What Is a Markdown in Retail and How to Implement Them?
If you’re in retail, then you know that markdowns are a necessary evil. But what is a markdown in retail? I remember when I first started working in retail and someone told me we were going to have to start doing “markdowns.” I had no idea what that meant or why it was necessary. All I knew was that it sounded like a lot of work and wasn’t something I was looking forward to. But as it turns out, markdowns are just a part of doing business in the retail world. And once you understand how they work and when to do them, they’re not so bad after all.
So let’s take a closer look at what is a markdown in retail including when to do them and how it can impact your business.
What is a Markdown in Retail?
A Markdown is a decrease in price due to a product’s lack of demand.
The markdown of an item is essential to selling inventory before the next season in order to make room for new merchandise.
In the clothing and fashion industry, there is an immense amount of pressure on salespeople to make a sale while the product is still trendy.
If you’re taking a markdown, it means that the value of your merchandise has gone down.
If the sales of a winter coat are weak, a 20 percent markdown may be applied to the original selling price of $100, bringing the price to $80. This is an example of how retail markdowns work.
If you bought a $20 coat, your gross profit has gone down from 80% to 75%.
markdowns are permanent price reductions, while sales or discounts are a limited-time offer.
A common marketing strategy is to offer a limited time discount to customers that buy before a specific deadline.
Discounts and deals can be specific to individual customers, such as an offer where a customer who spends $100 or more on a product gets 20% off their entire cart.
Most stores offer discounts for seniors, military personnel, and employees. These discounts are usually based on the customer and their conditions.
Sales and discounts are a great way to drum up some extra cash, but they’re not meant as a long-term price reduction.
A markdown is a reduction in the price of an item due to its inability to sell for its original selling price.
Retailers can be successful with good inventory management, but if they don’t have it, they will break.
It’s important to understand what your customers want, but it’s just as crucial to know how much inventory you need to keep on hand. Overstocking can lead to big losses, while understocking can cause customer frustration. Finding the right balance is key to successful inventory management.
Pricing your products too high or too low can both be disastrous for your business. It’s crucial to have a strategy in place that takes into account your branding and profit margin.
If you’re considering altering your prices through markdowns, it’s important to do so correctly in order to avoid missing out on revenue and profits. Unsuccessful or excessive markdowns can lead to staggering losses, so it’s crucial to have a clear understanding of your brand and what retail pricing strategies will work best for you.
Coresight Research’s 2019 study found that retailers missed out on $300 billion in revenue in 2018, due to markdowns.
Most retailers blame 53% of their Markdowns on their inventory being misjudged.
How to Implement a Markdown Strategy
Markdowns can be a great way of generating cash and moving inventory that otherwise would sit on store shelves. But, it’s not simply a matter of lowering prices until customers begin purchasing.
Markdowns should be used sparingly and only when absolutely necessary. Here are some things to consider when deciding whether to use a markdown.
Markdowns and Your Overall Pricing Strategy
When planning markdowns, you must take into account your overall pricing strategy and the different types of customers you serve. This will ensure that your markdowns are aligned with your company’s goals.
If you are marketing to price-sensitive customers, bundling, offering gift-with-purchase, and similar promotions can be very effective. Loyalty programs and coupons are also great ways to further entice your market.
If you are a luxury goods company, maintaining a high price point is essential to upholding the perceived brand value. Markdowns may lower the price point, which may not be appealing to your high-end clientele.
A discount or markdown strategy is best suited for a luxury retailer. Customers here are typically more discerning and are willing to pay more for a better product.
One final note: While everyday low pricing can be enticing, it’s generally not a good idea.
When J.C. Penny stopped offering discounts and deals, it lost the excitement that customers felt when they found a good deal. This shift in marketing strategy led to a decrease in retail sales.
Plan Markdowns Throughout the Selling Season
Instead of doing one huge markdown at the end of the season, it’s best to set a specific trigger and time frame for markdowns, especially in the clothing business. We all know fashions don’t last very long!
As a retail company, it’s crucial to use historical data on past sales and seasons to predict when you should mark down products. If you wait too long, you risk missing out on customers willing to pay full-price.
By understanding when customers are most likely to buy, you can plan your markdowns accordingly. If you mark down too early, you’re losing out on money that you could have made from full-price sales.
If you wait too long to begin your markdowns, you will not have enough time to lower prices gradually as the season ends.
As you consider how deeply to discount an item, consider how much customers are willing to pay at that particular time. This will help you find the sweet spot for pricing.
The goal is to make small changes as incrementally and intentionally as you can, as opposed to making huge changes simply out of reaction.
Be Unpredictable with Markdowns
One risk of Markdown pricing is the possibility that customers will only shop during certain times of the year when prices are low. This could result in a loss of sales for your business if people do not buy your products on a regular basis.
Some customers wait until the last possible minute to do their holiday shopping, hoping that retailers will lower their prices even further.
Promotions are a great way to excite your customers about your products. While regular discounts, sales and markdowns give consumers the incentive to wait for lower prices, promotions are unpredictable and happen on a random basis. This forces customers to act quickly if they want to take advantage of a promotion.
Your markdowns should not be the same year after year. This will keep value shoppers on their toes and coming back to see what’s on sale.
Consider Psychological Pricing
When you’re displaying marked-down items, use psychological pricing strategies to entice shoppers. For example, instead of $9.99, try $9.95. The small change makes a big difference in how much people are willing to spend.
Consumers tend to prefer prices that end with 9 to any other number.
A study conducted by the Massachusetts Institute of Technology and University of Chicago found that when pricing products for women, ending the price in 9 instead of 0 or 5 resulted in 24% more sales.
Charm prices, where you charge a price that ends in 99, are another way of charging more for a product.
One way to increase sales is to show customers that they can get a lower price if they buy now. You can do this by displaying that the item is now $79, instead of $100.
Keep an Eye on the Competitive Landscape
In today’s age of e-commerce, prices are constantly fluctuating. Your competitors are likely changing theirs every few hours to take advantage of what their competitors are missing out.
Keep an eye on your market, and your competitors’ prices. A competitive analysis can help give you insight into consumer buying behavior, which may help you make better strategic decisions.
Let’s say that your competition starts their markdown earlier. You want to be the first one to respond.
It’s important to be aware of what your competitors are doing, including how they offer deals and discounts. Offering things like free shipping on your products, while maintaining your profit margins and your brand image, is important.
Types of Markdowns
The second is a markdown that happens when an item doesn’t sell well and you need to get rid of it. There are two types of markdowns you will take in your retail store: sales and events, and when an item doesn’t sell well.
When you offer sales and discounts in your store, like 25% off all shoes or Buy 1 Get 1 50% off, you are incurring a markdown. By reducing your prices, you are enticing customers to make a purchase and generate cash flow for your business.
You are reducing your price to create cash flow for your business.
Permanent price changes are great for when you want to keep a certain item in your store, but need to change the price. This type of markdown is also good for when you want to get rid of an item quickly.
You put all four colors out on the showroom floor and priced them at $100 each. Two months go by and you’ve only managed to sell out of two of them, but the third one has barely moved. The fourth color is untouched.
In this case, your customer is telling you that the $100 retail price tag is a bit too much for that particular color. By reducing the price, you’re more likely to entice the customer into making a purchase.
The better practice is to markdown the color that is not moving, as opposed to markdowns on all colors. After all, why take a 50% (or 25%) Markdown on the shoe that is at 50% off?
Many customers will take notice of a sale price and consider the color. A great way to increase sales is to offer a Buy 1 Get 50% off deal on the non-selling color. This will often times prompt customers to purchase the item.
Many customers consider retail price before color, especially if the price isn’t too high.
So what is a markdown in retail? A Markdown is a decrease in retail price due to a product’s lack of demand. Retail markdowns are a necessary evil, but they don’t have to be daunting. By understanding when to do them and how they work, you can make the process much simpler. And remember, using markdowns is one of the best ways to clear out old inventory levels and make room for new products. So don’t be afraid to use them!