What an Option Costs: Pricing the Add Decision at Line Review

What an option costs

That distinction is the whole page. At line review the add decision is almost always discussed in expected terms: this colorway will sell, so it will pay for itself. The expected units are a forecast and the committed units are a fact, and they are settled at different moments by different people. The commitment is settled the moment the option enters the buy, at a quantity that somebody else — a mill, a factory, a filling line, a freight forwarder — has already decided the minimum of.

The practical consequence is that an option cannot be priced by asking what it will sell. It has to be priced by asking what it cannot be smaller than. That number is called minimum viable depth, and it is the input almost nobody brings to the meeting.

The lane split: counting the unit and pricing it are different jobs

Two questions get run together at line review and they belong to different disciplines. How many options a range should carry — and what counts as one option in the first place — is a range-sizing question. It is answered against a receipt budget, a price architecture and a definition of the counting unit, and it is the job of the option count planner on line-board.com, which defines and counts the unit.

This guide does not size a range. It prices one marginal add against the range you already have. The two are complements and they answer in different currencies: the counting lane answers in options, this lane answers in committed dollars. If you do not yet know what one option is in your business, start in the counting lane; if you know the count and are being asked to go one over it, you are in the right place here.

Minimum viable depth is not a preference

The most common way an add decision goes wrong is that somebody proposes a small quantity to make the option affordable. Small quantities are frequently not orderable, and the ones that are orderable are frequently not sellable. There are four constraints, they are owned by four different people, and the one that binds is the highest, not the average and not the sum.

Two of these — the size run and the material minimum — are floors: they set a number the buy must reach. The other two — case-pack rounding and MOQ — are operators: they take whichever floor is higher and push it up to the next legal quantity. That ordering matters, because applying them in the wrong sequence produces a number that is either unorderable or accidentally large.

Finding the binding constraint takes one pass and four questions, asked of the people who own each number rather than inferred from the last PO. The answer changes by vendor, by fabrication and by season, which is why a brand-wide rule of thumb for minimum depth is nearly always wrong somewhere expensive. A knit in a stock-service yarn and a piece-dyed woven in a mill-minimum fabric sit in the same line plan and have floors that differ by a large multiple.

Worked example: one colorway on an existing style

Everything below is an illustrative input, not a benchmark. The figures are chosen because they divide cleanly and because they show the mechanism. They are not drawn from any brand, and they should not be transferred to a plan.

The situation: a woven shirt already in the line in two colorways. Design proposes a third. The style is developed, the pattern exists, the vendor is set. This is the cheapest kind of add there is.

Illustrative inputs: eight sizes in the run; landed cost 18 dollars per unit; full retail 72 dollars, which is a 75 percent initial markup; the thinnest size on the curve is 5 percent of the run; the planner's rule is that no size may be bought below 6 units; the fabric is piece-dyed with a 300-metre mill minimum per dye lot at 2.0 metres per garment; the vendor ships in 24-unit size-ratio packs; the vendor's MOQ is 250 units per colorway.

Now compute the floor four times, once per constraint, as if each were the only one.

The same colorway costs 2,160 dollars or 4,752 dollars depending on which constraint you happen to be standing next to. That is a factor of 2.2 on an option that looks identical in the line board, on the same style, at the same vendor, in the same season. Nothing about the design changed. The number changed because a different person's minimum bound.

Run the four in their proper order and you get the real answer. The floors are the size run and the fabric minimum: the higher is 150 units. The operators then apply in sequence: MOQ raises 150 to 250, and case-pack rounding raises 250 to 264. Minimum viable depth is 264 units and the floor cost is 4,752 dollars. The size-run constraint, which is the one merchants usually cite, never binds here at all — it is 144 units below the answer.

That is the first useful output of the exercise: on this option, the binding constraint is commercial rather than merchandising, so arguing about the size curve to make the option cheaper cannot work.

The costs that do not scale

The 4,752 dollars is inventory. It converts back into cash if the option sells. The next set of costs does not: they are incurred once, at the moment the option is added, and they are the same whether the buy is 120 units or 1,200.

The amounts in the table below are illustrative inputs, not benchmarks. They are not what development or photography costs anywhere in particular, and they are not drawn from any brand. What a sample set and a shoot actually cost is a number each brand already holds in a budget; the point of the table is the arithmetic that follows once those numbers are put next to a minimum-viable buy, which is a step that rarely happens.

On a minimum-viable buy, the non-scaling costs are a third again on top of the inventory commitment. Spread across a 1,200-unit buy at the same landed cost the same 1,650 dollars is 7.6 percent, which is the point: these costs do not make large options expensive, they make small options expensive. The option that most needs to be cheap is the one they hit hardest.

The fourth non-scaling cost has no invoice, which is why it is left out most often.

Forecast dilution. Adding a variant does not create demand, it splits it. Suppose the style is forecast at 900 units across its colorways. Over two colorways each cell carries 450 units; over three, each carries 300. The forecast for each colorway is now thinner, and the absolute error does not shrink proportionally — a 60-unit miss is 13 percent of a 450-unit cell and 20 percent of a 300-unit cell. The consequence is that each variant's buffer has to be a larger share of its own buy to give the same protection, so the range as a whole carries more inventory to serve the same demand. This is the mechanism behind SKU rationalization as a discipline, and the same statistical logic that argues for planning at the coarsest level a decision can still be executed at.

Dilution is also why the cannibalisation question has to be asked explicitly. An option that takes its volume from the colorway next to it on the rack has added cost on every line of the table above and added nothing to the top line.

Three failure modes

1. The option added with no compensating cut

Continue the worked example. Say the class carries 20 options at 264 units each — 5,280 units, 95,040 dollars at cost — and the receipt budget is fixed. A twenty-first option is approved on merit, and the funding answer given in the room is that depth will be trimmed across the range to absorb it.

Test that answer. Twenty-one options sharing 95,040 dollars is 4,525 dollars each, or roughly 251 units. Round to the case pack and each option lands at 240 units, ten packs. But 240 is below the vendor's 250-unit MOQ, so 240 units is not an orderable quantity — it is a number in a spreadsheet that no purchase order can express. The smallest orderable quantity remains 264. Twenty-one options at 264 units is 99,792 dollars, which is 4,752 dollars over budget: exactly one option's floor cost.

The arithmetic closes cleanly and the conclusion is uncomfortable. You cannot fund an option by shaving depth, because depth has a floor. Either the receipt budget rises by one option's floor cost, or an option comes out. The version of this failure that actually ships is worse than the version described here, because the shave happens where there is no MOQ to stop it: every option drops just enough that the range is uniformly under-supported, sizes break early across the board, and the post-season review reads as a broad merchandising miss rather than as one funding decision nobody named. The breadth versus depth trade did happen — it just happened silently, at buy, instead of out loud at line review.

2. The tail option judged at full price

The same 264-unit option, approved on a 75 percent initial markup, looks obviously profitable: 264 units at 72 dollars is 19,008 dollars of retail against 4,752 dollars of cost. No add decision fails that test, which is a reason to distrust it.

Now run it at a realised sell-through mix. Illustrative outcome for a tail colorway: 55 percent clears at full price, 30 percent at 40 percent off, and the remaining 15 percent at 60 percent off.

Gross profit is 15,004.80 minus 4,752 of cost, or 10,252.80 dollars — a realised margin of 68.3 percent against an initial markup of 75. Subtract the 1,650 dollars of non-scaling costs and the option delivers 8,602.80 dollars on 15,004.80 of revenue: 57.3 percent, against a plan of 75.

Whether that is a pass depends on the hurdle the class is held to, which is a number each brand sets for itself. Suppose it is 62 percent — again illustrative, and internal rather than an industry figure. The option fails. Now run identical arithmetic on a proven core colorway that clears 85 percent at full price and the rest at first markdown: 224 units at 72 and 40 at 43.20 is 17,856 dollars of revenue, 13,104 of gross profit, and 11,454 after the same 1,650 of non-scaling costs — 64.1 percent, which clears.

Same style, same vendor, same floor cost, same non-scaling costs, opposite decision. The variable that decided it was the realised sell-through mix, which is precisely the variable the initial-markup test discards. The markdown rate an option will actually realise is a forecast like any other, and it deserves the same scrutiny as the sales forecast rather than being treated as a downstream surprise.

3. Pre-packs, which make an option look cheap per unit

A pre-pack lowers the per-unit landed cost, reduces handling at the door, and simplifies the purchase order. Every one of those savings is real and every one shows up in the cost sheet, which is where the margin test is run.

What does not show up there is the size ratio. The ratio inside the pack is the vendor's average across its customers, not your curve. Where the pack's share of a size exceeds yours, the surplus arrives on the first pack and is guaranteed markdown before the option has sold a unit. On the worked example: if the pack allocates 8 percent to the smallest size and your curve wants 5 percent, a 264-unit buy delivers 21 units where 13 were wanted. Eight surplus units per option looks like rounding noise. Across the class's 21 options it is 168 units of pre-committed tail, bought at full cost and realised at clearance, every season, in the same sizes.

The way to score the trade honestly is to put both sides in the same currency. Take the per-unit saving times the total units, then subtract the margin lost on the surplus units the ratio forces you to own, at the price they will actually clear at. Sometimes the pack still wins — on a style whose demand genuinely sits close to the vendor ratio, it usually does. The failure is not using pre-packs. The failure is scoring only the half of the trade that appears on the cost sheet. This is the same conversation as size and pack optimization, viewed from the add decision rather than from the distribution one.

How the floor moves by vertical

The four constraints exist everywhere. Which one binds, and how coarse it is, changes completely by category — and the coarser the binding constraint, the more expensive a marginal option becomes. The vocabulary below is each category's own.

Footwear: the size run is longer, and widths multiply it

Everything in the apparel arithmetic holds, but the denominator changes. A run of eleven sizes in half-size increments, offered in two widths, is twenty-two cells rather than eight. Apply the same rule — a tradeable number of pairs in the thinnest cell — and the sellable floor rises steeply: on an illustrative curve where the thinnest size takes 3 percent of the run, holding six pairs in that cell implies a 200-pair run before any width is added, and a second width behaves in cost terms like a second option rather than an attribute of the first. The share is an illustrative input, not a benchmark; the mechanism is that a longer run divides the same buy into more cells, and the thinnest cell sets the floor. A footwear colorway therefore has a structurally higher floor than an apparel one, which is why footwear ranges tend to be narrower and deeper by construction rather than by policy. The size-run mechanics are set out in assortment planning for footwear brands and the category view in footwear brands.

Accessories and bags: no size axis, so the material minimum is the whole floor

A handbag or a small leather good has no size axis at all, so one of the two floors simply is not there. The sellable floor disappears and the whole question collapses to the material minimum — a leather hide lot, a hardware tooling run, a webbing or zipper-tape colour minimum. Where the hardware is shared across the range, the floor is just the leather, and it can be genuinely small. This is the structural reason accessories ranges sprawl: the marginal option really is cheap to add, so nothing in the orderable arithmetic stops the count. The only brake left is the non-scaling costs — development, photography, master data — and those are exactly the ones a per-unit margin test does not see. Ranges here should be governed by an explicit option count rather than by affordability, as covered in planning accessories lines and accessories brands.

Health and beauty: a shade is an option, and the fill minimum binds

The variant axis here is shade rather than colour, and what binds is the fill or component minimum: the filling line's minimum bulk run per shade, plus minimums on the printed carton and label that carry the shade name. Two things make this harsher than apparel. First, the shade ladder is the product in the same way the size curve is — a foundation range shipped in six of twelve shades is not a smaller range, it is an incomplete one, and it reads as an exclusion rather than an edit. Second, an over-bought shade expires rather than marking down: period-after-opening and shelf-life dating put a hard stop on the clearance runway, so the exit lever that rescues an apparel misjudgement is weaker or absent. See merchandise planning for health and beauty brands and health and beauty brands.

Home and furniture: the container is the coarsest constraint of all

Nothing in this category rounds to a 24-unit pack. Bulky goods are bought to cubic capacity, so the orderable increment is not a 24-unit pack but a container's worth of cube. That increment is set by how much of the item fits in a box on a ship, which is a fact about the item's dimensions and has no relationship to the demand for the finish it is carrying — so for a bulky item in a new fabric the minimum orderable quantity and the sellable quantity are not related numbers at all. The rounding step here is not a rounding step at all; it is the decision. Compounding it, the lifecycle runs on model years rather than seasons, so an over-bought finish does not clear at the end of a season, it sits for a cycle, holding warehouse cube that has its own cost. The category mechanics are in merchandise planning for home and furniture brands and the budget consequences in OTB planning for home goods.

Outdoor: technical fabric minimums bind hardest, and bind twice

The constraint that binds is the same one apparel has, applied to a much less forgiving material, and it lands on the option twice. A membrane or laminate carries a large mill minimum per colour, and a colour change in a laminated construction can require the seam-seal and performance testing to be re-run, which adds a non-scaling cost that apparel does not carry. The result is an option whose floor is high in units and whose fixed cost is high in dollars at the same time — the worst combination for a marginal add. In outdoor the colour decision is a sourcing decision, not a design one, and it has to be taken at yardage commitment rather than at line review. The two-stage commitment structure that follows from this is worked through in planning against fabric minimums, with the category view in merchandise planning for outdoor brands and outdoor brands.

The decision frame at line review

The point of all of the above is to replace an argument about taste with three answerable questions. They take a few minutes each if the numbers exist and they cannot be answered at all if they do not, which is itself the useful signal.

// Three Questions Before an Option Goes In

Three Questions Before an Option Goes In

1. 1
   What binds depth on this option, and who owns that number?

   Name one of the four — size run, material minimum, case-pack increment, vendor MOQ — and name the person it comes from. Then compute minimum viable depth as the higher floor, rounded up by the operators, and multiply by landed cost. If nobody in the room can name the binding constraint, the option has not been priced and the decision is being made on a guess.

2. 2
   What comes out, or what goes up?

   Either an option leaves the range or the receipt budget rises by this option's floor cost. Shaving depth across the range is the answer that sounds cheapest and is usually unavailable, because the shaved quantity falls below an MOQ or a pack increment and stops being orderable. Write the cut down next to the add, in the same document, on the same day.

3. 3
   What does it have to sell at full price, and does it still clear at the rate this class realises?

   Divide the non-scaling costs by the full-price gross profit per unit to get the units that exist purely to pay for the option's existence. Then re-run the option's whole economics at the class's realised sell-through mix rather than at initial markup, and compare the result against the hurdle the class is held to. An option that clears only at full price has not cleared.

On the worked example, the third question resolves quickly. Full-price gross profit is 72 minus 18, or 54 dollars per unit. The 1,650 dollars of non-scaling costs divided by 54 is 31 units — so 31 of the 264 units committed, nearly 12 percent of the buy, exist only to pay for the option having been created. Those units carry no contribution to the class. They are the entry fee, and they are payable before the option earns anything.

That number is the single most useful thing to put on the line board next to a proposed add. It converts an abstract argument about whether the range needs another colour into a concrete one about whether the option can sell 31 units at full price before it starts contributing — and everyone in the room can form a view on that.

Where the number should live

None of this arithmetic is hard. It fails to happen because the inputs sit in four systems and one head each: the size curve in the plan, the fabric minimum in a sourcing email, the pack increment in a vendor agreement, the MOQ in a contract, the development and photography costs in a budget nobody brings to line review. By the time the four are assembled the range is already designed, and the add decision has been made by default.

In a connected model the four constraints are attributes of the option itself, so minimum viable depth and floor cost are computed at the moment the option is proposed rather than reconstructed at buy. The assortment plan then carries a depth that is orderable by construction, the option count is spent deliberately rather than discovered, and the compensating cut is visible in the same view as the add. That is the difference between a range that was chosen and a range that was accumulated.

Related resources

• →Planning Against Fabric Minimums, Not Style Minimums — When the material minimum is the constraint that binds
• →Case Packs, Inner Packs and Planned Depth — Where the rounding operator comes from and how it accumulates
• →Size & Pack Optimization for Apparel — The size-run floor, and the pre-pack trade in detail
• →Line Planning vs Assortment Planning — Which layer the add decision actually belongs to
• →Option Count Planner — line-board.com — The counting lane: defining and sizing the option unit
• →SKU Rationalization — Removing options once forecast dilution has already happened
• →Option Count — Glossary — The unit this page prices
• →Breadth vs Depth — Glossary — The trade the floor cost makes concrete
• →Style-Color Depth Formula — Turning a depth decision into units
• →Buy Quantity Formula — Where the binding constraint should be applied