How Do Retailers Markdown? 4 Strategies to Do It Right
How do retailers markdown products? As a retail store, you need to know how to do it without sacrificing too much profit. In this blog, I’ll share four tips on how do retailers markdown the right way.
What is a Retail Markdown Strategy?
A markdown strategy is a plan outlining when and how certain items should be marked down.
Having a clear markdown strategy is important because too often, markdowns are knee-jerk reactions to end-of-line inventory.
Most markdowns happen unexpectedly, which drains your profit more than is necessary. By planning for markdowns in the preseason, you can prevent this from occurring.
Many retailers view markdowns as a last resort.
Markdowns are a great way to price your products at a profitable level. By being smart with markdowns and knowing when to discount, you can maximize your sales without pricing yourself out of the market.
Any product that is sold in a store must have a markdown strategy that should be part of an overall product lifecycle.
How do you plan to price the tens of thousands of products in your catalog?
We’ll look at five proven markdown strategies, why they can fail, and how modern retail analytics can help develop effective markdown strategies that clear inventory while maximizing margins.
Before we go any further, let’s talk about what markdown means.
Why are Markdown Strategies Important?
The need for markdowns is not sudden and unexpected. It must be considered as part of the product life cycle.
Markdowns are the sales that typically happen at the end of a product’s life, and these can wipe out any profit that was made during the product’s successful release.
Formatting markdowns can also affect other product listings.
Retailers who are looking to clear inventory may find that bundling products may be a successful strategy. In this example, the retailer is offering a hat and gloves bundle at a steep discount. However, if they did not plan to have enough gloves in stock, this strategy will not be successful.
Retailers must plan their markdowns carefully, or they will find themselves with very few options.
It’s necessary to look at a retailer’s data closely and take into account other important factors to gain a clear understanding of how markdown pricing works.
Relying on last year’s sales figures only can cause you to make inaccurate predictions and price your products too high.
Markups are necessary evils.
Discover how some of the biggest names in retailing make money by marking down prices.
How Do Retailers Markdown?
1. Develop Clear KPIs and Goals
Measuring what matters to businesses is how you gauge success.
And, of course, what’s measurable can be managed.
It’s important to have clear, quantifiable goals for your markdown pricing. This will help you ensure that you’re meeting your company’s needs.
Or, you can track your markdown’s performance against your Key Performance Indicators (KPIs).
Your KPIs should be specific and measurable, and they should align with your objectives. You can utilize your markdown results to plan for the future.
For instance, you can set a target for when your inventory will be at zero, or you can see if your markdowns are impacting your return on investment (ROI).
It’s important to keep an eye on your KPIs before, during, and after setting a markdown. This way, you can react quickly if needed.
2. Adopt an Agile Markdown Pricing Strategy
An Agile Pricing Strategy helps online retailers adjust their prices based on market fluctuations. By setting price thresholds, they can raise them when their competitors are sold out or drop them when supply is high. This allows them to maintain their margins while providing value to shoppers.
In highly competitive industries, some businesses use temporary price reductions, such as markdowns or coupons, to increase sales.
With agile price setting, you can set predetermined markdown points for your products. This helps you clear out inventory with the maximum possible margin, while still keeping the door open for a potential sale.
Using agile markdown strategies is a great way to keep your pricing strategy up-to-date. By clearly defining what criteria trigger price changes, you can remain ahead of your competition and appeal to your customers.
3. Localize your Markdown Strategy by Store Attribute
To only apply markdowns to selected items, you can cluster your Shopify store by certain criteria.
Geography-based clustering ensures that your stores can adapt to local weather patterns, ensuring that your customers are always able to get the products they need.
The August sales slump in Tempe, AZ is vastly different from the September lull in Bangor, ME. That’s why it doesn’t make sense to discount shorts nationwide.
Markdowns for specific store locations help you to maintain profit in locations where products are in high demand while decreasing your losses in locations that have low product demands.
And you can use this same strategy to maximum effect by customizing markdowns based on the other factors that influence demand for your products, such as whether they’re sold in stores, the demographic makeup of nearby neighborhoods, etc.
4. Plan Your Markdown in Advance
Retailers plan markdowns for specific items based on when they are expected to sell. This way, they can maximize profits by taking advantage of increased sales without cutting prices.
If you want to keep your TV inventory in demand for up to 12 months, it’s important to plan your markdowns in advance. That way, you can make sure that your fast-fashion items sell within 60 days of being marked down.
By knowing your category’s seasonal trends and the assortment you have, you can plan out markdowns that will keep your shoppers coming back.
The timing, size, and frequency of markdowns can vary by store, region, and season.
5. Markdown with Alternative Pricing Strategies
A straight price cut may not be the best way to mark down end-of-life products. Retailers have other strategies for setting prices.
Buy-One-Get-One bundle pricing can have a significant financial impact, doubling the number of units customers buy. Similarly, optional pricing can be used to pair an end-of-life accessory with a related product at full price. This provides customers with greater value and encourages them to purchase more items.
This won’t work for every business. Pairing a winter coat with a TV sale might not work well but an end-of-life Blu-ray movie paired with a TV makes total sense.
There’s no one-size-fits-all answer to the question of whether a markdown or a price drop is better for your products. It depends on the product, the situation, and your goals.
Why Do Markdown Strategies Fail?
Retail markdown strategies can work wonders for your margins but when they fail, it is often because retailers did not fully consider these common issues:
Markdowns are Product-Specific
It can be time-consuming to mark down every product in your catalog, so focus on your highest-impact items.
For most products, a general markdown policy will be applied. While this will leave some profit off the table, it is the best strategy for most businesses.
When something goes wrong, the costs often increase quickly.
Markdowns are Context-Sensitive
Markdowns are simple in theory, but in practice, they’re often more complicated.
Markdowns are very context-sensitive and can be greatly affected by things like timing, seasonality, and the type of markdown. If retailers don’t take these things into account, their markdown strategies will likely fail.
Markdowns Don’t Exist in a Vacuum
An effective markdown strategy must consider the price strategy for the product throughout its life cycle.
When determining your price, it’s important to consider what your competitors are charging. You don’t want to charge too much or too little, so it’s best to look at similar products in your category.
Markdowns are an important part of retail strategy and if done correctly, can help increase profits rather than decrease them. So when and how do retailers markdown? There is no easy answer but there are some guidelines that retailers can follow to ensure they are making the most profitable decisions for their business.