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In the highly competitive world of retail, businesses are constantly looking for ways to attract new customers and move inventory. One commonly used strategy is to mark down items. This involves reducing the original price of a product to encourage sales and clear out excess stock.
However, while markdowns can be an effective way to manage inventory and boost sales, they also come with potential downsides, such as:
- Reduced profit margins
- Negative impact on brand perception
- Unnecessary holding costs
There’s a reason why Louis Vuitton never goes on sale.
In this post, we’ll delve into the world of markdowns in retail, covering the importance of pricing, effective strategies, and the role of third-party logistics (3PL) providers, like ShipBob, in optimizing inventory management.
What is a markdown in retail?
A markdown in retail is a deliberate reduction in the original selling price (often referred to as MSRP, or manufacturer’s suggested retail price) of a product.
Retailers typically use markdowns to clear out old or slow-moving inventory, make room for new products, and recoup some of the costs associated with carrying unsold merchandise.
The importance of pricing markdowns in retail
For some businesses, markdowns are crucial. They can be a lifeline for retailers facing slow sales periods or overstocked inventory.
By lowering the retail price, businesses can stimulate demand for their products and remain competitive in the marketplace.
Retailers typically introduce markdowns during seasonal changes, sales promotions, holiday sales, flash sales, or as part of clearance events. For example, If a retailer doesn’t properly forecast demand and orders too many outdoor grills in the summer, they may need to mark down prices in the fall to encourage sales and clear out remaining inventory.
Doing this helps reduce holding costs and frees up cash for the retailer to purchase new, more season-appropriate products.
Markdowns also help encourage impulse purchases. Even if a business loses money acquiring a new customer, they have the opportunity to generate long-term value from that customer through repeat purchases in the future.
Retail markdown strategies for the modern world
Implementing an effective markdown strategy requires a combination of careful planning, market knowledge, and psychological insight into consumer behavior. Retailers should consider the following strategies to maximize the potential benefits of markdowns while minimizing the risks.
Monitor your sales and know your inventory
Successful markdown management starts with a deep understanding of your sales data and inventory levels. By regularly reviewing this information, retailers can identify trends, pinpoint underperforming products, and make informed decisions about when and how to implement markdowns.
But keeping a close eye on your inventory levels isn’t always easy. Especially when you’re working with hundreds or even thousands of SKUs.
Black swan events like a global pandemic can also throw a wrench in your inventory management plans. Let’s say you sell hand sanitizer products and experienced a massive influx of new customers during the pandemic. Naturally, you’d want to order a lot of inventory to satisfy that demand, however, properly monitoring your sales and inventory levels is of utmost importance during these times.
If you’re not careful, you could be left with vast amounts of unsold inventory once the demand for your product dries up, as was the case with hand sanitizer.
Should you find yourself in this scenario, applying a markdown percentage to your unsold inventory to encourage sell-through may be a good option.
Make markdown pricing part of your product lifecycle strategy
By understanding the various stages of a product’s life, from introduction to growth, maturity, and decline, retailers can better plan markdowns.
Incorporating markdown pricing into your product lifecycle strategy provides retailers with an extended period of increased sales as a product begins to mature or decline.
Keeping a close eye on your sales data is vital to properly implementing markdown pricing during a product’s maturity stage. As sales begin to plateau or fall, this may signal an opportunity to introduce markdowns if lots of inventory remains in storage.
Avoid mass markdown
Resorting to frequent, large-scale markdowns can send a message to customers that your products are always on sale, potentially undermining the perceived value of your brand.
Instead of implementing mass markdowns, consider a more targeted approach based on specific products, customer segments, or seasons. This can help you maintain your brand’s image while still capitalizing on the benefits of markdowns.
Think ahead and pay attention to your retail calendar
Part of markdown optimization is about aligning your pricing strategy with key events in your retail calendar. This includes things like:
- Beginning/end of season sales
- Nationally or globally recognized sales events
Take Black Friday and Cyber Monday for instance. According to Adobe Analytics, in 2022, US shoppers spent 35.3 billion, up 4% year over year.
Planning your markdowns around nationally recognized sales events not only allows you to benefit from heightened consumer demand but also helps you stay competitive.
Learn from your experience with markdowns
Evaluating the effectiveness of past markdowns can provide insights that help you refine your strategy and improve future results.
Ask yourself questions like:
- Did markdowns tied to a specific holiday perform better than just random sales?
- Did an early markdown campaign perform better than a late one?
- Did the use of psychological triggers alongside markdowns increase overall sales?
Study everything from your email, SMS, and ad campaign performance to identify what really moved the needle.
It’s all psychological
Markdowns can trigger psychological responses in customers, such as the perception of a deal or the fear of missing out. But besides just lowering the price of an item, retailers can also leverage other strategies to tap into these psychological responses.
Some examples include:
- Create urgency: Use limited-quantity sales to motivate shoppers to buy sooner, leveraging their FOMO and encouraging quicker purchasing decisions.
- Avoid predictable sale patterns: Keep consumers engaged by offering varied, sporadic markdown sales throughout the year. This prevents them from waiting for a predictable weekly promotion to make a purchase.
- Additional promotions: Utilize various promotions alongside markdowns like free shipping, free gift with purchase, and BOGO sales to achieve specific goals.
- Use psychological triggers: Experiment with phrasing, like “get $X off” vs. “save $X,” and even consider dropping currency symbols to avoid reminding customers of the cost.
- Leverage charm pricing: Utilize prices ending in nine, such as $9.99 or $19.99, which often outsell lower prices.
The costly downsides of markdowns in retail and ecommerce
There are various benefits to offering markdowns but there are also obstacles. Marking down items comes with its own set of challenges that may impact multiple areas of your business.
Constantly running new campaigns to get rid of excess products may not be the best use of your time. It involves continuously adjusting pricing, updating marketing materials, and communicating the changes to your customers.
Your and your team’s time may be better used exploring other ways to move your product.
Tarnishing brand perception
As previously mentioned, frequent markdowns can lead to a decrease in the perceived value of a retailer’s brand.
Customers may come to expect regular sales and be less willing to purchase items at their full price, potentially harming the retailer’s long-term profitability and image.
Reduced profit margins
Relying too heavily on markdowns to drive sales can negatively impact a retailer’s average revenue per unit.
The retail sector already operates on slim margins. Deloitte found the average net profit margin for the top 250 retail companies was a mere 3.2%.
There’s also a lot more that goes into the calculation of your cost per unit than just your product cost. Therefore, if you’re not careful, your marked down items could be selling at a loss once you factor in all of the variable and fixed costs.
Symptom of a larger problem
Frequent markdowns can be a sign of deeper issues within a retail business.
If your business is frequently promoting markdowns, you may benefit from an inventory audit. These can be used to identify if SKU rationalization is required or if more attention should be put into your inventory restocking plan.
Reduce markdowns with inventory management
ShipBob helps retailers optimize their inventory by providing real-time data, demand forecasting, and order management tools.
By leveraging the expertise and resources of a 3PL, businesses can better plan their inventory levels, reduce overstocking, and ultimately minimize the need for markdown campaigns.
For instance, ShipBob’s platform allows businesses to calculate important inventory management KPIs like the inventory turnover ratio. This metric shows how many times inventory is sold and replaced within a specific time period. It provides insights into how well products are moving so that you can purchase the right amount of stock.
Furthermore, ShipBob’s analytics tool can help you determine stock availability, forecasted demand, inventory performance, and much more.
Having access to a real-time inventory management platform provides retailers with the data they need to avoid purchasing too much inventory and then having to markdown prices to offset potentially even greater losses.
Although markdowns may sometimes be necessary, effectively managing your inventory can significantly reduce the need for them. The goal should always be to maintain optimal inventory levels, healthy profit margins, and focus on growth strategies that drive long-term success.
Get started with ShipBob
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Markdown in retail FAQs
Here are answers to some of the most common questions about markdowns in retail:
What is an example of markups and markdowns in retail?
A markup is an amount added to the cost of a product to determine its selling price. For example, if a retailer buys a product for $10 and wants to achieve a 50% markup, they would sell the product for $15. A markdown, on the other hand, is a reduction in the original selling price. For example, if a product sold for $15 and received a 25% markdown that would reduce its price to $11.25.
What are some disadvantages of retail markdowns?
Some disadvantages of retail markdowns include reduced profit margins, brand image erosion, and inventory management challenges. Additionally, frequent markdowns can condition customers to simply wait for the next sale thus reducing full-priced sales revenue.
How can businesses avoid markdowns?
To avoid markdowns, businesses can focus on improving their inventory management practices, accurately forecasting demand, and aligning their product offerings with customer preferences. By partnering with an established third-party logistics provider, retailers can gain access to valuable data that help them optimize inventory levels and reduce the need for markdowns.
What is the difference between discounts and markdowns?
Discounts are usually more temporary in nature and offered to incentivize customers, increase foot traffic, promote sales, or reward specific groups of people (i.e. students, military personnel, or loyalty program members). Markdowns are permanent reductions used to clear slow-moving or excess inventory, make room for new merchandise, or liquidate seasonal items.