You have taken the plunge as a designer or have set up a business in the fashion industry. It is not easy and structure is important to give your business a fighting chance to make a profit. As there are textbooks on the subject of business models, this note will act as in introduction and provide some necessary pointers for you to develop further.
Some key things to ask yourself before setting out a business model:
- What is the purpose of my business?
- What sort of products do I produce/sell?
- Who is my market?
- Profit margins to be achieved?
A business model sets out how your business generates revenue. Or as simply put by Michael Lewis (author – The Big Short) “how you planned to make money”.
Before deciding on your model, you need to take the questions proposed in the introduction a step further. By setting out what your business is and what you want to achieve, you can start to plan out how to make money, or more importantly profit. There is no point earning £1,000 if it cost you £1,500 to produce, doesn’t sound like good business, now, does it? Profit is essential.
Underlying any model is your costing and pricing strategy.
Costing – Your need to know how much it costs to run your business. The cost is not just the cost of materials, you also need to consider all overheads- rent, rates, heating, office costs, staffing costs, packaging, transport, basically all the costs required to get your product in the hands of your customer.
To increase your chances of profit always manage your costs and minimise without compromising the quality you want to achieve.
Pricing- should only be determined once you know the entire cost of your product/service and this ties to the type of model you choose.
Wholesale price – if you are selling through a distributor, you need to consider the margin you want to achieve. The industry standard for designers is 40-50% of the cost.
Retail price- You also have to remember if selling via a retailer they also need to take a margin to cover their overheads and a profit, so this can impact on the wholesale price if you have to take a cut to make more attractive for a retailer to stock.
You may decide to have a loss leader- an item of clothing that sells at a much smaller margin in order to have an entry-level product for consumers. It might even be sold below cost. In this case the cost will have to allocated to another product.
Elasticity- not the stuff of waistband, but instead, how sensitive customers are to pricing. In general, if a customer can spend £5,000 for a handbag they are far less sensitive than a customer who will only spend £50. Important to consider when targeting certain segment and deciding on your model.
There are a variety of models, some of which are not really applicable for small to medium fashion-related businesses, so have been ignored. E.g. Franchising more applicable if you are a large retailer.
Your business model does not have to be static or linear, you may decide to have a number of models to suit your various ranges. For example, you may have a premium line e.g. Armani and add another line like a cheap chic range e.g. Armani Jeans.
You may feel you have grown enough brand awareness and trust to partner up with the high street to licence your brand, e.g. a range of homeware, John Rocha with Debenhams. Versace with H&M.
Your business will evolve over time and you may have to change models. Tastes change, competition happens, your materials change etc. So you will have to make sure your model is returning the profit you require.