How to Buy Clothes without the Retail Markup

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.

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.