Markdown pricing is a necessary evil for retailers. It helps them reduce the price of products to increase sales and clear out inventory. However, markdowns must be part of a holistic pricing strategy for each product across its life cycle. Markdown pricing must clear out end-of-life inventory while maximizing gross margins. Determining a retail markdown strategy without considering a product’s entire price strategy throughout its life cycle will be ineffective.
In this comprehensive guide, we will look at five effective retail markdown strategies, how to develop a retail markdown strategy, best practices for inventory management, consequences of overestimating demand, marketing's role in reducing the need for discounting, and final thoughts on retail markdown strategy.
What is a Markdown?
Retail markdowns are “reductions in selling price,” says Akshay R. Rao, General Mills Chair in Marketing at the University of Minnesota’s Carlson School of Management. Anything from coupons and discount codes that lower prices to seasonal clearances and store closing sales are considered markdowns. These price reductions can be temporary or permanent, depending on a retailer’s strategy.
Markdown pricing is especially important in keeping seasonal products profitable and avoiding unnecessary waste and loss. Markdowns are a pricing strategy used by retailers to reduce the price of a product to increase sales and clear out inventory. Markdowns must be part of a holistic pricing strategy for each product across its life cycle.
Importance of a Markdown Strategy
A retail markdown strategy is a plan that describes when and how certain products should go on markdown. In order to be effective, retail markdown strategies must be part of that product’s overall product lifecycle strategy. To ensure this is done accurately, retailers must have a holistic view and understanding of the factors affecting each individual SKU.
Markdowns are necessary evil, but if used properly, these retail markdown strategies can work wonders for your margins. When they fail, it is often because retailers did not fully consider product-specific issues or context-sensitive factors. Markdown pricing must clear out end-of-life inventory while maximizing gross margins. Knowing how, or even whether, markdown prices will work requires a nuanced understanding of the factors that impact product demand.
How To Calculate Markdown
Calculating markdowns for retail involves determining the difference between the original price and the discounted price, and then finding the markdown percentage. Here's a step-by-step guide on how to calculate markdowns for retail:
Use the following formula to calculate the markdown percentage:
Markdown = (difference of prices / original selling price) x 100
- Gather the information:
Collect the original selling price per unit and the actual or reduced selling price.
Original price: $100
Discounted price: $80
This information can be found in your sales records or on the products themselves.
- Calculate the difference also known as markdown (in dollars)
Subtract the discounted selling price from the original selling price.
Price Difference or Markdown (in dollars) = $100-$80 = $20
This number is essential for the markdown formula.
- Determine the markdown:
To find the markdown percentage, divide the difference ($20) by the original selling price ($100) and multiply the result by 100.
Markdown (as a percentage) = ($20 / $100) x 100 = 20%
In this case, the markdown as a percentage would be 20%.
Developing a Retail Markdown Strategy
Setting Clear KPIs and Goals
Developing specific, measurable key performance indicators (KPIs) for your markdown pricing ensures your decisions align with company objectives. Businesses measure things they care about. Used properly, these retail markdown strategies can work wonders for your margins.
Markdowns are product-specific. Manually planning markdowns for every SKU in an assortment is impossible (without specialized markdown software) for all but the smallest retailers. Everyone else must focus resources on high-impact products. For the vast majority of SKUs, general markdown policies within each product category will apply. At best, this leaves money on the table. But when things go wrong, the costs quickly mount.
Adopting an Agile/Automated Pricing Strategy
Agile markdowns are not limited to online sales, retailers can adopt this strategy with their brick-and-mortar stores. In either case, retailers must have clear, data-driven criteria for what triggers the price actions.
Localizing the Markdown Strategy by Store Attribute
Clustering stores by particular attributes lets you introduce markdowns selectively. Store geography is one option to form localized store clusters that respond to weather-related sales cycles. The summer selling season ends at different times in Maine and Arizona, so company-wide markdowns on cargo shorts are counter-productive.
Planning the Markdown Timing in Advance
Markdowns can be planned according to product life cycle stages, seasonality, or even weekly trends. A good rule of thumb is to plan markdowns in advance, while keeping an eye out for unexpected market shifts.
Using Alternative Pricing Strategies
If you have a pricing strategy that involves dynamic pricing, consider adding a price floor that sets a minimum price for your products. This will help protect your margins and avoid unnecessary markdowns. Another alternative pricing strategy is to offer bundled deals that encourage customers to buy more than one item at a time. This can help move inventory while preserving margins.
Best Practices for Inventory Management
Test, Read, and React Approach to Planning
Effective inventory management requires a test, read, and react approach to planning. This means constantly monitoring sales data and trends, making adjustments to inventory levels as needed, and reacting quickly to market changes. By staying on top of inventory management, retailers can minimize the need for markdowns and keep their margins healthy.
Working with Innovative Start-Ups in Liquidation Space
Retailers can work with innovative start-ups that specialize in liquidating excess inventory. These companies use data-driven methods to help retailers sell their surplus stock, often through online channels or other outlets that won't harm the retailer's brand image. By partnering with these start-ups, retailers can offload unwanted inventory more efficiently and reduce the need for aggressive markdowns.
Understanding Government Regulations in Certain Markets
In some markets, government regulations may dictate how and when retailers can offer markdowns. It's essential for retailers to familiarize themselves with these rules to ensure compliance while still maximizing sales opportunities. Understanding these regulations can also help retailers plan their markdown strategies more effectively.
Consequences of Overestimating Demand
Minimizing Markdowns
Overestimating demand can lead to excess inventory, which in turn leads to markdowns. Retailers should aim to minimize markdowns by accurately forecasting demand and adjusting their inventory levels accordingly. This may involve using advanced analytics tools to better predict sales trends and working closely with suppliers to manage stock levels.
Creative Promotions to Reduce Discounting
Rather than resorting to markdowns, retailers can explore creative promotions to move excess inventory. Some ideas include offering loyalty program incentives, hosting exclusive shopping events, or running limited-time offers that encourage customers to buy now. These promotions can help retailers sell through unwanted stock without eroding their margins as much as markdowns might.
Third-Party Platforms to Offload Leftover Merchandise
Another option for retailers looking to minimize markdowns is to offload leftover merchandise through third-party platforms such as eBay, Amazon, or even specialized liquidation websites. This allows them to sell excess inventory without impacting their brand image or in-store pricing strategies.
Marketing's Role in Reducing the Need for Discounting
Underscoring the Value of aRetailer's Offering
Effective marketing can help reduce the need for discounting by emphasizing the value and uniqueness of a retailer's products. This can be achieved through strategic advertising, engaging social media campaigns, and targeted promotions that highlight the benefits of shopping with the retailer. By focusing on value rather than price, retailers can maintain their margins and minimize the need for markdowns.
Product Bundles and Personalized Shopping Events
Another way marketing can help reduce discounting is by promoting product bundles or personalized shopping events. Product bundling encourages customers to buy multiple items at once, which can help move inventory while maintaining margins. Personalized shopping events, such as VIP sales or members-only offers, can create a sense of exclusivity and urgency, driving sales without resorting to markdowns.
Importance of Markdowns for Retailers
Mastering the art of markdowns is beneficial for retail stores as they help clear out inventory, increase demand for low-demand products, and boost overall sales revenues. To maximize the benefits of markdowns, retailers can adopt various strategies such as developing clear KPIs and goals, adopting an agile/automated markdown pricing strategy, localizing markdown strategies by store attribute, planning markdown timing in advance, and using alternative pricing strategies in markdowns.
