You’d be forgiven if the word ‘markdown’ sent a chill down your spine. As a retailer, if you have to sell at a reduced price you assume your brand is bound to suffer a loss, right?

Effective Markdowns Maximising Value3On the other hand, staying away from markdowns can have its own negative impact on your business: holding onto slow-moving merchandise which you hope to sell at full price will only lead to stale stock occupying your store space and consuming your resources. It would also mean disappointing customers who come in to your looking for the latest products and styles, who will be met with last season’s stocks on your aisles. So what can you do to minimize the negative impact of markdowns?

Well, when it comes to the product and pricing lifecycle, it’s important that you implement a markdown strategy as it can capture revenue even at the end of a product’s life. If you plan your markdowns wisely, some benefits you can expect include:

  • Increased foot traffic
  • Better product lifecycle management
  • A fresher assortment mix
  • Better revenues

Are you managing your markdowns effectively? Here are some things to think about while you evaluate your markdown strategy:

Don’t underestimate the power of markdowns

Effective Markdowns Customer Walk-inShoppers react better to prices that they perceive have been ‘cut’, even if it involves sharp mark-ups followed by dramatic mark-downs. Although predictable pricing might be fair in theory, the predictability is often a turn-off factor for shoppers – something that retailer JC Penney experienced the hard way.

In January this year, J.C. Penney announced that it was permanently marking down all of its merchandise by at least 40 percent so shoppers would no longer have to wait for a sale to get the lowest prices in its stores. The new pricing strategy involved getting rid of the 590 sales it offers each year in favor of a simpler approach to pricing. It entailed the rolling out of a three-tiered strategy that offers “Every Day” low pricing, “Monthly Value” discounts on select merchandise each month and clearance deals called “Best Price” during the first and the third Friday of each month. However, the company’s same-store sales fell 18.9 percent in the first quarter, total sales decreased 20.1 percent, which includes the effects of the company’s exit from its outlet business. Internet sales through jcp.com decreased 27.9 percent from last year and stood at $271 million in the first quarter. In effect, when the coupon system and dramatic short-lived markdowns disappeared, many shoppers did not feel compelled to shop with the retailer.

Always explain the markdown to your customer

Effective_Markdowns Customer PurchaseMake it a point to clearly indicate why you’re marking down the price of an item or items – is it because you’re having an end-of-season sale, a special buy event, running a weekend only promotion or something similar? It’s important for your customer to understand the reasoning; otherwise you risk your customers not believing your prices.

Many retailers use signage generously during a markdown to help customers know what’s on sale and where to get these items. They use brightly colored labels on products or on the hang tags, as these attract the customer’s attention. Ensure that the markdown price and the prior price are clearly visible. Leading retailer, Target, for example, uses orange stickers on all its clearance merchandise. The original price appears on the top right corner along with a code such as, “15A, 30A” etc. This is the percentage it has been marked down.

Why is this important? So that the deal highlights the implied savings and creates an impulse feeling for the customer to buy.

Take early markdowns of slow-selling vendors, styles, sizes or colors.

Effective Markdowns SaleIt goes without saying that a small percent price cut on a few, select in-season items is better than a drastic price cut on a large amount of unsold out-of-season merchandise. In March this year, popular apparel retailer Urban Outfitters announced that its fiscal fourth-quarter earnings sank 48% as its margins were harmed by greater markdowns offered to clear year-end inventories. Gross margin narrowed to 30.1% from 39.7% due to increased markdowns to clear slow-moving women’s apparel inventory at both Anthropologie and Urban Outfitters – an example of just how harmful, slow-selling stock can be. It is best to identify, mark down and sell slow movers as quickly as possible, to avoid situations such as these.

Consider multi-channel promotion of your markdown prices

Effective Markdowns Online PurchaseYou will need to think about how you are going to communicate these to your customers to draw them into your store. Exploring a multi-channel communication strategy can attract the customers who are most likely to shop at markdown prices, while still allowing you to advertise your fresh, regular-priced stock on relevant channels. A multichannel approach can also help you to push a markdown on one channel with a view to driving traffic to another one. An example is Pottery Barn, which mailed out a 120-page catalog immediately after Christmas where it emphasized new products for spring, with a call-out at the bottom of the front cover announcing 14 sale pages at the end of the catalog. . However, the layout and emphasis on the company’s online store was different: a banner headline announcing the sale right up front. The expensive print catalog was used to market the newer stocks and higher margin products while an e-mail campaign-combined with sales pages in the print catalog-drove customers to a website where marked down items were presented prominently to customers.

Retail analytics can help optimize your markdown strategy

Effective Markdowns Increased ProfitsA strong retail analytics system can help you optimize your markdown strategy during the key phases of your sales cycle which are pre-season planning, in-season promotions and end-of-season clearance. Retail analytics can help you conduct markdown analysis, which will monitor factors such as:

  • Inventory level
  • Average sales volume
  • Price elasticity
  • Salvage value
  • Time frame

These insights can then help you determine which items should be marked down and when.
Recent research supports this shift towards using markdown optimization: 48 percent of companies surveyed for Retail Systems Research’s 2011 annual pricing report said they have deployed or are in the process of rolling out markdown planning and forecasting solutions. Another 33 percent of survey respondents are evaluating or exploring solutions to help improve these capabilities.

Markdowns no longer need to mean ‘losses.’ Are you taking the necessary steps to optimize your markdowns – and getting the best out of them?