What are retail markdowns: How to use, what to avoid
So you’ve come to this question: What is markdown, and how do you implement it? Let’s take a look. Markdown pricing is a strategy retailers use to reduce prices on slow-moving merchandise permanently to generate sales and cash flow. Well-planned and strategic markdowns can help liquidate lagging inventory. However, excessive, reactive, or poorly timed markdowns can also erode profit margins and condition customers to just wait for periodic sales.
What are retail markdowns?
Markdowns differ from temporary sales and promotions. While sales or coupons offer conditional or time-limited discounts to create transactional urgency, markdowns are outright permanent price reductions until further notice.
Markdowns reflect a depreciation of an item’s value and selling potential. This typically occurs due to waning consumer demand, item obsolescence, or the progression of a product’s selling season.
For example, a retailer may sell a trendy shirt for $50 originally. But if the style falls out of favor, they may mark it down to $30 permanently since it fails to move units at $50 anymore. Or a new smartphone model release may trigger markdowns on older versions. Seasonal apparel also sees incremental markdowns as time passes and styles become outdated.
How to strategically implement markdowns
While markdowns can benefit sales and inventory management, haphazard price-slashing can diminish brand prestige and profits. Follow these best practices:
Align with overall pricing strategy
Consider your target customer segments when utilizing markdowns. Value-focused retailers serving budget-conscious shoppers can leverage promotions like Buy One Get One Free offers. However, luxury brands catering to prestige-driven consumers should use markdowns very sparingly to preserve perceived exclusivity.
Everyday low pricing is also not an ideal markdown approach. Maintaining consistently low prices diminishes the excitement of deals that shoppers experience.
Set markdown triggers and timing
Employ historical sales data for seasonal or fashion-driven categories to inform markdown cycles. Set specific timeframes and inventory milestones to trigger staged price reductions throughout a selling season rather than just at the end.
Go incremental based on demand at each stage rather than reacting to stagnation. This prevents leaving money on the table from shoppers willing to pay higher prices early on or failing to discount enough to move units later.
Vary markdown strategy
Avoid predictable markdown cadences where savvy shoppers just wait for annual sales. Alter timing, frequency, and items discounted each year to stay unpredictable. Keep competitors guessing as well.
Consider psychological pricing
Leverage charm pricing ending costs in 99 cents rather than round numbers to portray bigger discounts. Additionally, display original and marked down prices side-by-side. Seeing “Was $100, Now Only $79” enhances perceived savings.
Monitor the competitive landscape
Consistently research competitors’ pricing and markdown strategies using intelligence tools. Track their discounting dates, items, and consumer behavior. Be ready to respond quickly if rivals discount sooner or deeper. Match key promotions to stay competitive while upholding brand prestige and margins.
Pitfalls to avoid
Steering clear of pitfalls is a paramount concern for sustainable success. Let’s consider the key challenges, from the repercussions of excessive markdowns to the nuances of premature discounting.
Repeated and deep markdowns can condition customers to just wait for lower prices. This damages full-price selling potential. According to one retail study, 12% of 2018’s total retail revenue, equal to $300 billion, was lost due to ill-planned markdowns.
Premature discounting
Marking down items too soon fails to capitalize on early full-price sales from customers willing to pay more for immediate access. Wait until demand slows before discounting.
Reactive discounting
Basing markdowns purely on stagnant inventory without considering marketing opportunities or a product’s lifecycle can lead to overly hasty discounting. Maybe a marketing refresh would reinvigorate sales rather than an immediate price cut.
Inventory imbalances
Misjudging demand for certain products can overload retailers with excess inventory they feel pressured to mark down. Careful analysis of past sales and emerging trends improves future stock planning.
Brand value deterioration
Overdiscounting can make a brand seem cheap, inferior, or desperate. Luxury retailers rarely markdown for this reason. Markdowns should align with overall brand messaging.
Missed competitor insights
Not monitoring rivals’ pricing and markdown moves can lead to being undercut on price or missing out on when competitors clear out stale inventory. This provides helpful clues on upcoming changes in consumer demand.
In summary, retail markdowns require savvy strategy and continuous competitor monitoring to drive profitable inventory turnover rather than becoming an uncontrolled race to the bottom on pricing. When thoughtfully implemented, markdowns are a valuable tool for retailers. When reactionary and excessive, they erode margins and brand reputation.
