The fashion and textile industry is under pressure. Consumer uncertainty, increased labor and manufacturing costs, delivery bottlenecks and high inventory levels require changing rules in pricing. While brands and retailers have been able to rely on stable margins and predictable sales cycles in recent years, strategic pricing is needed more than ever today. This article provides an overview of product pricing in the fashion and textile industry.
How prices are created in the fashion industry and what is changing
Traditionally, target pricing in the fashion industry follows a brand- and calculation-based approach: based on the production costs, a markup is calculated that takes into account trade margins, marketing costs, planned discounts and the manufacturer’s desired profit. The resulting price recommendations for end customers are based on the market positioning (premium, mid-market, discount) and the competitive environment. The markups are relatively rigid and are usually adjusted irregularly based on the real costs or market situation.
But this model is increasingly reaching its limits. The pricing logic is shifting from a cost-oriented to a market-oriented perspective: consumers compare online, expect transparency and react more sensitively to price changes. At the same time, manufacturers are struggling with fluctuating raw material prices (e.g. for cotton), freight costs and changing order volumes. Pricing decisions must therefore be much more dynamic, more data-based and more closely aligned with real demand behavior.
Christoph Krauss is an associate partner at Prof. Roll & Pastuchn with a focus on the B2C sector. He has more than 20 years of experience in marketing and sales at leading consumer goods manufacturers as well as in consulting on sales, strategy and pricing. Dr. Arne Heinrich is Senior Project Manager at Prof. Roll & Pastuch.
Rising costs are met by consumer restraint
Rising manufacturing costs mean that margins come under pressure and sales prices have to be adjusted. There is little scope for price increases, particularly in the middle price segment. Consumers react too strongly by refraining from purchasing or switching to cheaper brands. In addition, the price increase is often counteracted by an overstock of goods, with the result that prices are not adjusted and shrinking margins are accepted. The operating costs in retail, i.e. rent, wages and energy, have also increased, so that on the one hand the pressure on margins is high and on the other hand the need for active and differentiated price management has increased.
And then there is the reluctance to buy: the development of demand and, above all, consumers’ willingness to pay is not keeping pace with the increased costs of manufacturers and retailers. People are buying more selectively, comparing more intensively and reacting strongly to discounts.
Increased acquisition costs and low demand are putting pressure on margins from two sides. This forces the industry to control price promotions more specifically and not to react reflexively to inventory pressure with price reductions.
Which approaches are needed now?
The dilemma of higher costs and, at the same time, a cold consumer climate requires new approaches to pricing.
First of all, you should rethink product pricing and say goodbye to the industry’s cost-oriented cost-plus pricing. The dynamics on the cost side have nothing to do with the customers’ willingness to pay, but in this process they are directly linked through the surcharges. There is also a lack of market orientation, as this process does not systematically take competitors or consumers’ willingness to pay into account.
It makes more sense – especially in times when customers are highly cost-sensitive – to use market-oriented methods for setting prices. Competitive pricing includes competitive prices in the price determination and is therefore clearly oriented towards the market. Manufacturers base their pricing on that of the relevant competitors, i.e. approximately “X percent below competitor A”. Differentiated rules for each category enable good, market-oriented results and are based entirely on the consumer’s shopping experience. However, control mechanisms should be taken into account in order to prevent a competitor’s possible pricing errors from being transferred to your own pricing.
Value pricing aligns product prices with consumers’ willingness to pay. However, procedures for determining this willingness to pay, such as customer surveys or price tests, are complex. In addition to product-specific price determination, value pricing is particularly suitable for supporting and checking a competitive pricing approach. In this way, insights into value drivers and brand preferences can be applied to a larger number of products.
In the case above, the rule “X percent below competitor A” could be adjusted to “Y percent above competitor A” if, for example, consumers’ perception of value has changed between brands. A side effect of value pricing is that the drivers for the purchase decision can be identified. Is it the brand, the sustainability, the cut, the material,…? In this way, important insights for brand communication are determined. However, value pricing requires a very specific idea of the target group addressed.
The target group brings us to another strategic lever: a clear, precise segmentation of the target group as part of the brand positioning enables a precise price approach and thus a clear framework for the price ranges. Today we also have greater dynamics in the target groups, which should be taken into account in such a way that segmentation is now a permanent process and no longer a one-off exercise.
In order to respond to the fundamentally increased market dynamics, more and more fashion manufacturers and retailers are relying on dynamic pricing. With this approach, which enables quick and optimal management of the business, prices are checked, for example, based on defined goals and rules using current data and adjusted regularly (automatically) if action is required. Classic data points can be competitive prices, inventory levels and sales, which lead to different price reactions with the alternative objectives of “optimize margins” or “reduce inventories”.
Of course, this process assumes that the actors have price sovereignty, for example as a retailer or in the brand’s own store. These primarily use dynamic pricing online, but the increasing spread of electronic price tags and improved digital infrastructure is also leading to an increasing spread in stationary retail. The company’s own product range logic must be taken into account in all pricing procedures – issues such as line pricing (different colors or sizes) and “good-better-best” logic (e.g. running shoes) should not be undermined by the pricing procedures. In addition, minimum prices must always be taken into account. Consumer psychology: prices beyond reason
Of course, in the luxury fashion sector there are often factors responsible for purchasing decisions that are beyond the measurable and sometimes rational. Basically, the higher the price ranges, the higher the emotional value contribution from the brand or the designer. This is the result of consistent brand and price positioning that creates desirability and requires years of discipline on the part of management. Whether the high prices are justified or not can only be answered by the brand’s target segment. The prices justify the additional emotional benefit from the brand and the designer – value pricing can help here too.
Another factor driving desirability is the way the goods are presented. the go-to-market approach: The willingness to pay is further fueled by shortages and the resulting Fomo effect (fear of missing out), which is fueled by limited capsules and collabs as well as appropriately staged drops (including countdown and social media-effective queuing).
Conclusion: Create room for maneuver and implement it through pricing
Challenges from the market environment – high costs coupled with purchasing reluctance – should be met by the price. The prerequisite is an immediate, precise and data-supported understanding of market events and active price management that is derived from the brand strategy. Market-oriented product pricing procedures are recommended – the times for cost-focused pricing are over in the fashion and textile industry.