Law of Supply & Demand for Apparel
The Law of Supply and Demand is Economics 101. It describes what effect the relationship between the availability (supply) of a particular product and the desire for that product (demand) has on its price. Generally, low supply and high demand increases price and the inverse situation decreases price. But for industries like apparel, several problems have always existed:
- Demand for different styles / designs is uncertain and impossible to predict precisely, which further results in:
- Supply surpluses, which leads to price cuts (lower profit margin) or waste
- Supply shortages, which leads to lost potential revenue
- The market does not find a natural price equilibrium for most clothing brands
- The standard Keystone Markup does not account for all the factors needed to properly price your garments
- Learn how to properly price your apparel HERE
Problems with the Supply Model:
Many companies approach their business from the supply model – obtain supply, then create demand. They design a product, have it manufactured (usually at high quantities to keep cost per unit low) and then try to sell it to their customers. For industries like apparel, the supply model is essentially a guess at what brands think their consumers will want to buy in the future.
Gambling on Supply Levels = Big Markdowns
Designing clothes is like gambling. You can make educated guesses on what designs or styles you think will sell based on past information, but ultimately brands don’t really know. A lot of times, brands make risky bets and are left with piles of unsold merchandise. This merchandise gets discounted once, then twice, before it becomes waste (one garbage truck of clothes is burned or sent to the landfill every second!). According to Coresight Research, US retailers lost $300 billion in revenue due to markdowns in 2018.
Furthermore, 40% of all merchandise in the US is only sold after being discounted. This markdown culture has had a serious psychological effect on consumers. Many consumers have been trained to wait for items to go on sale before they make a purchase. This is where improperly pricing your garments from the beginning can have a significant effect on your profit margins. Learn how to properly price your garments here.
Sometimes a brand will hit the jackpot on a particular garment that sells well or even sells out. But it’s difficult to then further capitalize on a popular style. Brands have to consider how much potential revenue they are missing out on with the item being sold out.
Demand Model vs Supply Model
Unlike the supply model approach, where supply of product is at the core of the process, in a demand model, the customer is at the center of all operations. Smart companies now refine old products, develop new products and forecast based on their customers’ feedback and demand. However, these brands are still left with educated guessing when it comes to supply. Operating on a true demand model means producing the exact number of garments that are ordered without having to guess at all.
Is the On-Demand Model Even Possible?
In the past, operating a demand model, especially in the apparel industry, simply was not possible for two big reasons:
- Minimum order quantities – Most factories require brands to produce a certain number of units in order to keep cost-per-unit low. Also, big factories don’t make any money on small orders. Thus, producing units as they are ordered was never cost effective.
- The “Amazon Effect” – Customers have come to expect their (online) orders in 2 days or less, which is only possible if the item is already made and waiting to be shipped.
Blacksmith has been working on finding a solution to these obstacles to a successful demand model. Over the last year, Blacksmith has been testing our own on-demand factory, right here in Utah. The purpose of this factory is to provide the minimum order quality (MOQ) of 1 in a cost-effective way. This means that brands can test the market on different styles and designs and fulfill each individual order within days. Designs that are not selling can be easily discontinued without having to deal with a pile of unsold merchandise.
Simply put, the demand or on-demand model is the future for the apparel industry, specifically for direct to consumer brands. It takes the guesswork out of manufacturing, allows companies to respond to consumer taste with agility, and not leave potential revenue on the table.
To test our on-demand manufacturing, fill out the following form: Start a New Project
Great post, thanks for sharing this 🙂