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Why Ethical Fashion Start-Ups Should Avoid Cost-Based Pricing

Is your ethical fashion company setting prices based on cost?

Since I’ve started working in the ethical fashion industry, I’ve had a few start-ups tell me “Your commission is too high. My margins are already very low.

On the other hand, I’ve also had a significant number of brands tell me that they want to work with me, and never complained about the commission.

In many cases, those two types of companies are even selling the same type of products. But do you know what is the difference between them?

Pricing models.

Cost-Based Pricing Dilutes Your Impact

When I ask those objecting brands, “why are your margins so low?” They usually answer something to the effect of “I can’t raise my prices any higher otherwise my product is not competitive“.

For me, that is mistake #1: trying to compete in price.

The whole premise of Ethical Fashion is that there is value added to the product by using ethical production processes and supply chains, sustainable materials, etc. As I explained in my other post, there is a large segment of consumers that is clamouring for these values to be added to their products. I firmly believe that the market for ethical fashion is there. But you need to target it.

That is (in my understanding) the problem with ethical fashion brands that do cost-based pricing: they are trying to compete with fast fashion. And that is simply impossible. When you target the same consumers that fast fashion does, you will always have to price your products based on cost, because that is what fast fashion is doing.

Yes, I understand that the social impact cannot be what differentiates an ethical brand from the competition (be them ethical or not). But that does not mean that price has to be their differentiator. When a brand is competing on price, they are discounting all the value that they created through their social impact.

At the most extreme, their social impact becomes transparent to the consumer (“because consumers only care about price”) and the real value of the brand’s impact is lost.

Cost-Based Pricing Leaves Money on The Table

As mentioned above, when an ethical fashion brand does cost-based pricing, they are not marketing their real value. They are not really showing consumers the value of their ethical business (the real impact they are making). And by doing that, they are leaving a lot of money on the table (as the this insightful article explains).

Being an ethical consumer myself, I have been surprised many times at how affordable some of these products are – which means I was willing to pay way, way more than what they were asking. The value I attributed to their products was much higher than the value attributed by the brand. They missed out on a great opportunity to make much higher profits (which could have been used to grow the business, make a bigger impact, etc).

And I believe many ethically-minded consumers think like me. They are well informed. They understand that not using sweatshop workers costs more money, and they understand that this has to be added to the product’s final cost. They also understand that more careful production processes result in higher quality garments.

What is the solution?

The answer is value-based pricing.

As I mentioned in a previous blog post, my research shows that there is a strong demand for value-based priced goods. The ethical fashion market keeps growing, and ethically-minded customers want to buy products based on their impact and quality (their value added), not their cost.

Like I said before, of course competing on value (instead of competing on price) doesn’t mean simply relying on the value of your social impact to price your merchandise. Your product has to be unique and provide value to your customer regardless of its social and ethical attributes. That uniqueness is what will win your customers over the competition (be them ethical or not).

The social value of your product should also be a part of your pricing and marketing. But you can’t count on it alone as the value of your product.

Value-Based Pricing Is Hard But Pays Off

The problem is that value-based pricing (and marketing) is much harder than cost-based pricing (and marketing). It is much easier to research how much the competition is charging for their products (and then just charge a bit less) than it is to try and find out the value of your products and their impact to a consumer.

But as experienced business advisors have put it: you already decided to start a business, which is a pretty hard thing to do. Why not make the extra effort to make the business more competitive and profitable (so that it can make an even bigger impact in the world)?

Value-based pricing might be more challenging, but it will help your business in the long term. Taking the time now to place your product in the right market will benefit your company (and the people whose lives you are trying to change) for many years ahead. You will stay competitive and weather economic storms because your product has a solid base of value.

I hope this has helped you (at least) think of how you price your products and see a different option (if you are doing cost-based pricing). I will write another post explaining more about value-based pricing (and marketing) and how to set it effectively.

Are you interested in getting into the ethical fashion market? Are you already in it but want to grow your sales without hiring a sales person? Are you looking for new ethical products for your store or distributorship?

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