Ask a unit owner what profit they make on a garment and you will often hear the mark-up
they add: “thirty-five per cent.” It sounds like the same thing as profit. It
is not, and the gap between the two is the reason some units that are busy all month
still end it with less than they expected.
Mark-up and margin are two different numbers
Mark-up is the profit as a share of the cost.
Margin is the profit as a share of the selling price. The same
profit gives a smaller percentage when you divide it by the larger number.
Take a cost of 100 and add a 35% mark-up. The price is 135 and the profit is 35. Divide
that 35 by the price and the margin is 25.9%, not 35%. Nothing has gone wrong; the
two percentages are measuring the same rupees against different bases. The trouble starts
when one is quoted and the other is assumed.
Say which one you mean
“We work on thirty-five” means nothing until it is clear whether that is on
cost or on price. A buyer asking for “a 35% margin” and a supplier offering
“35% on top” are about nine points apart without either of them being wrong.
Build the cost in layers
A selling price is only as good as the cost under it, and the cost has layers that are easy
to skip. In order:
- Direct cost — fabric, trims (buttons, zip, lining, thread,
labels), cutting, stitching, and finishing, pressing and packing.
- A rejection allowance — the share of pieces lost to rework or
that cannot be sold.
- Overhead — rent, power, supervision, administration.
- Then the mark-up.
Most of the mistakes below come from stopping at the first layer.
A worked example
These figures are made up to show the sum. They are not a benchmark and not a claim about
any garment or any unit. They are the values the
garment costing calculator opens with, so you can check every
line there.
- Fabric: ₹420
- Trims and accessories: ₹60
- Cutting: ₹15
- Stitching: ₹120
- Finishing, pressing and packing: ₹25
Direct cost: ₹640. Add a 3% rejection allowance, ₹19.20, which
makes ₹659.20. Add 12% overhead on that, ₹79.10, and the total cost is
₹738.30.
A 35% mark-up on ₹738.30 is ₹258.41 of profit, so the price is
₹996.71. Profit divided by price is 25.9%. That is
the margin. The mark-up was 35%.
In this example the fabric is ₹420 of the ₹640 direct cost, about 66%. That
ratio is specific to these made-up figures, but it is why
cutting wastage deserves attention
before almost anything else on the cost sheet.
Mistake one: pricing off the direct cost
The quickest quote is direct cost plus mark-up. On the figures above that is
₹640 × 1.35 = ₹864.
But the real cost is ₹738.30, so the profit on that ₹864 is only
₹125.70 — a margin of 14.5%. The quote looked
like a 35% mark-up and delivered barely half the profit, because the rejects and the
overhead were never in the price. They were still paid for.
Mistake two: letting a flat overhead percentage do the thinking
Putting overhead on as one percentage is the usual shortcut, and it is a fair one for a
quick quote. Know what it does, though. Overhead — rent, power, supervision —
follows time and machines, but a percentage of direct cost follows money.
Take the same garment with the same sewing, the same ₹120 stitching cost, the same
machine and the same supervisor, but in a ₹120 fabric instead of a ₹420 one.
Direct cost falls to ₹340 and the 12% overhead falls from ₹79.10 to
₹42.02. The expensive-fabric garment carries ₹37.08 more overhead for exactly
the same use of the floor. Expensive-cloth styles end up subsidising cheap-cloth ones, and
a simple style in fine fabric looks costlier than it is.
To find your own overhead percentage, take last year's total overhead and divide it by last
year's total direct cost. Use your figure, not a round one from somebody else's unit.
Mistake three: forgetting what a discount costs
A buyer asks for 10% off the ₹996.71. That is ₹99.67 off the price, giving
₹897.04. The cost has not moved, so the profit falls from ₹258.41 to
₹158.74 and the margin from 25.9% to 17.7%.
Ten per cent off the price took 38.6% of the profit. A discount is taken
from the profit, not spread across the whole price, which is why it hurts more than the
number sounds.
Small changes in the cost add up quickly
Double the rejection allowance from 3% to 6% and the total cost rises from ₹738.30 to
₹759.81 — ₹21.50 more on every garment, or ₹21,504 on a thousand.
Nothing about the work looks different. It simply shows up on the cost sheet as a number
you never saw coming.
Pricing for the margin you want
If the target is a margin, not a mark-up, work backwards:
The formula
Price = total cost ÷ (1 − margin). For a 35% margin on a ₹738.30 cost,
that is ₹738.30 ÷ 0.65 = ₹1,135.85. The profit is ₹397.55, and the
mark-up needed to get there is 53.8%, well above the 35% most people would have added.
What these sums leave out
- GST. The prices here are before tax. Tax is added on top of the
price, not taken out of it.
- Discounts, returns, commission and unsold stock. All of them come off
the margin later, and none of them is in the cost sheet.
- A flat overhead percentage. As above, it is a shortcut, and the more
your styles differ in complexity the more it distorts.
Put your own figures into the costing calculator; it shows the
mark-up and the margin side by side so neither can be mistaken for the other. If you want
the fabric line itself, the fabric consumption calculator works
out what one garment should take.
Pricing for a small boutique, where the work is one-off and not made in quantity, follows
a different method; how to price boutique
stitching covers that. And if you are weighing up a machine rather than a price,
the payback and EMI article does the
equivalent sum.