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The Art of the Sale: How Markdown Optimization Empowers Fashion Retailers

6 MIN READ
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Markdown pricing in retail is as much a part of the industry’s processes as building seasonal assortments and purchasing and selling goods to consumers. Markdowns are ingrained in the consumer shopping experience, influencing purchases which shoppers might never have even considered wanting or needing. The primary goal of a retailer is to sell merchandise at full price, but if a retailer faces a mismatch of demand and supply, a markdown is necessary to solve this inefficiency.  

 Behind every successful markdown is an intricate process of choosing which products to mark down, at what time and by how much. Getting these variables right means more revenue and higher margins as the result of a sales cycle. But miss the mark and retailers can be left with deadstock and a brand reputation where customers expect and wait for sales, both negatively affecting the margin.

What is markdown pricing and what is its purpose?

Markdown pricing is a common retail pricing strategy with the single goal of clearing out excess inventory to maximize margins. A markdown optimization strategy helps support a well-balanced inventory, in several ways:  

  • Increase sales through influencing demand in lower performing products 
  • Increase margin due to a reduction of unsold inventory 
  • Free up cash flow 
  • Make space for new, full-priced products  

A successful markdown pricing strategy is an essential opportunity to maintain sales momentum and keep products moving through the inventory lifecycle. 

What are the different types of markdown pricing?

There are many different types of markdowns, some of these include:  

  • Clearance: This type of markdown is aimed at overstocked items or slow sellers. Clearance markdowns can help drive these items to sell, which results in an at-cost or loss price. 
  • Seasonal markdowns: To prevent being burdened with unsold end-of-season stock, retailers will reduce the price on items to encourage shoppers looking to stock up for next year. For example, heavily discounting winter coats at the end of the cold weather season is a prime example of this.  
  • Loss leaders: Offering up bargains on certain products which seem too good for consumers to resist can be an effective strategy for retailers looking to entice shoppers into the store to upsell other items.  
  • End-of-life products: When items become phased out, it presents a good opportunity to markdown to give them a final push out the door and make space for newer products. 
  • Dynamic pricing: By employing markdown optimization techniques based on real-time supply and demand data, retailers can more effectively control the timing of markdowns.  
  • Competitive: Lowering prices to effectively match those of direct competitors and sway consumers to purchase their products. 
  • Promotional: Generate attention and create a sense of urgency with temporary price cuts, circular promotions, coupons, and other limited time price reductions.  

What mistakes do some retailers make when setting markdown strategies?

Markdown pricing in retail clearly has its place within any in-season pricing strategy. But there are some pitfalls retailers need to look out for in order to reduce revenue loss and further bolster sales. 

Markdown Mistake #1: Marking down the wrong items

If an item is performing well, it’s important to not be too quick to place it on markdown. Doing so can cut into revenue by preventing full-priced sales from continuing. 

However, by consistently monitoring sales, retailers will have a better grasp of what products are consistently performing well. Only marking down once a drop in sales begins to build is a better option than cutting off full-priced sales before momentum has died off. 

Markdown Mistake #2: Discounts that cut too deep

After deciding on what products to discount, a retailer will next need to determine the “markdown depth,” referring to the amount of the markdown. This depth will be decided by several variables, including how quickly a product needs to be moved out of the store and how severely consumer interest is lagging. The higher the need to move the product and the greater the consumer disinterest, the higher the discount will most likely need to be.  

Markdown ladders are the percentage rate discounts that consumers see. These typically begin at 10% and go deeper from there. The right rung on the markdown ladder hits the sweet spot of inspiring a sale without leaving potential revenue behind. This is why it’s better to start with a conservative markdown earlier on and track how it performs. A retailer can always speed up sales with a deeper discount, but it’s significantly more challenging to raise the price back up.  

Markdown Mistake #3: Markdowns that don’t move the needle

Consumers aren’t moved by paltry markdowns. For instance, have you ever seen a 5% off sale? There’s a good reason why such slim discounts are unheard of in the world of consumer retail. The psychology of pricing is vast and complex and there are many approaches a retailer can take when presenting the offer, including what type of discount and the copy used to describe it, one must also consider if competitors are offering a better discount on a similar item? However, retailers need to keep in mind that if a markdown isn’t moving the products, it may simply be because the discount isn’t deep enough

Markdown Mistake #4: Blanket markdown

Markdowns work best when they are strategic and backed by market intelligence, like knowing which exact colors and sizes within a product group need an additional push. Applying a blanket markdown to an entire category of products can group well-performing and high-earning products in with sluggish ones, causing unnecessary markdowns to be applied. Instead, retailers do better when they have the technical capabilities to apply markdown optimization and do a more precise product selection. 

Markdown Mistake #5: Missing the mark in the market

It’s nearing the end of the snow season, so it makes sense to begin marking down winter coats and snow gear, however there is an unseasonable cold snap heading into most of the retail region. A markdown in place during such a weather event might mean a seriously missed opportunity for optimizing the margin.  

Retailers can miss the mark when they fail to consider the bigger picture in scenarios like this. That’s why it’s important to have an automated process for examining the context of markdowns that will take all these influencing factors into account.  

Challenges and limitations of markdown strategies

In addition to these common errors, there are also other challenges retailers face when attempting to apply markdowns. First, there’s the issue of complexity. How do you develop a pricing strategy if you’re faced with an assortment that includes thousands of SKUs? Added to this already overwhelming number, retailers must also account for their various retail channels and locations. Effective markdown optimization will require taking a range of factors, including competitors’ strategies, consumer demand, and current trends into consideration.   

For brands and retailers who are still working manually, using spreadsheets to track pricing and inventory, it’s common to encounter significant blind spots. Which products are marked down? Why and how are they impacting the business? Such a protracted and time-consuming process often makes it impossible for retailers to be proactive in their markdown strategy. This leads to a cycle of continuously playing catch-up, rather than being on the forefront of pricing trends. 

How can retailers build a more effective markdown strategy? 

Such a significant set of variables and ever-changing dynamics means retailers need a markdown optimization process which is predictable, streamlined, and efficient, so it can be actioned at any point in-season to hit the markdown target. A multi-step approach should include the following steps:  

  • Develop clear KPI goals: What are the desired outcomes – is it to maximize margins (profit optimization) or clear inventory more aggressively (stock optimization)? Whatever these KPI goals are, they must align with the overarching company goals.  
  • Identify the right items: Only powerful AI technology can quickly and accurately pinpoint the exact items to discount. This will prevent whole categories from being marked down. Retailers would be wise to also identify colors and sizes within assortments for markdown. The more specific, the better.  
  • Be agile and proactive: Pricing strategies need the ability to rapidly respond to inventory changes and market conditions. Keeping up to date on the actions of competitors is key. If a main competitor is out of stock on specific items, for example, this knowledge will allow a retailer to benefit from keeping their items at full price.  
  • Localize strategy and markdown in the right places: Nuances in geographic locations will affect markdown pricing strategy, making it more important to have access to real time data and utilize it for more effective markdown strategies. For instance, clustering stores together to create a unified climate profile which enables a more immediate response to variables in weather and selling seasons.   
  • Plan markdowns in advance: Markdowns are not a surprise situation, they’re a predictable part of any selling cycle. So why wait until the end of the season to discount? Every season will have its slow sellers. A preemptive markdown plan means retailers can start with shallow discounts early on to salvage as much margin as possible.  

What are the benefits of markdown optimization? 

AI based markdown optimization uses optimization engines to achieve maximum sales, gross profit and optimal inventory turnover. Utilizing sales history, real-time sales tracking, customer behavior, market trends, and competitor analysis, fashion brands and retailers can better uncover patterns and insights related to customer preferences, buying habits, seasonal variations and product performance. 

Essentially markdown optimization makes the process of discounting more effective, on-target, and helps prevent missteps throughout the process. But this requires the right pricing tool, which will allow for greater capabilities in tracking, analysis and action. Here are some of the benefits to expect from an advanced AI price markdown optimization solution:  

  • Move from manual to optimized markdown pricing with powerful AI technology. 
  • Gain SKU-level markdown suggestions per channel and location. 
  • Use accurate demand forecasting to better predict future sales and reduce the need for markdown optimization overall.  
  • Maximize sales thanks to improved timing and more effective discounting.  
  • Reducing capital binding by accelerating inventory turnover. 
  • Clear stock at a profit and make space faster for new assortments at full price.  
  • Make the switch to proactive, future-focused price planning, rather than looking strictly to the past for direction.  
  • Accelerate actions with an automated process which demands less time from staff, freeing humans up to lead the process and fine-tune the optimization strategies and business rules.  

Invest in the right markdown pricing solution 

With Centric Pricing & Inventory™, teams can utilize powerful AI to develop forward-facing demand forecasts, intelligent pricing and inventory recommendations to optimize every product, in every location and channel. Easily override the AI or set the automation level so there is a greater level of control and peace of mind, and accurately and optimally price and markdown 1000s of products during the in-season stage for reduced inventory and increased margin.