Markdowns in retail generally take the form of sales, discounts, clearance, or reduced prices. Sales make customers feel like they’re saving money, which is why they adore markdowns. Since markdowns aid in inventory liquidation, retailers gain from them.

Retailers, here’s all the information you need to answer the question “What is markdown?” and take advantage of markdowns with style and without breaking the bank. We’ll also cover all the usual traps, like being predictable and compromising authenticity. Let’s go!

What are Markdowns In Retail?

Retail markdowns are reductions in the selling price of goods. For shoppers, markdowns feel like getting a steal of a deal. For retailers, they help move stagnant inventory off shelves to make room for faster-selling products. Markdowns come in a few forms:

Temporary Markdowns

Limited-time sales of a specific duration, such as a weekend 30% off promotion, are temporary markdowns. This creates urgency for shoppers to purchase before the sale period ends, and pricing returns normal. Other examples include coupons and seasonal promotions like Black Friday sales. Temporary markdowns help spike short-term demand.

Competitive Markdowns

Price matching policies allow retailers to offer markdowns only to customers willing to do their homework and show competitors selling an identical item for less. This caters for discounts to price-sensitive shoppers without having to advertise reduced pricing that may diminish the perceived value. Price matching enables retailers to remain competitive.

Permanent Markdowns

End-of-season clearances, discounts on damaged goods, and liquidations when stores close permanently are examples of permanent markdowns not intended to return to original pricing. As time passes, the deepening discounts offered on unsold seasonal apparel also fall under permanent markdowns aimed at clearing old inventory.

Top Reasons Retailers Offer Markdowns

Let’s take a closer look at the main motivations behind firms offering discounts: reducing time-sensitive inventory, increasing sales, and staying competitive.

Poor Sales Performance

When an item fails to sell at expected levels, it ties up space and capital that could be devoted to faster-moving products. Marking down lagging products helps recoup losses by spurting demand and clearing out undesirable inventory. This makes room for more promising products.

Perishable Goods

Goods with short shelf lives due to spoilage, like fresh produce, or obsolescence concerns, like consumer electronics, lose value over time. Marking these items down as their expiration date approaches helps recover some costs before inventory becomes completely unsellable.

Competition

Staying competitive means not losing customers because a rival retailer offers lower prices. Some retailers will price-match key competitors on identical items to retain business. While they sacrifice a bit of profit margin on those sales, this is preferable to completely losing those customers.

How to Calculate Markdown Percentages

Subtract the sale price from the original full price. Next, divide the resulting difference by the original full price. Finally, multiply that number by 100 to arrive at the percentage discounted.

For example, a $500 television marked down to $300:

($500 – $300) / $500 = 0.4

0.4 x 100 = 40% markdown

It’s essential to ensure sale prices still yield a profit margin after markdowns are applied.

Strategies for Successful Markdowns

Use these tactics to make markdowns profitable for your company.

Consider Pricing Psychology

Displaying original prices alongside sale prices boosts perceived value. Charm pricing ending in 9 signals a bargain. Urgency created through short durations pushes sales. Simplified pricing removes dollar signs and cents to disassociate from money.

Localize Markdowns

Tailor online versus brick-and-mortar markdowns based on inventory levels and demand within each channel. Regional differences between locations can also inform optimization.

Watch the Competition

Monitor competitors’ pricing trends. Strategically match key rivals’ markdowns to retain customers. Gain insights into upcoming promotions based on historical trends.

Leverage Data

Analyze sales data and metrics. Link specific markdowns and promotions to measurable lifts in demand. Refine strategies based on insights into customer response.

Avoid Pitfalls

Don’t establish a predictable cadence to sales cycles. Vary frequency and discretely plan promotions to preserve urgency.

Prevent brand reputation damage from over-discounting, giving a cheap impression. Some luxury brands destroy unsold goods to avoid this perception.

Consider product lifecycles before prematurely discounting slower sellers. Marketing boosts may be better suited than immediate markdowns.

Consider Markdowns for Your Business

When strategically executed, markdowns optimize inventory by spurring sales of languishing products. They please deal-seeking shoppers. They help retailers stay competitive. Yet markdowns require careful consideration to maximize their benefits and avoid potential downsides. Analyzing data enables retailers to perfect their approach over time.