What is markdown pricing?

Markdown pricing is a technique used by retailers to cut the price of a product in order to increase sales and clear out inventory. It is crucial to prevent needless waste and loss and maintain seasonal items' profitability.

Products that aren't selling well or are nearing the end of their seasonal lives should be marked down in price. In some circumstances, businesses may use markdown pricing to entice new clients by providing discounts on particular products. Markdowns are one of the pricing methods. 

What are the types of price markdowns?

There are four main categories of price markdowns in retail:

1)  Promotional 

These are discounts resulting from promotional sales of all kinds, including temporary price cuts, circular promotions, coupons, endcap promotions, and more.

2) Clearance 

When a retailer decides they won't stock an item ever again, they put it on clearance. It can be an outdated style that will be replaced by the newest offering from that company, or it might be a subpar product that the retailer will never stock again. In essence, clearance just means "getting rid of extra inventory."

3) Markdowns for damaged items

This is for post-delivery spoilage and damage to the items. As a customer, you've experienced this kind of markdown before. Do you recall when the Banana Republic shop manager gave you a 10% discount on a shirt you bought because it was missing a button or had a loose seam? That is a reduction for damaged goods.

4) Competitive 

These markdowns are the effect of price matching. This price reduction represents the Toys R Us price match guarantee made by Walmart over the holiday season.

These markdown pricing types almost invariably result in chargebacks to the vendors in order to recoup all or a portion of the markdown.

Discount and markdown price - what's the difference

 Discount and markdown are frequently used interchangeably. It is safe to say that every markdown is a discount, but not every discount is a price mark down.

Although they may both signify the same things to a buyer, they mean something quite different to a store. While a discount is frequently provided at the checkout and is for wholesale, a price markdown lowers the price of the product.

Assume you run a shoe store with five different shoe models, each of which has an original price of $25. You reduced the value of one of them by 20% since it performs poorly. The new price is $20. The consumer will spend $20 to purchase this item.

But if the store offers a loyalty discount worth $5, customers will spend $15 instead. They will spend $20 rather of $25 if they decide to buy the other style without the markdown thanks to the loyalty discount. Friends and family discounts, employee discounts, and loyalty discounts are the most widely used types of discounts.

Depending on the nature of your business, you might give your loyal clients the most bills, etc.

Why do retailers calculate markdowns?

How to calculate a markdown? A retail markdown strategy involves deciding when and how to discount specific products. A markdown pricing strategy is therefore essential because it has a direct impact on sales and stock clearance. Without a plan, retailers risk overstocking their shelves and seeing fewer sales.

Additionally, your store will be full of unsold product that isn't making you money. As a result, if you lose money, it will be difficult for you to pay your bills and maintain your financial stability. 

Markdown pricing strategies also impact other products. 

Offering a hat-and-gloves bundle in the winter season, for example, may increase demand enough to help inventory move without a significant reduction. However, this is impossible unless the retailer plans to keep enough gloves on hand.

The retailer will severely limit possibilities without advance planning. The only method to get useful information about markdown pricing is to examine a retailer's data in-depth and take a variety of other pertinent elements into account. Pricing strategy types that are solely based on sales data from prior years result in significant markdowns prices and miscalculations.

How to calculate markdown?

Assume you own a shoe store and bought 20 pairs of the same model in blue, green, and red, three different hues. After a month, you see that customers primarily purchase blue and green ones while leaving the red ones on hand unpurchased. You choose to employ a markdown price because you don't want to keep this product on your shelf indefinitely.

You made a choice to implement a 25% markdown for the red sneakers despite the fact that the original selling price for all three varieties was $50.The discount amount is $40, and the real selling price is $10.

You must use the following formula to determine the markdown given the original price and the current price: Markdown is equal to Original Price - Current Price.

For instance, the markdown would be $20 if the item's original price was $100 and it was actually sold for $80.

Example of markdown pricing

Let’s look at the Competera markdown case study for shoes and accessories retailer Intertop. Intertop manages 114 brick-and-mortar stores and 14 mono and multi-brand apparel chains across 25 cities in Eastern Europe. Launched in 1994, the apparel retailer offers over five million SKUs. In 2014, the company entered the e-commerce scene.

Challenge

• High pressure to clear off shelves fast while maintaining the gross profit and profit margin

• Repricing takes too much time

 

Solution

• Regular elasticity-based markdown suggestions

• Analytics for well-informed price decisions available with one click

 

Results: Intertop reached all the set goals.

Conclusion

Every retailer has a different markdown pricing strategy. The strategy must take the target market, the lifecycle of the product, and the objectives of the company into account. Nevertheless, the merchant will eliminate end-of-cycle inventory and increase gross margins if it is done properly and under the correct conditions.