# From sourcing to shelf: how a product's journey shapes its margin
A basic cotton T-shirt might cost a retailer around $3 to $4 to buy from a factory in Bangladesh, then sell for $15 to $20 in a store in Chicago. That gap looks enormous. It is not free money. By the time the shirt lands on a folded stack, a long list of costs has quietly eaten into it.
This lesson follows that single shirt from cutting table to shop floor. Along the way you will learn the three numbers every retail operator watches: landed cost, markup, and shrinkage. Master these and you understand where retail margin actually comes from, and where it leaks away.
Our shirt starts life in a garment factory outside Dhaka. The price the retailer negotiates there is the FOB price (Free On Board): the cost of the goods loaded onto a ship at the port of origin. The buyer takes ownership and risk from that point onward.
Say the FOB price is $3.50 per shirt.
That is the sticker price of the product itself. But almost nothing about getting it to Chicago is included yet. This is the single most common mistake new buyers make: they anchor on the factory quote and forget everything downstream.
Landed cost is the total cost to get a unit from the supplier to your warehouse, ready to sell. It bundles the FOB price with every expense along the way.
For our shirt, the additions typically include:
Freight costs are volatile. During the 2021 to 2022 shipping crunch, container rates spiked to many times their normal level, and any retailer who priced on old assumptions got squeezed. Rates have since normalized, but the lesson stands: freight is an estimate, not a constant.
Add these up and our $3.50 shirt might have a landed cost closer to $5.00 to $5.50 per unit. That number, not the FOB price, is the real cost base for every margin calculation that follows.
If you want the official reference for how US import duties are classified, the Harmonized Tariff Schedule is free and searchable.
Now the shirt reaches the retailer's pricing team. They apply a markup: the amount added to cost to set the selling price.
Apparel retailers often target a keystone markup, an old rule of thumb meaning double the cost. A landed cost of $5 becomes a $10 price. Many retailers push higher, aiming for an initial markup (IMU) well above keystone to leave room for the discounts they know are coming.
Here is the key distinction most people miss:
They are not the same number. A shirt with a $5 cost sold at $15 has a 200 percent markup but a 67 percent gross margingross marginGross margin is the share of revenue left after subtracting the direct cost of producing goods or services, expressed as a percentage of revenue.Voir la définition complète → ((15 - 5) / 15). Retail teams speak in margin because that is what flows to the bottom line.
Retailers rarely sell the full assortment at full price. Some units sell at $20, some at a $12 promotion, and the leftovers get marked down to clear. The average price a retailer actually collects is the realized price or net selling price, and it is usually below the ticket.
This is why initial markup is set high. It is a buffer. The gap between the price on the tag and the price at the register is where a lot of margin quietly disappears.
Even after a smart markup, some shirts never generate revenue at all. This loss is called shrinkage: the difference between the inventory a retailer's records say it has and what it actually has on the shelf.
Shrinkage comes from several sources:
Industry surveys, such as the National Retail Federation's annual security reports, have estimated total US retail shrink at well over $100 billion in recent years, with shrink rates commonly cited around 1.5 percent of sales. Treat these as estimates: methods and definitions vary.
That percentage sounds small until you remember it comes straight off the top. If a store runs a 3 percent net profit margin, a 1.5 percent shrink rate is not a rounding error. It is half of profit vanishing.
For our shirt, shrinkage means the retailer must earn enough margin on the shirts that do sell to cover the ones that walk out the door, get damaged, or never showed up.
Let's trace the economics end to end with illustrative numbers:
| Stage | Amount |
|---|---|
| FOB price (factory) | $3.50 |
| + Freight, duty, insurance, handling | ~$1.75 |
| Landed cost | ~$5.25 |
| Ticket price (initial markup) | $18.00 |
| Realized price after promos/markdowns | ~$14.00 |
| Gross marginGross marginGross margin is the share of revenue left after subtracting the direct cost of producing goods or services, expressed as a percentage of revenue.Voir la définition complète → per sold unit | ~$8.75 |
Now apply the losses that never touch a register:
After all of that, the retailer's net margin on a basic apparel item is often only a few percent. The $3.50-to-$18.00 gap that looked like a fortune is mostly consumed getting the shirt to the shelf and keeping the lights on.
Understanding this chain changes how operators act:
Vérification des acquis
1. What is the key distinction between the FOB price and the landed cost of a product?
2. Why does the lesson describe anchoring on the factory quote as the most common mistake for new buyers?
3. A buyer notices that ocean container rates have surged far above normal. What is the most direct implication for their product economics?
4. Select ALL correct answers about what is included when building a product's landed cost.
Sélectionnez toutes les réponses correctes.
5. Select ALL correct answers about why the gap between a T-shirt's factory cost and its shelf price is not pure profit.
Sélectionnez toutes les réponses correctes.
No single lever wins. Slashing landed cost by chasing the lowest factory quote can raise defect rates and shrinkage from damage. Pushing markup too high invites deeper markdowns when nothing sells at full price. The skill is balancing the whole chain.
This is why retail is often described as a game of inches. Gross margins can look healthy while net margins stay thin, because so many small costs sit between the shelf price and actual profit. The operators who win are the ones who see the entire journey, from the factory gate in Dhaka to the folded stack in Chicago, as one connected cost story.