Target Costing Formula
How apparel designers and product developers calculate target cost from retail price and target IMU — before fabric and factory decisions lock in.
What Target Costing measures
Target costing is the landed-cost ceiling a style can carry before it breaks the margin plan. It is derived from the retail price and the category's target IMU — the designer's cost brief, in a single number.
Target Cost = Retail Price × (1 − Target IMU %)This is the inverse of IMU. Instead of asking "what margin did this style land at?" after the fact, target costing asks "what is the highest cost the sourcing team can come back with?" before the spec sheet is issued.
Worked apparel example
A brand prices cotton tees at $88 retail with a 62% target IMU.
Target Cost = $88 × (1 − 0.62) = $33.44
Sourcing cannot exceed $33.44 landed — FOB plus freight, duty, and inbound — without forcing a retail-price change or a margin compromise. That single number drives fabric selection, factory choice, and construction spec.
Your landed cost ceiling is $33. Brief sourcing to this number before fabric and factory decisions lock in.
Failure modes we see
Design briefs without cost ceilings. Designers specify fabric, trim, and construction; sourcing comes back with a landed cost; merchandising discovers the style IMU will not meet category target. By then the material is committed and the retail price gets pushed up to recover — which breaks the brand's pricing architecture.
- FOB-only target. Designer targets FOB of $28, ignoring freight + duty + inbound. Landed arrives at $34. IMU compresses.
- Single target across channels. One cost target for a style that ships both DTC and wholesale forces the lower margin on both.
How RetailNorthstar handles target costing
Target cost is attached to every line-plan row from concept. As sourcing posts landed cost estimates, the system flags styles exceeding the target before materials are committed. Designers see the margin impact of a fabric substitution in real time.
Related formulas
- Initial Markup — the margin target that drives target cost
- Cost-to-Ticket Ratio — the inverse view, useful in sourcing conversations
- Gross Margin % — the downstream P&L result
See how RetailNorthstar links target cost, landed cost, and IMU live across the line plan.
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