How to Buy Clothes without the Retail Markup

Your clothes shopping habit can really strain your wallet over time -- but it doesn't have to.
Your clothes shopping habit can really strain your wallet over time -- but it doesn't have to.
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The high cost of clothing can be staggering, whether you're seeking out the latest trends or looking for more classic, functional styles. No matter where you're shopping, from specialty stores in your local mall or the chicest boutique in town, you'll find designer jeans priced at $300, handbags made in Italy starting at more than $1,000, and wool pants priced anywhere from $35 to $500. The endless variety is enough to make your head spin and put a serious strain on your wallet.

So what's a frugal fashionista to do? To help make your clothing budget go a little farther, it helps to know how the fashion industry works and gain some insight into retail pricing practices.

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Normally, retailers (like Nordstrom, Ann Taylor, Intermix and the Gap) who sell to consumers purchase their goods from a manufacturer or distributor at a wholesale price that includes the cost of designing, manufacturing, and marketing, plus a reasonable profit. These manufacturers and distributors offer products spanning a huge spectrum of quality, materials, and promotion, from mass manufacturers like Liz Claiborne to luxury designer goods companies like LVMH (the company that makes Louis Vuitton apparel). Many goods feature a "Manufacturer's Suggested Retail Price" that serves to present uniform pricing in the marketplace and build in an attractive margin for the retailer. The typical retail markup on fashion items ranges from 2.2 to 2.6 times their wholesale cost [source: Binkley].

Thankfully, the Internet has made shopping for bargains easier than ever. You can shop and compare prices at your favorite department store, retail chain, boutique or specialty store, even buy from trendy designers like Rebecca Taylor and Tory Burch. Grab a bargain at flash sale Web sites such as Ideeli and RueLaLa, or take your time checking out your favorite designers at Outnet or Bluefly. Shopstyle and ShopItToMe let you track your favorite brands and sizes, and send you emails when styles you might be interested in go on sale.

But why is it that you can pay more than $275 for a cashmere sweater at Neiman Marcus -- or bag a deal at Yoox for $120? Read on to learn more about how retail markups (and markdowns) are determined.

Retail Clothing Markup Percentage

Whether you're shopping at a local boutique or a large department store, clothing prices at retail are generally set at double the wholesale price. For example, if it costs $75 for a boutique owner to purchase a jacket from a wholesaler, he or she will double the price and mark it up to $150. This standard practice is known as keystone pricing. However, some retailers may choose a higher multiplier (typically between 2.2 and 2.5) depending on the cachet of the brand or the overall pricing strategy.

Retail markup is the difference between the wholesale price and the retail price as a percentage of the number on the tag; in the jacket example above, the markup is 50 percent, or half the retail price. You'll see markups that range from 50 to 80 percent in most boutiques and department stores. While these pricing strategies may seem outrageous, keep in mind that the markup goes to help the business owner pay for rent, insurance, salaries, advertising expenses, taxes, and other costs.

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Of course, not all merchandise is sold at its retail price. Having some flexibility in the profit margin allows clothing purveyors to reduce prices during special promotions, mark down merchandise that isn't selling quickly, and offer discounts to its most loyal customers, while still earning a reasonable profit.

When it comes to designer lines, the actual markup can be much higher, as advertising, celebrity endorsement and prestige help to drive up the prices set by manufacturers. Some luxury handbags come with an average markup of 10 to 12 times their actual price [source: Moore].

The denim market illustrates how a magic combination of cost, profit margins, and markup can result in similar products sold at a wide range of prices. What's the difference between a pair of designer denim and basic blue jeans? A pair of True Religion's latest "it" jeans cost $50 to make and wholesale for $152, while the average store price is $335. These jeans are made in the United States using a high quality fabric, then advertised and publicized as celebrity favorites. The jeans sold in Sears or Kohl's for less than $50 may be sewn overseas, where manufacturing costs are much lower using a less costly (but still good quality) fabric. The profit margin for luxury jeans is substantial, while jeans sold at Wal-Mart or Sears at much lower prices have gross profit margins of less than 20 percent [source: Binkley].

All in all, setting the right retail price is a bit of an art form, as it's the consumer who actually decides the correct selling price when he or she decides to purchase an item. Today, retailers use computer software to set prices, then determine when and how much the price will be reduced, depending upon what items are selling and when new merchandise is expected.

Next, let's take a look at a few ways smart shoppers avoid paying retail markup.

Tips for Avoiding the Retail Clothing Markup

You don't even have to enter a store to get great deals on clothing.
You don't even have to enter a store to get great deals on clothing.
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So how can you shop 'til you drop, put together a chic wardrobe and still have money left in your wallet? Fortunately, there are many ways for savvy shoppers to avoid paying full retail prices:

  • Flash sales. Gilt Groupe, Ruelala, Ideeli, and Swirl are discount sites that offer reduced pricing on designer goods to members only for a limited amount of time. The products you'll find on these sites are typically excess supply purchased from luxury retailers at a deep discount. That's how members have an opportunity to purchase a $495 Rag & Bone dress for 60 percent off. To get the most out of flash sales, know the sizing and quality of the brand you're buying and understand the website's return policies.
  • Comparison shopping. Sign up for an online shopping service with a powerful search engine like Shopittome or MyPerfectSale, register your favorite brands and sizes, and you'll receive an e-mail notification when items you might like go on sale.
  • In-store promotions & sales. There's so much competition among retail stores, it seems like sales are offered every week. Bloomingdale's often offers 20 percent off coupons to cardholders, while Nordstrom marks down regular-price merchandise during its Anniversary Sale. Get to know a sales associate at your favorite stores to help you take advantage of the best deals and markdowns.
  • Loyalty discounts. Sign up for emails from your favorite stores or like them on Facebook for significant savings. Cole Haan, for one, offers 25 percent discounts several times a season to regular customers, as well as big discounts off sale items.
  • Discount stores. Retail stores often sell inventory that's left over at the end of a season to an apparel industry insider, who then sells it to discount stores like TJ Maxx, Marshall's, or Loehmann's. Say Macy's overbought a certain style of The North Face jacket or had hundreds left in stock when the southern region had a milder winter than expected. The discount store will hold onto them until they're back in season, so you can score a warm coat at a great price. Make sure to examine your finds carefully, however: The merchandise that ends up in a discount store is sometimes flawed or fits poorly. Bluefly.com and Outnet.com take the discount concept online, offering discounts of 10 to 70 percent off retail prices on designer goods.
  • Outlet stores. While these stores used to carry merchandise from the factory with small flaws or defects, many stores today feature items made especially for the outlet store. Careful shopping is a great way to buy name brands at a bargain price.
  • Thrift and consignment stores. Take a look around thrift and consignment stores in your neighborhood for great prices on designer goods. Some shoppers clean their closets every season to make room for new threads, while others are getting rid of great items they no longer need due to a lifestyle changes. That's good news for you -- someone else's gently used Louis Vuitton handbag is now your treasure.
  • eBay and Etsy. Online auction sites and DIY online retailers offer a smart way to find great clothing at bargain prices, from a gently worn pair of Manolos on eBay to hand-painted silk T-shirts on etsy.com.

So, now you have the inside scoop on why that great blouse costs what it does -- and some insight on how to save money before you plunk down your credit card. Check out the links on the next page for more information. Then, go out and find some great deals!

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Lots More Information

Related Articles

  • Binkley, Christina. "How Can Jeans Cost $300?" The Wall Street Journal. July 7, 2011. (Nov. 10, 2011.) http://online.wsj.com/article/SB10001424052702303365804576429730284498872.html.
  • Bond, Ronald L. "Finding the Right Price for Your Retail Products." Entrepreneur. May 25, 2008. http://www.entrepreneur.com/article/193986. ( Nov. 10, 2011.)
  • Chicago Magazine. "How to Shop at Department Stores and Not Be a Chump." October 2008. ( Nov. 11, 2011) http://www.chicagomag.com/Chicago-Magazine/October-2008/The-Best-for-Less/How-to-Shop-Department-Stores/.
  • InStyle. "Best of the Web." November 2011. Pages 255 – 266.
  • Keith, Tamara. "Are Outlets Really Cheaper?" NPR.com. December 3, 2008. ( Nov. 10, 2011) http://www.npr.org/templates/story/story.php?storyId=97750547
  • Levitt, Shia. "Person-to-Person Sales Outlets Succeeding." NPR.com. March 16, 2009. ( Nov. 10, 2011) http://www.npr.org/templates/story/story.php?storyId=101944903.
  • Moore, Booth. "Inside the luxury factory." August 19, 2007. Los Angeles Times. ( Nov. 10, 2011) http://www.latimes.com/features/la-ig-book19aug19,0,3198503.story
  • Real Simple.com. "Your Month-to-Month Guide to Shopping Deals." ( Nov. 29, 2011.) http://www.realsimple.com/work-life/money/spending/best-time-to-buy-00000000028717/page12.html.
  • Small Biz Survival. "How to set retail prices." ( Nov. 10, 2011) http://www.smallbizsurvival.com/2010/11/how-to-set-retail-prices-and-markups.html.
  • Wolverson, Roya. "Gilt Groupe: Will the Lux-for-Less Obsession Last?" The Curious Capitalist. Time. May 11, 2011. ( Nov. 29, 2011) http://curiouscapitalist.blogs.time.com/2011/05/11/gilt-groupe-will-the-lux-for-less-obsession-last/
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