At Grana, we talk about markups a lot, mainly because we do ours so differently. But with all this chitchat surrounding business models and markups we thought it would be best to take a step back and slow it down for a minute. You probably know that a markup has something to do with a price going well… up. Maybe you know it’s those extra dollars businesses charge to make a profit. But what’s really in a markup?
Under the Microscope
The term markup was actually developed to avoid admitting to customers that they’re typically paying much more for a product than its original price. So, calling it a ‘markup’ sounded a lot better than ‘500% increase’. Simply put, a markup is the difference between the cost of something and its selling price. It costs a luxury brand $7.5 to make a t- shirt, they then sell that t-shirt for $60. This is an 8 times price markup, meaning the company will make a profit of $52.50 when they sell it. Sounds lucrative, doesn’t it? So, the markup is what directly affects a company’s profit. The fashion industry’s markup can be ballpark anywhere between 6 – 10 times higher than the sourcing cost (aka how much it costs to make).
It’s also important to note that there’s no official markup standard that retail businesses (or any business) must follow. However, if a company wants to stay competitive and relevant then they’ll use a similar markup as their competitors. This is where the water gets murky and customers more often, than not get the short end of the stick.
Is it Greed? Hmm – It’s a Broken System
The fashion industry has been sailing along on its profitable markup wave for a very long time, and no one questioned its margins until recently. Now, it’s becoming fairly obvious that the system was built on the unsustainable frames of bills, agents, brokers, selfishness and inventory. Traditional retail costs a lot to maintain, this is absolutely true.
Bricks-and-mortar have rent, bills, employees, fixtures, furniture and storage space costs to cover. Traditional retail also has a lot of overhead (aka operation costs) costs due to wholesalers, agents and brokers that help them source their products. All of these things increase the costs of running a business. So in order to make a profit, businesses increase their markup. But in the end, it’s the customer who foots the bill to cover these costs, which kind of sucks for the customer.
How Low Can You Go?
You may have heard word around town that our business model is based on 2-3 times markup. How can we do this? Mainly because we’re an ecommerce company with a lean business model. So what does “lean business model” actually mean? It means we outsource as little as possible and instead, do most of the legwork ourselves and eliminate any unnecessary people or procedures that would increase costs. By doing our designs in-house, selling online, saying bye bye to intermediaries and working directly with our partner mills and factories, we’re able to cut lots of unnecessary costs. We lower costs even further by being strategically located in Hong Kong. Keeping our head office and warehouse in Hong Kong means that we’re able to ship everything from one warehouse. It also means that we can use to our (and our customers) advantage the city’s low import duty and taxes and its ability to provide fast worldwide shipping.
So, remember that $60 t-shirt? It still costs us $7.5 to make that high-quality luxury t- shirt but we sell it for $15 instead. This means the price has been marked up 2 times its original cost. Which means we make a $7.5 profit when we sell it. Don’t think it sounds lucrative? Maybe not, but it is profitable. It’s also cost effective and sustainable, which is what the world needs.realdeal / by Grana / 01.27.17