Markdown strategies are essential for retailers looking to clear out inventory, increase sales, and maintain profitability. These strategies involve reducing the price of a product, particularly seasonal items, to avoid waste and loss. They can be particularly effective during the holiday season, when retailers experience a surge in demand for gift items. By offering markdowns on seasonal products, retailers can not only clear out inventory but also attract price-sensitive shoppers who are looking for deals during this time of the year.
In addition to reducing prices, retailers can also use other tactics such as bundling products, offering free shipping, or providing exclusive discounts to loyal customers to boost sales and stay competitive. However, it’s important for retailers to carefully plan their markdown strategies to ensure that they don’t negatively impact their margins or brand reputation.
Ultimately, successful markdown strategies require a combination of data analysis, consumer insights, and creative marketing techniques. In this guide, we will explore various markdown strategies, their benefits, and how to implement them effectively in your retail business.
1. Develop clear KPIs and goals for your markdown strategy
Before implementing any markdown strategy, it is crucial to define your goals and key performance indicators (KPIs). This ensures that your decisions align with your company’s objectives and helps you measure the success of your markdown strategy. Goals may include clearing out end-of-life inventory by the end of the season while maximizing gross margins or increasing sales of specific products.
KPIs can be determined based on different factors such as the number of units sold, the percentage of inventory cleared out, and the overall revenue generated. It is important to set realistic targets and monitor progress regularly to make adjustments as needed. In addition to quantitative goals, consider qualitative goals such as improving customer satisfaction or brand perception. By setting clear KPIs and goals, you can effectively track the success of your markdown strategy and make data-driven decisions to optimize it.
2. Consider the product lifecycle
An effective markdown strategy should be part of a larger pricing strategy that takes into account the entire product lifecycle. This includes initial pricing, promotional events, and end-of-life markdowns. By considering the product lifecycle, you can ensure that your markdown strategy complements your overall pricing approach and avoids issues such as product cannibalization. When it comes to end-of-life markdowns, it’s important to strike a balance between recouping some of the costs and maintaining the brand’s integrity.
Markdowns that are too steep can result in a perception of low value and damage the brand’s reputation. On the other hand, not offering any markdowns can lead to unsold inventory and lost revenue. Therefore, it’s crucial to develop a calculated markdown strategy that considers factors such as the product’s age, demand, and margin. This will help you optimize your pricing approach and maximize profits while keeping your brand’s image intact.
3. Localize your markdown strategy
Different stores may have varying levels of demand for certain products. To maximize the effectiveness of your markdown strategy, consider localizing markdowns based on store attributes such as geography, demographics, and other factors that impact demand. This allows you to preserve profits in stores where products remain in high demand while accelerating sales in stores with fading demand.
For example, if you’re a retailer selling winter coats, you may want to consider localizing your markdown strategy by offering steeper discounts in stores located in colder regions. This would allow you to move inventory more quickly and also tailor to the needs of customers in those areas. Similarly, you might want to offer discounts on athletic apparel in stores located near universities or gyms, where there is likely to be a higher demand for such products. By localizing your markdown strategy, you can ensure that you’re catering to the unique needs of each store’s customer base while also maximizing profits.
4. Plan your markdown timing in advance
Timing is crucial when it comes to markdowns. Retailers should plan their markdown schedules in advance, taking into account factors such as seasonality, product demand, and inventory levels. Agile markdowns can be implemented both online and in brick-and-mortar stores, provided that retailers have clear, data-driven criteria for triggering price actions. Markdowns are an effective way to move inventory and boost sales, but timing is everything.
Retailers must be strategic in planning markdown schedules by analyzing historical sales data, monitoring product demand and inventory levels, and considering seasonal trends. By doing so, retailers can optimize markdowns for maximum impact, minimizing the risk of overstocking or understocking products. With agile markdown strategies, retailers can quickly adjust prices both online and in-store to respond to changing market conditions.
5. Use a variety of markdown types
There are several types of markdowns, including percentage-based reductions, bundle deals, and buy-one-get-one offers. Each type works best with certain products in specific situations. The key is to determine which markdown type is most effective for your product and situation, rather than relying solely on simple price drops. One important factor to consider when deciding which markdown type to use is your target audience. For example, if you are targeting budget-conscious shoppers, a percentage-based reduction may be more effective than a bundle deal or buy-one-get-one offer.
On the other hand, if you are targeting customers who are looking for convenience or luxury, a bundle deal or buy-one-get-one offer may be more appealing. Another important factor to consider is the seasonality of your product. If you are selling seasonal items, such as winter coats or summer sandals, it may be more effective to use a buy-one-get-one offer to clear out inventory at the end of the season. This can help to create a sense of urgency and drive sales.
6. Implement specialized markdown software
Manually planning markdowns for every SKU in your assortment can be time-consuming and challenging. Specialized markdown software can help retailers optimize their markdown strategies by providing data-driven recommendations that maximize gross margins while clearing out end-of-life inventory. This software can also offer insights into customer behavior, such as which products are more likely to sell at a discounted price and which customers are more sensitive to markdowns.
By automating the markdown planning process, retailers can save time and ensure that their pricing decisions are based on accurate and up-to-date data. Additionally, this software can help retailers stay competitive by allowing them to quickly respond to market changes and adjust their prices accordingly.
7. Continuously evaluate and adjust your markdown strategy
Retailers should regularly assess the effectiveness of their markdown strategies and make adjustments as needed. This may involve analyzing sales data, monitoring inventory levels, and considering changes in market conditions or consumer preferences. Retailers can also consider implementing new technologies to improve their markdown strategies.
For instance, they can use artificial intelligence (AI) and machine learning algorithms to analyze sales data and predict future trends. This can help retailers to make more informed decisions when adjusting their markdown prices and timing. Additionally, retailers can leverage social media platforms and email marketing campaigns to communicate with their customers about upcoming markdowns and promotions.
In conclusion, implementing an effective markdown strategy is crucial for retailers looking to clear out inventory, increase sales, and maintain profitability. By developing clear goals, considering the product lifecycle, localizing markdowns, planning timing in advance, using a variety of markdown types, implementing specialized software, and continuously evaluating and adjusting your strategy, you can ensure that your markdown approach is both successful and sustainable.
Jeanel has 15 years of retail, marketing and brand management experience. She has started an ecommerce business in 2019, after working in corporate retail and real estate as a senior managing director and former consultant. She's traveled all over the world, speaks at world renowned trade shows and events, holds a Bachelor’s of Commerce (B.Comm) and a Certificate in Commercial Real Estate. You can connect with her on Linkedin.