Retailers are in the business of making money. This means it’s extremely important to budget, price and plan according. The following guide is a deep drive into markdowns so that you can develop a strategy that avoids losses by making better business decisions.
What is a markdown?
A markdown is the reduced selling price of an item. This can be calculated by taking the original asking price and subtracting actual selling price.
Why are markdowns important?
On average, inventory only has a 60-90 day shelf life.
In some retail markets like fast-fashion for boutiques, inventory lifecycle is even shorter. Old product can steal space from new items.
By taking a markdown, you’re making room for new inventory because you know you can sell it more quickly for full price.
What is the difference between a discount and a markdown?
A markdown is a devaluation or a reduction in price because of a product’s inability to sell it at its original price. A discount is a reduction in price for a specific purpose (e.g. employee discount, military discount, student discount).
They are NOT the same thing. Markdowns are permanent price reductions while discounts are just temporary. However, this does not mean markdowns are a bad thing. Sometimes retailers hang onto products longer than they should in hopes they will sell at full price.
The truth: the product you’re trying to sell has already been paid for and your money is sitting on the shelf not turning a profit.
By holding onto it for an extended period with the hopes it will sell at full price, you are stealing space on your shelves from new products that could sell more quickly for their full value.
Reasons for Markdowns
- Seasonal sales. You’re a month out from the end of the season, but you still have seasonal items in store. Take markdowns on those items before your customers have moved on to shopping for next seasons merchandise. You don’t want to warehouse that merchandise until the right season comes around again!
- Poor performance. Products have about 12-week inventory cycle. If you see something that is not selling start marking them down. For example, you buy the same boots in 3 colors. The black and brown leather boots are turning much faster than the grey. Using this knowledge, you recognized the opportunity markdown the grey boots. The influx in cash will allow you to purchase more of the higher performing black and brown boots, which you can sell for a better margin.
Markdowns can help you make better buying decisions.
Think of a markdown as an educational opportunity to make better buying decisions in the future. Not sure how this works? Let me give you an example.
When looking at sales performance data within RICS, Mar-Lou Shoes, recognized high demand for women’s footwear styles. Women’s footwear was accounting for more than three-fourths of their company volume and profit.
They responded to this demand and by adding more than 20 new women’s footwear brands and replacing at least 10 underperformers. Not only did they increase the number of orders purchased for women’s footwear, they increased item quantities purchased.
The result: Markdowns dropped over 10% and their margins were up 1.5% to levels higher than industry benchmarks.
How to create a markdown strategy for retail?
- Create a plan before going into the next selling season. Having a plan for how and when you need to mark items down and how to present that information to your customers, will help you stay consistent in your strategy and meet your goal of selling as much at full price as you can.
- Look at your historical data. How did you buy for the previous season? What inventory did you have left? When did you markdown items in the previous season and was it effective? Knowing this information will give you a good indication of when you should expect to start marking things down and it will also tell you how you can improve your buying plan in the future.
- Evaluate your margins for the prior season. Ask yourself if your strategy allowed you to get rid of the product that was going to be updated or changed. Did it preserve a high enough margin when you did so?
- Understand trends in your inventory key performance indicators (KPIs). Metrics like turns and ROI are good indicators of how a product is performing. Monitor product performance in the beginning, middle, and end of the season so that you can understand when the markdown was effective and how to maximize your margins.
- Limit your sales. If you have a sale every other week, you’re overbuying and creating an atmosphere where customers won’t pay full price for your inventory and instead wait for a sale.
- Explain your markdowns to your customers. There should always be a clear reason for a markdown (e.g. End of season). This makes it clear to your customer that these are special cases, so they don’t wait around for future full-price items to “go on sale”.
- Designate a clearance area. Make it clear to your customers where markdown product can be found. That way it is not confused with your full-price inventory and can sell quickly.
- Use your marketing budget to tell customers about sales. Send out emails to customer who have bought similar items in the past and post photos of the marked down items on social media to generate buzz.
- Align your strategy with industry standards. Be aware of the Minimum Advertised pricing (MAP) from vendors, which is the lowest price a retailer can advertise the product for sale. You can only advertise outside your store using the MAP price, but in-store you can sell it for the price you want.
- Know when to donate. Sometimes things just won’t sell. Consider this product a free gift to customers to reward them for shopping or donate it to charitable organizations for a tax benefit.
- Learn from markdowns. Your markdowns should inform the buying decisions you make in the future. Do not just do that same thing over again. Instead use your historical data as an opportunity to responds to demand.
What should I markdown my products?
Research shows you should markdown products at least 20 to 30% to entice your customers to make a purchase. However, reserve markdowns for clearing out old merchandise. Do not mark down all your products to entice more sales because you don’t want to be a discount store. You want to get the best margin possible.
A Baseline Markdown Schedule
The truth is, each business owner must take many things into consideration in determining the markdown schedule. But here is something to use as a baseline…
- 60 days – 30%
- 75 days – 50%
- 90 days – 70%
Important to note: This does not include carry-over items and again it’s not for every retailer in every situation. This baseline is for someone who wants to be aggressive with their inventory turn and who is buying items you only sell through once.
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