Retailers are in the business of making money, which means it’s extremely important to budget, price and plan accordingly. And sometimes that plan involves markdowns, reductions of the original prices of goods to increase sales. Markdowns can have a big effect on your bottom line. If you don’t want markdowns to severely impact your gross margins, it’s important to get a step ahead in the game and create an actionable retail markdown strategy. Here’s how you can use markdowns to move product out your doors, all while staying profitable and growing sales. 

The Difference Between a Markdown and a Discount

Contrary to what people might think, markdowns and discounts aren’t the same thing. A markdown is a reduction in price because of a product’s inability to sell at its original price, while a discount is a reduction in price for a specific purpose. While discounts are temporary, markdowns are permanent price reductions.

An example of a markdown would be if you bought a pair of sunglasses for $5 and set the retail price at $15. It turns out sales of the sunglasses are slow after a few months, so you mark down the price to $10. Your initial gross margin was a whopping 300%, but that doesn’t do you any good if you’re not selling any product. After the markdown, your gross margin drops to 200%, but instead of losing all the profits, you can still come out on top by selling a higher volume of the sunglasses.

A discount is a reduction in price for a specific purpose and targeted toward a specific group of people. For example, this could include employee discounts, military discounts, student discounts, senior discounts or special events. Unlike markdowns, discounts only affect an item’s retail price for a certain group of people, not every shopper.

Often, discounting is planned even before you even source the inventory you’re going to discount, and it’s used to attract customers and increase sales. Markdowns, on the other hand, occur when you reduce an item’s price in order to clear slow inventory while trying to still recoup some of your initial investment.

Common Reasons for Markdowns

Markdowns are inevitable, but when done right, they can keep the store fresh and inviting. While many retailers believe an item will sell if they “just give it a little more time,” the truth is that customers vote early on your merchandise. If it’s not selling, it’s a smart strategy to mark down items sooner rather than later.

Seasonal Sales

If you’re a month out from the end of the season, but you still have seasonal items in-store. Make room for new, seasonally appropriate inventory by marking down last season’s items. You don’t want to warehouse those items for another full year until the season comes around again. It’s a common retail best practice to implement seasonal sales, so keep a close eye on your calendar for any events or holidays coming up.

Poor Performance

In general, products have about 12-week inventory cycles. While it’s easy to fall in love with a product, if you see it’s not moving off the shelf, start marking it down so you can make room for something that is selling. For example, you buy the same shirt in three different colors. The black and gray shirts are turning much faster than the yellow. Take this opportunity to mark down the yellow shirt, which gives you the cash to purchase more of the higher-performing black and gray shirts, which you can sell for a better margin.

Competition

If you’re competing with other businesses that offer identical items for lower prices, first try to gain a competitive advantage by offering something exclusive like a better location or excellent customer service. But if that’s not enough, you might have to resort to markdowns to remain competitive and increase sales. 

Steps to Take for a Successful Retail Markdown Strategy

Now that we know why markdowns are taken, it’s important that we know how to go about creating a successful retail markdown strategy. 

Be Proactive

You don’t want to be left with items that aren’t moving off your shelves because all of that product is costing you money. Create a plan before going into the next selling season that includes how and when you need to mark items down, as well as how to present that information to your customers. This will help meet your goal of selling as much at full price as you can and also account for any subsequent markdowns.

Define Your Goals

Do you want to get rid of inventory that hasn’t sold well and recoup as much of your initial investment as possible? A markdown is probably your best option. Is your goal to attract a certain group of customers? Creating a discount that applies to specific clientele is a better way to reach that goal. 

Look at Historical Data

Your point-of-sale system can be your best friend, as it can give you the data on how you bought for the previous season, what inventory you have left, when you marked down items in the previous season and whether or not it was effective. With this knowledge, you’ll have a good indication of when you should expect to start marking things down. In addition, it can also tell you how you can improve your buying plan in the future.

Consider Your Pricing Strategy

Every product in the industry falls into three types of pricing strategies: Budget, value, and luxury. This is important because you need to understand what motivates your customers, what they value and how you can price your items to maximize short-term sales while maintaining a consistent brand identity.

• budget: This pricing strategy targets price-conscious consumers who are most interested in the cost of an item, and they’re often willing to sacrifice quality for affordability. This pricing strategy works best for selling a high volume of items at a low cost, and your most effective tactics would be deals like bundles, buy-one-get-one-free or gift with purchase, which can help you move product and still make a profit. 
• luxury: Unlike budget consumers, this group sees low prices as a negative and correlated with low quality, which can detract from a brand’s image. A luxury pricing strategy focuses more on assuring that an item’s price correlates with the brand’s image and high perceived value. You can charge higher prices, as people are willing to pay for brand image. While there are exceptions to the rule, markdowns don’t often appeal to this group.
• value: This pricing strategy falls somewhere in between budget and luxury and strikes a balance between a product’s cost and its quality. Value shoppers don’t want to sacrifice quality for extremely low prices, but they also aren’t willing to pay more for an item simply because of the perceived value of a brand. To appeal to this group, don’t push prices too low and don’t over-inflate prices for brand equity.

Here’s a quick cheat sheet on these different types of shoppers:

Understand KPI Trends

Good indicators of how a product is performing are retail metrics like turns and return on investment. After marking something down, monitor product performance in the beginning, middle and end of the season. This helps you understand when the markdown was effective and how to maximize your margins.

Be Flexible

Use something called agile pricing, which is when you keep your price points flexible so you can easily price-match or undercut the competition. This also gives you the space to raise your prices if your competitors run out of a specific item. This strategy helps you maximize profits for each item you sell.

How You Should Mark Down Your Products

There is no magic markdown formula that will bring in profits and increase sales, as each retailer must take many things into consideration in determining the markdown schedule. However, a good baseline is:

• 60 days: 30%
• 75 days: 50%
• 90 days: 70%

Remember to reserve markdowns for clearing out old merchandise. You don’t want to become a discount store, marking down all your products to try and entice more sales. The goal is to get the best margin possible while moving out slower items.

The Bottom Line

There’s a lot to consider when it comes to markdowns and discounts, and they’re not the best solution for every type of retailer. But when done strategically under the correct circumstances, there’s no doubt they can help clear out old inventory and bring in profits.

This story originally was published at Vend.