This article aims to demystify the concept of 'factor' in the retail industry, its significance, and how to calculate it. As a fashion buyer, you may often be asked by a supplier about your 'factor'. This term, while simple, is crucial to understand for anyone involved in retail or accounting.
In essence, a 'factor' is another way of expressing a margin or a mark-up. For those unfamiliar with retail mathematics or accounting, a margin is the portion of your final selling price that constitutes profit. Mathematically, the gross margin is calculated as the selling price minus the cost of goods sold plus annual sales return. It's important to note that gross margin is not the same as net profit, which deducts all expenses, such as office supplies or travel expenses.
A mark-up, on the other hand, is a percentage added to the cost price to determine the selling price. For instance, if you purchase a dress at a wholesale price of $25 and sell it for $50, your mark-up is 100%. Mathematically, this is expressed as ($50 - $25)/$25 = 1.00 or 100%.
Using the same example, where the selling price is $50 and the cost to buy the dress from the supplier is $25, the factor is simply 2.00. This is calculated by dividing the selling price by the cost of the product ($50/$25 = 2.00). It's a straightforward calculation that doesn't require an accounting or finance degree.
In practice, you'll likely use a factor to determine the selling price. The suggested industry best practice is to use a factor of 2.5. So, using our previous example, we would multiply the cost of our dress, $25, by our factor, 2.5, to get $62.50. This is equivalent to marking up our product by 150%.
However, it's important not to use 2.5 as a default. Your factor should be determined based on various factors, including your marketing mix, strategic position in the industry, and whether customers will perceive a 2.5 factor as reasonable for your product.
It's a common practice not to price your products strictly according to your factor, but rather what you believe your customers are willing to pay for the product. In some cases, the factor may be less than 2.5 or more than 2.5. As retail becomes increasingly customer-centric, it's crucial for the customer to influence your selling price rather than a simple formula. Therefore, you should always work within a range of factors.
Sales reps will ask for your factor to determine if your store aligns with their marketing mix. If your factor is too low, they may perceive that you are devaluing their brand. If your factor is too high, they may think you won't sell enough units. A safe response is to say your factor ranges between 2.2 to 2.8, depending on the product.
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