In a perfect retail world, markdowns wouldn’t be necessary and every item would sell at full price within weeks of being in store. Unfortunately, we all know we don’t live in a perfect world, and we’ve all seen the end of season sales, BOGO deals, and clearance racks.
A challenge faced by retailers is how to maximize margins while clearing seasonal merchandise by a certain date. This is where markdowns come in handy, as the demand for a product diminishes, sales can encourage shoppers to purchase an item they wouldn’t have considered buying at full price. By actively rotating and adding inventory, you can provide more room for new, in-season products that can sell at full price. Not only does this increase overall cash flow, it also creates an incentive for customers to continually return to shop for new items and increase a customer’s satisfaction.
Retailers shouldn’t fear markdowns, but rather embrace them. Markdowns are inevitable, luckily, we have some strategies for you to improve the timing and depth of markdowns to ensure you get the highest margins possible.
Plan Markdowns in Advance
The reality is, your products will either sell out or you’ll have excess inventory. It’s important for retailers to have an action plan in place to determine what products they’re willing to discount and over what period. Once you have a minimum price established, it’s easier to slowly mark down an item until it sells out. Ideally, it is best to set specific goals. For example, set a goal to sell 50% of an item in 45 days, if not met, begin implementing your markdown strategy. Furthermore, you can establish a budget per month, quarter, or year to help control the amount spent on markdowns.
Once a plan is in place, retailers should actively monitor their items in real time. Monitoring items will provide insights on how rapidly they are selling or if they need to be marked down sooner to entice more sales. Having a plan of action will ensure you are gradually selling your inventory and avoid providing huge markdowns that require you to take a loss at the end of the season.
Analyze Historical Data
Looking into historical data can help you see trends of promotions and markdowns done in the past. If you look at your competitor’s historical data, you can see when they started markdowns during a certain season last year, and you can more accurately predict what their promotional timeline might look like this year. Furthermore, historical data can provide insights about your own past strategies. Utilizing this data, you can analyze yearly trends of when you began past markdowns correlating it with any leftover inventory you may have had. For example, if you sold out on a certain item too soon last year, you can hold off on markdowns for an extra couple of weeks this year to maximize your margins.
Historical data can help provide an understanding of what items require a price change and when to start allocating markdowns. Retailers who markdown too much, too soon, can lower their margins and result in stock-outs. On the other hand, retailers who don’t markdown items or wait too long can lead to lost revenues and leftover inventory. Utilizing past data can help retailers forecast better for future markdowns.
Consider Price Elasticity
When determining price markdowns, keep in mind price elasticity. A price sensitive product may not respond well to a markdown. For example, luxury items aren’t typically marked down as it would dilute the brand image. Discounts aren’t as simple as taking 30 or 40 percent off a product, instead, various factors are considered. In addition to price elasticity, keep in mind the length of time a product has been on the floor, the quantity left in stock, and whether the product is still in season.
Conduct Competitive Research
As much as you can plan ahead, you also have to be prepared to make any adjustments to your strategy based on any market changes. By conducting competitive research, you can gain insights on what competitors are doing to stay ahead. By actively monitoring competitor promotions and offerings on similar products to your own, you can price competitively and provide additional value. For example, if a competitor is selling the same product at the same price, but they’re offering free shipping, your product isn’t as valuable.
Additionally, if the market begins to make markdowns earlier than expected in the season, you must be able to respond quickly to stay competitive. By keeping your competition top of mind and offering more value than them while staying competitively priced, you can plan your markdown strategy more effectively.
Conclusion
Retailers should embrace markdowns. By having a plan of action, considering historical data, price elasticity, and your competitors’ strategy, you can create a strong markdown strategy that can lead to positive outcomes. Optimizing markdowns can help maximize your margins, increase your cash flow, raise profit margins, and increase customer satisfaction.
