How to sustain profitable growth in the fashion industry

Effective pricing is a key driver of profit margins in the fashion industry. Many well-known fashion companies such as the Dutch McGregor Group, the stock-listed fashion company Steilmann, the online outlet Dress-for-Less and the menswear specialist Pohland filed for insolvency this year, while other well-established companies such as Gerry Weber, Tom Tailor and Hugo Boss admitted they are struggling.

Once again, these examples show that established brands and businesses in the fashion industry are as likely to fail as market newcomers. What is the key takeaway?

Continuously focusing on pricing and profitability is essential for success!

Here are three Dos for players in the fashion industry to sustain profitable growth:

1. Focus on consumers when making decisions

The key questions many companies continually forget to ask themselves is: What do our consumers want? What is he or she looking for? How can we best serve them? In fact, many players don't even know exactly who their consumers are or how they make purchase decisions. Furthermore, they don't understand where they potentially lose consumers along the consumer decision journey. However, understanding the consumer decision journey and the potentially different consumer segments along the way is crucial for the total marketing mix of fashion companies. Topics that need to be addressed include: where to sell products (online, offline, wholesale, retail), which products to sell (assortment mix, price range structure, cross-sell opportunities), what prices to set (segment-specific willingness to pay), and what to communicate when and where (how to inform, inspire and interact with consumers, specifically in the digital world). Integrating the consumer's view into your marketing mix decisions is the most important success factor.

2. Set prices based on consumers' willingness to pay

Too often we still find companies applying a cost-plus approach to pricing. In doing so, they systematically leave margin on the table. To maximize revenue and profit, we advise taking a value-based approach to pricing. Gain a clear understanding of your consumers' value perception and the exact criteria they are willing to pay for by using market research methods that force consumers to make trade-offs with regard to their available budget. Value drivers help to break down a product into different characteristics consumers are willing to pay for, and these results will frequently surprise you. Applying a value-based pricing approach will not only help you to optimize your prices, it will also help you to increase your performance by identifying white spots in your portfolio and provide insights on how to fill them with new product developments that match the required price point ('productize to a price').

3. As a fashion brand: Reflect your pricing strategy in your product mark-ups to retailers and introduce pay-for-performance trade investments

Trade puts continuous pressure on suppliers to improve their margins. Especially in the fashion industry, many brands tend to give away value through product category mark-ups without translating a price strategy into their mark-ups and without expecting something in return from the retailer. The solution to this is twofold: (1) Differentiating mark-ups systematically between categories and even products (good, better, best) enables you to skim value in strong categories while pushing in basic or more competitive categories. Furthermore, a systematic approach to country mark-ups ensures a harmonized approach to global retailers. (2) Implementing a performance-based trade investment structure will incentivize retailers to support your distribution and channel strategy, for instance, through functional (e.g., assortment mix, quality of brand presentation), operational (e.g., early payment, strategic business planning) or volume incentives (e.g., sales volume in euros and net revenue growth).

About the authors:

Nina Scharwenka is Partner in Simon-Kucher & Partners' Consumer Goods & Retail Competence Center. Nina focuses on non-food consumer goods industries, especially the fashion and apparel industry. Ruben de Lange is Senior Consultant with Simon-Kucher in Amsterdam.