What is my profit?

Emily operates a clothing store on the west side of Toronto in the heart of the fashion district.  She has grown her business organically to just over $2 million in revenues and features Canadian designers as well as her own label, Chic Design.  Emily is now considering introducing a new line of clothing where she imports fashions from overseas.  With Toronto’s multi-cultural persona, Emily believes she can grow her business by attracting a more diverse clientele and offering a broader range of fashions.  This savvy entrepreneur has a knack for knowing her customer, buying smart, and offering value-based pricing to her customers.  Locally, Emily employs a cottage industry of seamstresses who must pass Emily’s strict quality guideline as well as tailor designs for customers.  Emily uses a simple pricing tool – she basically adds a 100% mark-up to her costs to come up with a price to her customers.  This had worked well for her when she started. However, after looking at her financials she noticed that her gross margins are only 20% (of revenues) and she can’t figure out why this is the case when she marks-up her costs by 100%. She needs to get to the heart of this before bringing on new fashion lines to her business.  Where has Emily gone wrong?  Do you relate?

This seamstress needed to stitch her way out of a messy set of books

There are a lot of things going on in Emily’s business and she cannot tell which parts of her business are doing well and which ones are draining her money.  Moreover, Emily needs to understand why her 100% mark-up blanket strategy isn’t working.  To get to the bottom of this, Emily first needed to review all her costs and categorize them by business line:  Chic Design, Other Designers, Tailored Fashions.  In doing so, Emily realized that she was underestimating the costs of Chic Designs because she was only using fabrics and accessories to set her prices and wasn’t considering seamstresses’ wages, cutting wages, special packaging, and her own creative design effort.  For Other Designers, Emily concluded that their inventory was taking up a lot of store space and was not moving very quickly.  It was taking a lot more effort to sell their designs than she expected. As for her Tailored Fashions, Emily was underestimating the effort that seamstresses applied to alter and manipulate garments to make them well-fitting for customers.  Her pricing models needed a major overhaul.  Once Emily had more clarity, she sold Other Designers’ lines on consignment and charged them for store space and handling; she increased her mark-up on Chic Design to reflect the true cost of producing her lines and found that customers were indifferent to the price adjustments and finally, she consulted with her seamstresses before tailoring and altering any fashions before quoting a price to her customers, making sure Tailored Fashions was earning its fair share. Decomposing her business into three revenue streams and understanding the costs related to each stream was critical for Emily to understand why her blanket mark-up of 100% was not yielding the margins she expected. Instead, she now understands how to price each type of business and ensure she is earning her targeted margins.

Take a look at our costing primer to understand how to decompose your costs by business lines.