The Hidden Math of Fashion Pricing: How to Price Your Products at 4x COGS (and Actually Sell Out)

Making fashion pricing sound so easy that the only thing you think about is that your first markdown cycle will wipe out the margin you were dreaming of. The majority of new sellers do just that - they double their cost and call it a price, not knowing they still aren't covering costs.

We all know that fashion return rates on fit-dependent items can easily go well above 20% alone, and that will be 2x markup right there without any marketing being done.

In order to avoid being surprised by unexpected additional costs that a bad quarter could expose, using a 4X-COGS model includes all the hidden costs in your price from the very beginning, not waiting until you've had a bad quarter to find out your expenses.

This article shows the exact mathematics behind the model first of all, followed by a worked example of imaginary numbers, and then explaining when it is better to set one's price below or above that level according to the information on the demand and supply rather than just guessing.

Why Double Your Cost Pricing Doesn't Work for Fashion

If you double your unit cost and set the price equal to that, it is a simple calculation that is also easy to go wrong with. It considers your unit cost as the only real expense in the business, which in fact isn't true.

Usually, a 2x markup overlooks:

• Restocking, especially the fitting of return goods like ladies'jackets
• Discounting needed to push out those sizes or colors that are slow-moving and not in demand at the end
• Fee charges for the platform, and taking off the payment processing charge at each of the sales
• Cost of marketing required to persuade a buyer to get to the product.

After making all these subtractions from a 2x-price, the profit that remains is hardly noticeable; sometimes it is all gone even on those products that have higher return rates. When such sellers set prices, they usually blame either that the product was not good or that the market was not favorable, without knowing that the only major cause is the pricing formula that they are using.

For example, take a $10 product cost landed priced at $20 under a regular 2x markup. A return rate of 25% on fit-dependent categories can cost your business $2 to $3 per unit alone if you add return shipping cost, restocking labor as well, and reduced resale value on returned items where tags are missing, or the garment has some minor use.

On top of that, deduct the 5% to 10% platform fees and a small cost of advertising to acquire the customer, and the $10 of "profit" will reduce to $1, $2, or even less in case of higher return volume categories. The figure on your price tag seemed decent. The figure in your account after a full cycle of sales is rarely the same. ​‍​‌‍​‍‌

The 4x-COGS Framework, Explained.

If you consider the 4x multiplier to start from the landed cost, you will miss the bigger picture. Landed cost includes all these factors:

• Unit production cost provided by your supplier
• Freight from the overseas supplier to your warehouse
• Import duties and other charges
• Cost of unit packaging

Ignoring shipping and duties is probably the number one reason sellers overestimate their profits. A typical example is a shirt quoted at $6 each could end up costing $8-9 after including shipping and duties.

Where the Other 3x Goes

Only the 1x multiplied by your landed cost remains as profit. The other three 1x are used to cover other operational expenses:

• One covers the cost of your logistics: picking and packing the order, and delivery to the end buyer
• One part of it is put aside as a return reserve since fashion items tend to be returned in larger proportions than average product categories.
• A third part is meant for marketing, such as ads and other content that will attract customers to your store.
• Whatever is left after all expenses is your ​‍​‌‍​‍‌margin

A Worked Example

Here's an illustrative example using fictional numbers to show the math in action.

It should be understood that these figures are examples and not intended to be the right category or right supplier for every single case.

Your own landed cost, return rate, and ad spend will move the numbers around, but the structure of the example remains the same. The idea is not to take $36 as a random figure which could have been drawn out of the listing of a competitor but, to the contrary, it is a figure which arises from real cost components.

When to Flex Above or Below 4x

Use the 4x as a starting point or reference only and not a rule. Some factors may cause the multiple to be either higher or lower.

Pricing Above 4x

A price more than 4 times the price is good for items that drop only once in a limited number, as well as items with rising demand and low competing supply (confirmed). When you have Market Insights data confirming demand in an area is growing fast and there are not many competitors in that area, it's a sign of the market power from the seller side. Scarcity plus confirmed demand is the combination resulting in higher prices accepted without the slightest doubt by the customers.

The clearest example would be a capsule, or a limited-run product. The fact that the small collection is being sold out in a day or two means it doesn't have to compete with other sellers on price the way the basic evergreen product might.

Pricing Below 4x

Lower than market multiples would be justified mainly in the following cases:

• Getting rid of old stock that is a burden for both the cash flow and the inventory space
• Finding out the potential market for new products with no market validation that you have done the groundwork for, or in other words, where it's about getting the market feedback quickly rather than making profits

Low-price testing can give you sell-through figures that you can use to decide whether it's time to move your production level to normal ​‍​‌‍​‍‌multiples.

How Trend-Demand Signals Change the Pricing Conversation

Without guessing at future demand, you can get a more accurate estimate of how much to charge. As one example, Garmio has used Market Insights to detect when there's a surge in interest in a category but also that there is not much supply competing with that demand. This situation is actually a signal for pricing. It's not just a signal about your sourcing strategy.

Different sellers take demand data to identify what they will produce. However, they also use it as a pricing decision support instrument. The fact that a certain product category is known to be understocked allows you to charge a higher multiple than the standard one since buyers in that shortage don't get many other goods compared to yours. This is an area where you are likely to find great profit margin if you make a pricing decision based on such data.

Common Pricing Mistakes New Brands Make

A few patterns emerge again when you look at pricing strategies of new fashion brands - and silently they all reduce profit.

Underpricing just to be on par with a competitor and not differentiating. Usually, when the two products are very close in terms of materials and design, the seller ends up selling them at the same level as the competitor. The latter's seller is probably selling at just a slight profit; hence, when you mimic, you too end up selling at the margin level of your competitor.

No adjustment of return rate is considered when determining price. Generally, the rates of return in dresses and fitted shirts are higher compared with basics such as t-shirts or accessories. To treat all products at the same multiple is unfair to some of them, as it disregards the fact that different return rates exist while the others get wrongly funded.

No competitor's cost model verification is done while matching prices to others. The larger brands normally enjoy the advantage of low purchasing costs because of the bulk orders, and as a result, they have the ability to set their prices lower and still manage to retain the same profit margin as the smaller ones would.

Deciding on a price at the beginning of the season and sticking to it for the rest of the season is another frequent mistake. Prices should not just be set based on the season; return rates, ad costs, and shipping fee fluctuations may change a lot of them within that period.

Quick-Reference Pricing Checklist

Bear this in mind while pricing a new product:

• Fully understand landed costs, freight charges, customs duties, and packing costs included.
• A 4.5 or 5x multiple is a starting point.
• Garnish your product description with some Market Insights to explain the scarcity of your product against the competitors' offer.
• Filling a genuine gap in the market or limiting stock availability justifies that you charge a higher multiple.
• If a new item in your inventory will not be a major seller and the only purpose for keeping it is to test how the market reacts to a certain feature, then you are justified in setting your price well below the multiple you normally use so that your cost can be recovered quicker.
• Depending on your category, calculate the reserves against returns instead of having a flat rate for your entire product line.
• After the initial sales cycle, do a price recalculation by plugging in the actual numbers about returns and advertisement costs. ​‍​‌‍​‍‌

Frequently Asked Questions

Why 4x and not just a simple markup like 2x or 3x?

The extra multiple isn't profit margin. Covering returns, platform fees, fulfillment, and marketing are all taken into account. 4x is just a reference point, not applicable for every category.

What's included in COGS for this formula?

Landed cost should include unit production cost, freight, duties, and per-unit packaging. Not including freight and duties is a common mistake when calculating COGS.

When should I price above 4x COGS?

Price above 4x when demand data shows the category is rising and under-supplied. Limited-run products are the clearest case for pricing above the baseline.

When should I price below 4x?

When clearance of aging inventory or quickly testing an unvalidated SKU is needed.

Does this pricing math change for dropshipping versus holding inventory?

Yes. Dropshipping has higher return friction, so a margin buffer is more important. Brands holding their own inventory have more flexibility.

How do return rates affect the right multiple for a category?

Fit-dependent categories like dresses see higher returns. This cost should be factored in ahead of time, rather than found out after poor performance.

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