How a price is built: from the factory's cost to the shop shelf

A price is not one number set once; it is built up, hand-off by hand-off

This lesson is for anyone who wants to understand why a T-shirt that costs a factory about USD 3.00 to make can sell for several times that by the time it reaches a customer, whether the buyer is an overseas brand or a domestic one buying for its own shops. It is for a merchandiser who has to explain a price to a buyer, a factory owner setting a quote, or a student learning how the trade works. When a merchandiser cannot explain how a price is built, two things go wrong: a buyer who thinks the factory is overcharging pushes for a cut it should not get, and a factory that does not understand the buyer's own costs agrees to a price that leaves it no profit. This lesson walks one T-shirt's price up the chain, from Delta Garments' own cost to Cedar & Co.'s shop shelf, stage by stage, and gives you the two words — margin and markup — that people in this trade often confuse.

What you need, and what this lesson does not cover

You need: the ten stages and the shapes an order can take from lesson 1.1. You do not need any accounting background; every calculation in this lesson is shown in full.

By the end of this lesson you can:

• explain the rule that makes a price rise at every hand-off in the chain;
• tell the difference between margin (profit divided by selling price) and markup (profit divided by cost), and calculate both from the same numbers;
• walk Cedar & Co.'s order from Delta Garments' ex-factory cost build-up to its own delivered cost and shop price, with every calculable step shown in full;
• explain why a buyer's delivered cost is higher than the ex-factory price it pays the factory;
• use the method to build or check a price at any stage of any order.

Not covered here: who owns the goods at each stage (lesson 1.2), who carries the risk when something goes wrong (lesson 1.4), and how the 16-week timeline behind an order like this is planned (lesson 1.5).

Words you will meet in this lesson

Every company that sells to the next one adds its own cost and its own profit on top of what it paid

A T-shirt's price does not appear once, at the shop. It is built up in stages, one hand-off at a time. Every company in the chain that sells to the next one first pays for what it received, then adds its own real costs, then adds its own profit, and only then sets its selling price. The price rises at every hand-off. How much it rises depends on that company's own margin, not on the product itself — two companies selling the very same T-shirt can charge different prices because they run their businesses differently, not because the T-shirt is different.

Margin and markup look different from the same profit; the chain can be short or long; the ex-factory price is never the buyer's real cost

The rule above holds everywhere, but four things about how a price rises change from one order, one company and one market to the next.

Cedar & Co.'s domestic order: priced from Delta Garments' cost to Cedar & Co.'s own shop shelf

We follow a domestic order this time: Delta Garments makes basic cotton T-shirts for Cedar & Co., a local brand with 12 shops that buys to its own sales forecast (Make to Stock), on 60-day open account, with local delivery inside the country. Because Cedar & Co. buys directly from the factory and sells directly in its own shops, there is no separate wholesaler standing in the middle — only two hand-offs matter here, not four.

Delta Garments' ex-factory price is itself built from five line items — fabric, trims, making (cutting and sewing), overhead, and Delta Garments' own profit — and it is worth seeing that build-up before looking at what Cedar & Co. adds above it.

From ex-factory price to delivered cost to shop price, and Delta Garments' own margin

Before climbing the chain, look inside Delta Garments' own ex-factory price. The USD 3.20 is not one number; it is five parts sitting side by side.

Now look at the gap above the factory. Unlike an order shipped overseas, Cedar & Co. does not pay freight, insurance or import duty: its own delivery cost is the cost of moving the goods, inside the country, from Delta Garments' factory to Cedar & Co.'s own warehouse. Delta Garments does not see or share in this cost — it is Cedar & Co.'s own added cost, just as freight and duty would be for an importer — but it is normally a smaller add-on than international freight and duty, because the goods never cross a border or clear customs.

Because Cedar & Co. sells in its own 12 shops rather than through a separate wholesaler, there is only one further step above the delivered cost, not two: from Cedar & Co.'s delivered cost straight to its own shop price. That single markup has to cover everything a retailer normally pays for — rent across 12 shops, staff, marketing, stock that does not sell — plus Cedar & Co.'s own profit as a retailer. No separate wholesaler's margin sits in between, which is exactly the "fewer companies in the chain" shape from the table above.

Finally, look at Delta Garments' own margin, using the same profit figure two different ways.

Notice that Delta Garments' profit of USD 0.26 is a small share, 8.1%, of the price it sells at — but it is a bigger share of what it paid to make the T-shirt, because the ex-factory price of 3.20 includes the profit itself, not just the cost before profit (fabric, trims, making and overhead add up to 2.94, so the same 0.26 profit is 0.26 ÷ 2.94, about 8.8% markup on cost). Margin and markup are never equal above zero profit; margin is always the smaller number, because the selling price it divides into is always bigger than the cost.

Four steps to build or check a price at any stage

Whether you are a factory setting a quote, a buyer checking a supplier's price, or a brand setting its own shop price, the same four steps apply at every stage of the chain:

1. Start from what you paid to get the goods to this point. For a factory, that is fabric and trims bought in. For a buyer, that is the ex-factory price it paid the factory. Never start from zero.
2. Add your own real costs, not just profit. Delivery, storage, staff time, waste, financing while you wait to be paid — all of these are real costs before any profit is added.
3. Decide your margin or markup, and calculate the price. Be clear, with whoever you are talking to, about which one you mean.
4. Sense-check the result against what the market or the buyer will actually pay. A price built correctly from costs can still be too high for the market to accept; if so, go back and look for a cost to reduce, not a step to skip.

Confusing margin and markup, and treating the ex-factory price as the buyer's whole cost

A common mistake in this trade is confusing margin and markup when talking to someone else in the chain. Quoting "30% margin" when you actually mean 30% markup understates the real profit, because markup on the same profit is always the larger-looking percentage; the reverse mistake, quoting a markup figure as if it were margin, overstates it. Either way, the two sides end up planning around different numbers, and the mismatch surfaces later as a mispriced order or an argument about who agreed to what.

A second, smaller trap is assuming the ex-factory price is the buyer's real cost, and forgetting to add delivery when comparing suppliers. A factory quoting a lower ex-factory price is not automatically the cheaper choice once delivered cost is worked out; a supplier further away, even inside the same country, can end up costing the buyer more in delivery even with a lower ex-factory price.

• The price rises at every hand-off. If you cannot see a company's own cost and profit inside a price, ask what they are.
• Margin (profit ÷ selling price) is always smaller than markup (profit ÷ cost) on the same profit. They are never equal above zero profit.
• A buyer's delivered cost, not the ex-factory price, is its true cost: delivery is added after the factory's price, whether that is freight and duty for an import or local transport for a domestic order.
• Fewer companies in the chain usually means a lower shop price, or more margin kept by the brand, for the same factory cost.
• Some retailers use a fixed markup multiple on every product; others price product by product. Do not assume one tells you the other.

Cedar & Co.'s owner emails Delta Garments questioning its ex-factory price against a cheaper competing quote

Omar, the owner of Cedar & Co., sends Delta Garments' merchandiser a costing query by email: "Your ex-factory price of $3.20 seems high — another supplier quoted $3.05 for the same spec. Please justify your price line by line." Attached to the email is nothing from the competitor, only the question. The merchandiser opens Delta Garments' own costing sheet to answer it.

You are the merchandiser at Delta Garments. How should you respond: cut the price to match the competitor's $3.05, or something else? Decide before opening the answer.

Order shape sheet: add a price at each stage, and fill this in for every new order

Add one row to the Order shape sheet from lesson 1.1: the price at each stage of the chain, from the factory's cost up to the shop shelf. Fill it from the actual costing sheet and the buyer's own pricing, not from memory.

Download the Order Shape sheet (Excel)

Lesson 1.4: Who carries the risk?

You now know how the price climbs from the factory's cost to the shop shelf, stage by stage. The next lesson looks at a different question: when something goes wrong along the chain, who carries the loss, and why that is not always the same company that made the mistake. Back to the course map