Most retailers who think they're making 60% on a dress are actually making somewhere nearer 45%. The gap isn't dishonesty or bad maths. It comes from three things that get left out of the sum: VAT, the real cost of getting stock onto the rail, and the pieces that end up sold on discount.
This guide walks through the calculation the way an experienced buyer does it, so the number you work from is the number that actually lands in your bank account.
Margin and markup are two different numbers
This is where most pricing confusion starts. Both figures use the same inputs, but they answer different questions.
Markup tells you how much you've added on top of what you paid. Profit margin tells you how much of the selling price you get to keep.
• Markup % = (selling price - cost price) / cost price x 100
• Profit margin % = (selling price - cost price) / selling price x 100
Say you buy a knit top at £10 and sell it for £25. You've added £15. That's a 150% markup, but a 60% margin. Same top, same £15 of gross profit, two very different looking percentages.
Always be clear which one you're talking about, especially when comparing notes with other retailers or reading supplier advice. A "100% markup" sounds generous. It's only a 50% margin.
Here's how the common retail multipliers translate:
|
Selling price as a multiple of cost |
Markup |
Profit margin |
|
2.0x (keystone) |
100% |
50.0% |
|
2.2x |
120% |
54.5% |
|
2.5x |
150% |
60.0% |
|
2.8x |
180% |
64.3% |
|
3.0x |
200% |
66.7% |
Take VAT out before you calculate anything
If you're VAT registered, the price on your ticket includes 20% VAT that belongs to HMRC, not to you. Your margin has to be worked out on the net figure.
Take a dress you buy at £12 plus VAT and sell at £36. It's tempting to call that 3x and a 66.7% margin. It isn't. Strip out the VAT and your net selling price is £30. Your real margin is (£30 - £12) / £30 = 60%.
The rule is simple: divide your VAT-inclusive ticket price by 1.2, then run your margin sum on what's left.
If you're not VAT registered (the UK threshold is £90,000 of taxable turnover), the picture flips. You keep the whole ticket price, but you can't reclaim the VAT on your wholesale invoices either. So that £12 dress actually costs you £14.40, and that's the cost you should use.
Work from landed cost, not the price list
The wholesale price is only the starting point. Your true cost per unit is everything it took to get that piece ready to sell. Buyers call this landed cost.
For a typical independent retailer, that includes:
• the wholesale price per unit
• delivery charges, split across the units in the order
• card and payment processing fees on the eventual sale (usually 1.5% to 3%)
• packaging, swing tags and bags
• for online sellers, the cost of returns and outbound postage you absorb
Here's a worked example for an online boutique buying 30 tops at £9 each:
|
Cost line |
Per unit |
|
Wholesale price |
£9.00 |
|
Inbound delivery (£15 across 30 units) |
£0.50 |
|
Packaging and tag |
£0.40 |
|
Payment fees (2% of £22.50 net sale) |
£0.45 |
|
Return allowance (postage and repackaging) |
£0.60 |
|
Landed cost |
£10.95 |
At a £27 ticket (£22.50 net of VAT), the headline margin on the £9 price is 60%. On the landed cost of £10.95, it's 51.3%. That's nearly nine points gone before you've had a single slow week.
Initial margin versus achieved margin
The margin you set when you price the stock is your initial margin. The margin you actually make once the season is over is your achieved margin. The difference is markdowns.
Very few ranges sell through completely at full price. Let's go back to the £12 dress with a £30 net selling price. You buy 20.
• 14 sell at full price: 14 x £30 = £420
• 6 go in the sale at half price: 6 x £15 = £90
• Total net sales: £510 against a stock cost of £240
• Achieved margin: (£510 - £240) / £510 = 52.9%
You priced for 60% and made 52.9%. That's normal, and it's why experienced buyers set their initial margin higher than the figure they need to survive on. If your business needs 50% achieved to cover rent, wages and marketing, you can't price at 50% and hope.
Track your full-price sell-through on every style. A retailer who sells 80% of a line at full price will out-earn one who uses a higher markup but clears 40% in the sale.
What is a good profit margin for a clothing retailer?
There's no single right answer, but there are sensible ranges for independent womenswear:
• Initial margin: most independent boutiques price for around 55% to 65% net of VAT, which is roughly 2.2x to 2.8x cost
• Achieved margin: after markdowns, 45% to 55% is a healthy result for a small shop
• Online-only sellers: usually need to sit at the top end, because returns, postage and ad spend eat further into every sale
Basics and fast-selling repeat lines can run a little lower because they sell quickly and rarely need discounting. Trend pieces and occasionwear should carry more, because a proportion of them will end up marked down.
Don't judge a product on its percentage alone
Margin percentage matters, but it isn't the whole story. Two other numbers decide whether a product is actually worth stocking.
Cash profit per unit. A £6 vest sold at 2.8x makes you £10.80 of gross profit per sale. A £20 coat at 2.4x makes £28. The coat has the lower percentage and is far more valuable per sale.
Speed of sale. A line that sells out in three weeks at 55% will earn more over a season than one that sits for three months at 65%, because you can reinvest the cash and buy again. Buyers measure this with GMROI (gross margin return on inventory investment): gross profit divided by the average cost value of stock held. A GMROI above 2 means every pound tied up in that stock is returning more than two pounds of gross profit over the period.
A quick margin checklist before you place an order
• Is your cost the landed cost, not just the price on the line sheet?
• Have you worked out the selling price net of VAT?
• Does the initial margin leave room for 20% to 30% of units to be marked down?
• Will the price feel right to your customer, not just to your spreadsheet?
If the numbers only work when everything sells at full price, the numbers don't work.
FAQs