Starting with Boutique Math

Math and Fashion.. Oh what a match made in heaven.  Haha, jokes aside there are some basic math concepts that are fundamental to running your boutique.  Today let us look at 2 concepts, Margin and Markup.  Understanding these numbers and knowing how to calculate them will give you basic tools to evaluate the health of your business. 

First a couple definitions so we are on the same page:

Wholesale Cost – The price you pay the wholesale vendor.

Retail Price – The price your customers are paying you for the item.

Okay, on to the important stuff:

Markup is the easier concept to intuitively understand IMO.  Markup is simply the multiple of the Wholesale Cost that you are selling items.  For example, if you by shirts at a Wholesale Cost of $15 and your mark up is 2x then that means you are selling at a Retail Price of $30.  This is double or 2 times the Wholesale Cost. At a 3x markup you would be selling the product for $45.  This is triple the Wholesale Cost or 3x markup.

Here are example Retail prices for a $15 wholesale cost at different markups:

Okay, now that we understand markup we can dive into Margin.  Once you understand how they are related my hope is that it will become much more clear what various margins mean for your business. 

Here comes a math formula. Try to stay calm, we will walk this together. If you are starting to hyperventilate, grab a brown paper bag and take some deep breathes. We can do this together, I promise!

Margin = 1-(1/Markup)

Okay, let us look at this with some examples to make this clearer.

If your markup is 2x the formula would be 1-(1/2) = .5 which is 50% margin

If your markup is 3x then your margin is 1-(1/3) = 2/3 which is 66.7% margin.

My point is that margin and markup are directly related.  For each markup there is a corresponding margin.  Here are some examples:

An important thing to notice is that as you get higher, the amount of markup needed for each margin % becomes greater.  To increase your margin from 33% to 50% only takes changing your markup from 1.5x to 2x.  To increase your margin from 80% to 90% it takes increasing mark up from 5x all the way to 10x.  To illustrate this with an extreme example, let us say you are marking up 50x, which is 1-(1/50) = .98 or 98% margin.  To get just 1 additional margin % it would take going from 50x markup to 100x markup! (1-(1/100) = .99 or 99% margin.)

My point here is that as you slide up the scale each margin % takes more markup to achieve.  5% margin increase is a lot easier to achieve in the 40-50% range than if you have margins of 60-70%.

Now, we can pull it all together and look at markup and margin together:

Now that we understand markup, margin, and how they are related to each other it is important to talk about the pitfalls of fixating only on these numbers.  Margin can be a bit misleading because it does not account for unsold items. So be careful only fixating on margin. You need a strong sell-through rate as well to make money.  Check out another of my blog posts to learn more about managing and increasing your sell-through rate, Ignoring This Could Destroy Your Boutique.

Based on our personal experience and the consensus I have found across 1000s of posts on markup and margin here are some general rules of thumb to shoot for:

If you bring your items all in house, target 3x or 67% margin. It can be less if you are using drop shippers because you do not have nearly as much risk of left-over inventory and a lot of the expenses are built in for fulfillment. With a drop shipper 2x is normal but ones that target 2.1-2.25x are out there. To find a drop shipper that targets 2.1-2.25x you are in the right place.  Check out all that Boutique Tree has to offer and schedule an intro call with Amanda to learn how Boutique Tree services can help your boutique.

Disclaimer:  This blog is for informational purposes only.  Nothing herein will be construed as a promise or guarantee of results.  All businesses are different and individual results will vary.  I am not a business coach, accountant or financial advisor.  If you are seeking a professional opinion on how you should proceed to achieve your personal goals, please consult a professional.