How can I offer $140 shirt for only $39.50?

I received an Ad insert for Charles Tyrwhitt shirts with Saturday’s WSJ. Yes, as a matter of fact I still get the real paper newspaper, but we digress.

The Ad offered all kinds of dress shirts for a single price of $39.50 (normally $140 to $160). The Ad, speaking in the voice of the shirt company founder, then poses the question you see in the post title and answers it for us.

As expected the answer starts with cost, “because our buyers are great, we deal direct and no middlemen”

You can see at play some of the behavioral pricing tactics – price anchoring  with stated high price and signaling great value with marked down prices. Besides the  tactics the explanation does not answer the original question. In fact that is not the right question at all.

If the cost argument is accurate, then the question a customer should ask is,

How is it a shirt that likely costs less than $39.50 to make is normally priced at $140-$160?

As a regular reader of this blog and a fellow practitioner of value based pricing you may be tempted to answer this pricing question  with,

“because there exist a customer segment that is willing to pay that price for whatever job they are hiring the shirt for”

Unfortunately it is not the case with apparel pricing.  Pricing is not as sophisticated as you believe it is. It is steadfastly stuck in the land of cost based pricing with standard markups.

The data for this comes from an article in WSJ that analyzes pricing of $155 polo shirts. Almost the same, down to the sub-category level and price point.

The article does a marvelous job of marginal cost analysis. Most articles on cost analysis commit cost allocation error – allocating a share of all fixed costs to every unit made. This analysis gives us a true marginal cost of $29.57 for a polo shirt. We won’t be far off to assume that Tyrwhitt shirts have the same cost structure.

Then we see how they arrive at $155 price tag,

Using standard industry markups, the MacLanes set the wholesale price for the women’s polo at $65 and the retail price at $155. (Retailers in the U.S. mark up wholesale prices of ready-to-wear by roughly 2.2 to 2.5 times.)

Here are your answers for both the original wrong question and the right question.

How can a producer offer a $140 shirt for only $39.50?
Because it likely  costs them less than $39.50 to make one so they can still make  profit per unit and the $140 price is based on wholesale and retail markups.

How is it a shirt that likely costs less than $39.50 to make is normally priced at $140-$160?
Because of the antiquated way of setting wholesale and retail prices of apparels.

It is one thing to charge four  or forty times the marginal cost based on customer willingness to pay (Apple) but to charge four times the marginal cost based on standard markups  is …