First, periodically review your brand expenses to ensure you only spend on what is necessary. Then, cut the fat and shop around for the best supply prices.
A great way to cut direct expenses is to shop wholesale. So if you’re shopping for pullover hoodie wholesale options, look for a wholesaler that provides quality products for reasonable prices. That way, you can mark up your branded products appropriately without sacrificing quality and fit.
Get the Right Mix
As with an investment portfolio, it’s important to diversify within your small business. It’s best to have a mix of high-profit and low-profit items in your inventory to meet your brand’s profit margin goals.
Less expensive products are closer in price to production costs. They make your brand less money but bring in high customer volume. You attract more first-time customers with these lower-priced items, which is an excellent way to build customer trust and generate repeat purchases.
More expensive products with lower production costs can create a higher profit margin. These items sell at a lower volume but attract higher-paying customers. High-value products create a premium perception of your brand and can lead to long-term profits.
You can source quality wholesale apparel from suppliers like Bella + Canvas to diversify your product line. A mix of branded fleece pullovers, cropped hoodies, and cotton v-neck tees will diversify customer demographics and increase sales for your brand.
Benchmark with Profit Margins
Use profit margins as benchmarks to measure the success of your business. In addition, analyzing profit margins help you plan for the future and streamline expenses and production systems.
According to The Motley Fool, a profit margin at or above 15% is considered healthy. Every business is different, of course, but a 15% benchmark generally means your business can cover all operating expenses and still turn a profit.
If you realize your brand isn’t there yet, that’s okay. Restructure costs by finding a new apparel wholesaler or streamline part of your production with a new technology service. Continue to benchmark, track the effectiveness of these changes, and go from there.
Profit margin benchmarks also indicate your brand’s health to potential investors and creditors. Strong profit margins show that your brand is financially stable and here to stay. Therefore, it’s an important benchmark to focus on if you want to grow your business.
Fair Profit Margins: A Work in Progress
It may seem daunting, but creating fair profit margins is possible. When you set the correct prices for your products, keep track of expenses, and offer various quality products, your business will start to see healthy profit margins.
Just remember to do your research, be open to change, and be ready to pivot if something doesn’t go according to plan. As a new clothing brand, remember that all businesses are constantly learning and adjusting to create fair profit margins, even veteran competitors.
Also Read: 7 Tips And Techniques For A Profitable Restaurant Venture
