How to launch a collection: Budgets
After creating your collection's sales forecast, it's time to apply that to your production budget—better known as your COGS (cost of goods sold) budget. If you need a refresher on financially planning a collection launch or creating a sales forecast, you can find a link to them in the comment section!
It will be difficult to price your items to earn a profit if you don't know how much it costs to create each piece. Here are some factors to consider when it comes to pricing:
Unit cost: To calculate the unit cost for every design in your collection, you need to know what it costs to make each item. For example, when creating a dress, it's important to factor in the following costs:
Materials: Everything needed to make the dress, such as the fabric, zippers, buttons, thread, and pattern.
Labor: Consider how many individuals are needed to sew the dress and how long it takes.
Manufacturing: Fixed and variable overhead costs, such as rent, utilities, storage fees, property taxes, factory repairs or maintenance, and anything related to the manufacturing process.
Adding up these three factors will give you your unit cost per design. Comment "Send Unit Cost Table" below, and we'll send you a spreadsheet that does all the hard work for you!
Tip: While looking at past unit costs is a great starting point, remember to factor in inflation and yearly price increases of materials and labor. If inflation is 4%, you should increase your unit cost by at least 4% (or else you’re losing money).
Unit Price: Pricing each item will consider the unit cost of producing it, along with several other factors, including operating expenses like storefront rent, utilities, marketing, sales staff, and anything related to running your business.
There are two ways to price your items, and it’s best to use a combination of both: selling price information from Income Statements and comparing to competitors.
Income Statements: Only available from public companies, you can roughly figure out their pricing by calculating the markup multiplier (Revenue/COGS) and then apply this multiplier to your own COGS to get your selling price. The markup multiplier will vary between companies, so it’s important to look at several Income Statements and take an average.
Competitor Analysis: How are your competitors pricing their items? Analyze the prices of similar products with your closest competitors and use that as a starting point for your own pricing!
Assess Demand: Which items sold well last year? Didn't sell well? What's popular or trendy this year? Answering these questions will help you decide what to focus on producing. It's important to approach it from a business mindset instead of a personal or emotional mindset - what you love might not be your customers' favorite (sorry to break it to you)
Once you answer the above questions, you can assign a number to each item in your collection from 1 to 3. Most likely to sell and do well: give it a 3; neutral about the item or not sure how it will sell: give it a 2; and for those more unique pieces that will be harder to sell: give it a 1. This process will help you determine how much to produce of each item.
Collection Inventory: After deciding the popularity of each item by assigning it a number between 1 and 3, you’ll want to make sure the quantities of each item build up an inventory with a retail value equal to the sales revenue goal. Figure out the quantities of each design, with the more popular items (those assigned a 1) getting produced more than an item assigned a 3.
Remember: assign quantities before starting production to guarantee you reach your sales revenue goal. Need help figuring this out? Comment “Send COGS Budget Table” below, and we’ll message you a spreadsheet.
COGS Budget: As a reminder from our first post in the series, your materials budget, labor budget, and manufacturing overhead budget all contribute to your overall COGS budget. While unit cost focuses on the cost associated with producing each individual garment, your COGS budget provides an overall estate of the cost of goods sold over a specific period.
You can calculate how much it costs you per budget to produce an item by dividing the total budget by the number of garments produced. For example, if all your materials cost €20,000 to make a dress and you can create 2,000 dresses with those materials, the cost per dress from the materials budget is €10.
Liquidity Planning: Cash flow is the secret to any successful business! Make a schedule of when payments are due and when orders will be paid to ensure you always have enough money in the bank! Knowing whether payments are net 30, 60, or 90 helps guarantee there is enough money to cover monthly operations.
When it comes to creating a COGS budget (or any budget in general!), it's always better to be on the more conservative side. This makes adjusting for unexpected income or expenses that may arise throughout the year easier! If you need help figuring out the budget for your next collection, comment "Send COGS Budget Table," and we'll send a spreadsheet to help you. 🎉
We’ve created a spreadsheet to make it easy for you to figure out your pricing. As always, reach out if you need help with any of the steps or want additional information.
