How to Markdown in Retail
In most retail situations, markdowns are an inevitable process. Whether used as a promotional strategy or as a means of stock clearance, markdowns are vital to maintaining a balanced inventory.
The importance of an effective markdown strategy
In an ideal situation, retailers would want to maintain sales at full price indefinitely to maximise profitability.
Many may think of markdowns as a loss but that is not necessarily true, as it can be executed correctly. Achieving a reduced profit margin is a small price to pay for an inventory overflowing with aged stock.
Markdown objective determines the types of mechanic
Constant markdowns without clear intent can erode a brand image. Consumers may only associate your brand with markdowns and avoid purchasing products at full price. Therefore, the right markdown timing is important and it becomes urgent when:
- The inventory levels are showing red flags. For example, when a particular colour or print shows subpar results, prior action needs to be taken to maintain a healthy inventory balance as well as to make room for new collections.
- There is a key sale period that was highly participated by competitors, of which you should not be missing out on to remain relevant and to leverage high traffic to sell down stocks.
There are commonly two types of markdown in retail execution: temporary and permanent. A temporary markdown aims to increase traffic for slow-moving items and protect profit margins with a maximum discount of 30% off.
It is executed over a short period of time to drive the urgency to purchase. Items on temporary markdown typically return to full price after the promotion period ends.
Temporary markdowns, also known as tactical promotions and promotional marketing, are commonly executed over Mother’s Day Special, Labour Day Weekend and Black Friday.
Whereas a permanent markdown is carried out more aggressively to drive out aged stock and make way for new collections.
It is executed over a minimum period of 14 days, with further markdown executed after the first 7 days when discounted items turn fragmented in size and options.
Items on permanent markdown rarely return to full price after the end of the promotion or sale. Large scale discounts such as end-of-season sale and sitewide clearance are examples of permanent markdowns.
Temporary vs. Permanent Markdown
Markdown policy guides the depth of discount
Determining the depth of discount can be a complex exercise. Therefore, opting for a staggering markdown policy is a great practice to help allocate the appropriate discount depth.
In a staggering markdown cycle, the length of time an assortment has been in stock directly controls the discount depth in principle prior to layering the sell-through analysis.
The staggering markdown strategy functions as a tool to propel sales for slow-moving items periodically. Sticking to a staggering markdown strategy for a slow-moving item helps to ensure it reaches its intended stockout by the end of the season.
Timing is key when it comes to markdowns. The example above helps to avoid clashes during key retail events. Crossovers such as launching a promotion during key events may effectively boost sales when consumers are more willing to spend. However, launching a promotion during a product launch period can be dangerous as it draws attention away from newly launched products that are typically at full price.
Seasonality and sell-through analysis
Upon setting the markdown objective and having a markdown policy in place, the next step to markdown planning is analysing seasonality (or stock ageing) and sell-through performance to determine the exact product to be actioned upon.
The chart above depicts a granular look into the current stock and performance status of a retailer. Benchmark the individual sell-through rate against the average sell-through rate for the most accurate results. This helps to avoid marking down a bestseller at a deep discount, which sacrifices profit margin.
For example, Sweater A Pink has been in stock for the longest period against all sweaters yet failed to achieve the sell-through higher than the average of 58%. This makes it a slow-moving item and action need to be taken immediately to ensure that there will not be pile-up on Sweater A Pink when a new season arrives.
When applying a temporary discount on slow-movers, it is crucial not to markdown too low. When the price of an item has been slashed too low, reverting to its original price will be challenging as consumers may be unwilling to pay the full price given its prior discount.
Example of a tactical promotion planning
The bundle above intends to capture mass attention with a 50% off promotion. This promotion drives inventory movement while protecting profit margin with the first item at full price. Typically, the promotional items grouped together should complement each other for a higher chance of purchase.
Promotion performance analysis
After every markdown execution, proper analysis needs to be carried out to draw key insights and lessons learnt, to be referenced in future implementations. The immediate analysis also helps to determine if further actions need to be taken should the promotion fail to deliver its intended objective.
A common rule of thumb in retail promotions is that the average sell-through rate should exceed the discount percentage offered. For example, if the discount offered for the sweater above was 20% off, the average sell-through rate of 49% off concludes that the promotion was a success.
Studying your competitor’s markdown strategies
Due to stiff competition in retail, relying on internal data alone is insufficient to implement an effective markdown strategy.
Retailers need to take a proactive approach by analysing the discounting patterns of competitors, to develop a holistic approach to markdown planning. Understanding the discounting strategies of competitors may present untapped opportunities or be informed of certain risks.
Diving deeper into the biggest category of Tops from Fashion Nova on Omnilytics dashboard, we analysed the discounts offered and the sellout performance for each range.
For the Bodies subcategory, the 20-29% discount range had the largest SKU count. However, based on the sellout rate, this discount range failed to perform well. Instead, the discount range that delivered sellout performance in line with SKU count was the 50-59% range.
A dive into the assortments by SKU within the 20-29% discount range gave a clear picture of what to steer clear from when planning for future bodies collections.
The same insight also allows retailers to spot low-demand items in the market for close monitoring and to plan for an immediate markdown strategy.
The process of markdown requires proper planning and holistic market analysis.
Adopting data-driven methods provides retailers with clear markdown objectives, guided by visibility on their current assortment performance, of which an effective action plan can be devised. Most importantly, this helps to effectively improve inventory management and reduce the risk of aged stocks.
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