How Retailers Can Create a Successful Markdown Strategy

Published by Martha Pierson at April 28, 2022

A retail markdown strategy involves a permanent price decrease on an item at the end of its lifecycle. The goal is to sell through all the stock and maximize gross margins. Without a retail markdown strategy, retailers may face over-stocked store shelves and lower sale figures.

Therefore, small business owners that want to move their products off shelves and maintain profitability must be proactive and create a successful markdown strategy. The first steps should be:

  • define goals
  • adopt an agile approach
  • look at historical data
  •  understand target customers

What is Markdown in Retail?

Close up on shopper carrying bag with "sale" written and standing next to a "sale" sign

A markdown is a permanent price decrease for an item at the end of its lifecycle. The goal is to temporarily increase demand for products and sell through the remaining stock. For example, cutting prices is one of the most effective ways to clear the leftover inventory at the end of the product’s lifecycle and maximize gross margins. 

The markdown percentage is calculated in the following way. Suppose an item’s original selling price was $50, and you want to sell them for $30. The difference between the original and actual selling prices is $20. Then, divide the $20 with $50, and you will get a markdown of 40%. Even though the markdown percentage is almost half the original selling price, the retailer remains profitable because the markdown is not lowered to a point where the initial investment amount is lost.

Markdowns vs. Discounts

Although markdowns and discounts are used to increase sales, their purpose and approach are different. A markdown in retail is a permanent reduction of the price of an item to clear out inventory that hasn’t sold well and to maximize gross margins. Therefore, if you want to recoup as much of your initial investment as possible, a markdown could be the best solution.

For example, suppose you bought a dress for $75 and set its retail price at $200. After a few months, you notice that you still have dozens of dresses in your inventory, and fall is approaching. Therefore, you decide to mark the original selling price down by 45%, bringing its actual selling price to $110. Your initial gross margin was 266% but ineffective because you were not selling the dress. After marking down the item, your gross margin drops to 146%. However, you haven’t lost all the profits because the lower price will increase sales volume.

Conversely, discounts are temporary reductions of the price of an item for a specific purpose or targeted towards one particular group of people — not every shopper. The goal of discounts goes beyond sales. It includes increased in-store traffic, familiarity with new products, and attracting a specific clientele. For example, this could consist of military, student, and senior discounts.

Why It Is Important to Have a Markdown Strategy

A retail markdown strategy involves planning when and how certain products should be marked down. Therefore, a markdown strategy is crucial because it directly impacts sales and stock liquidation. Without a strategy, retailers may face over-stocked store shelves and lower sales figures. Moreover, your shop will be filled with idle inventory that’s not generating profit. Consequently, if you don’t make a profit, you will struggle to meet overhead costs and stay afloat.

How to Create a Successful Markdown Strategy in Retail?

Overhead view of professional meeting with "KPI" graphic in the middle

A retail markdown strategy is an integral part of a product’s lifecycle strategy. Moreover, retailers must remember that the goal of markdown pricing is to clear out end-of-cycle inventory while maximizing gross margins. Therefore, retailers should understand the factors that impact product demand to create a successful markdown strategy. Here are four proven markdown strategies to help you develop your plans:

Develop Clear KPIs

KPI stands for “key performance indicator.” It is a measurable value that evaluates a company’s strategies and how effectively it achieves vital business objectives. Developing clear KPIs for your markdown pricing strategy ensures your decisions align with company objectives.

For example, the KPI could be a target date for zero inventory or the markdown’s impact on return on investment (ROI). After marking a product down, monitor its performance at the beginning, middle, and end of the season. Doing so helps you understand when the markdown was effective and how to maximize your margins.

You could also track your inventory turnover to help you understand which inventory items are affected most by seasonality and give you insight into what is selling well or not. Then you can take the necessary action to ensure your inventory is performing to your desired KPI standards.

Adopt an Agile Markdown Pricing Strategy

Adopting an agile markdown pricing strategy includes keeping your price-points flexible. Doing so will help you easily price-match or undercut the competition or raise your prices if your competitors run out of a specific product. Consequently, adopting this pricing strategy enables you to maximize profits. Most online marketplaces like Amazon use agile pricing models to ensure that their price points reflect fluctuations in supply and demand. Consider moving to a cloud-based POS system if you want the flexibility to modify your prices in your online brick-and-mortar shop.

Suppose the selling price of a pair of sneakers is $100. When your competitor runs out of the same sneakers, you could raise your selling price to $120. Or, if your competition is attracting all the customers, you could undercut them and sell the same item for $80. Adopting this strategy will help you maximize profits and reflect the market’s supply and demand.

Look at Historical Data

Look at historical data in your POS system, as it can give you information regarding your purchases and sales in the previous season and what inventory you have left. You can check how you marked down your products in the past. With this knowledge, you can improve your buying plans in the future and estimate when you should start marking down your prices.

Consider Your Pricing Strategies

Close up on "buy 1 get 1 50% off" sign

Every product in the industry falls into three types of pricing strategies: budget, value, and luxury. Each of these retail pricing strategies targets different consumers. Therefore, retailers must understand what motivates their customers, what they value, and how they can develop unique markdown opportunities to maximize sales and maintain a consistent brand identity.

Budget pricing strategy

This pricing strategy targets price-conscious consumers. These types of consumers place a high degree of importance on an item’s cost and are often willing to sacrifice quality for affordability. A budget pricing strategy works best for selling a high volume of things at a low price, which sometimes can be problematic. Instead, retailers can consider deals like bundles, buy one get one, or gift with purchase to empty inventory and make a profit.

Luxury pricing strategy

Contrary to a budget pricing strategy, low prices are terrible in this market segment because they are related to low quality. Consequently, a luxury pricing strategy emphasizes assuring that an item’s price correlates with the brand’s image and high perceived value. In this case, retailers can charge higher fees because people are willing to pay for brand image. After all, markdowns don’t often appeal to this type of consumer. However, consider offering your luxury shoppers a POS lending solution to help them purchase your quality products and pay in installments.

Apple is the best example of luxury-based pricing. The iPhone is one of the most popular smartphones worldwide and is priced based on its value and brand image, not costs. Its pricing strategy focuses on its loyal customer base that perceives the brand name as more valuable than the product.

Value pricing strategy

This pricing strategy falls between budget and luxury pricing. Value pricing aims to strike a balance between a product’s cost and its quality. Value buyers don’t want to sacrifice quality for extremely low prices. At the same time, they are not willing to pay extra because of the perceived value of a brand. To appeal to value consumers, avoid pushing prices too low or too high.

Nike is an example of a company that uses a value pricing strategy. Although Nike products are marked slightly higher, the price is based on the quality. As a result, customers find the price reasonable for the quality they are receiving. Therefore, when Nike offers markdown deals, consumers typically flock to the discount because they believe they are getting a deal on quality items.

Conclusion

A markdown strategy is unique to every retailer. The strategy must consider the target customer, the product’s lifecycle strategy, and the business’s goals. Nonetheless, if done strategically under the right circumstances, the retailer will clear out end-of-cycle inventory and maximize gross margins.


Martha Pierson

Martha Pierson

Editor-in-ChiefMartha is Editor-in-Chief at Finturf.com. Her career began in 2003 when she started as an investment banking analyst. Martha continued her career path as a financial advisor for investments. She has a passion for writing and is mainly focused on covering financial and business management topics.

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