When it comes to maintaining a steady cash flow and keeping your store’s inventory fresh, retail markdowns are an essential tool. By strategically lowering prices, you can move slow-moving stock, stay competitive, and meet customer expectations while still achieving your revenue goals.
Here’s everything you need to know about markdowns — what they are, when to use them, and how to get the most out of them for your store.
What Are Retail Markdowns?
Simply put, a markdown is a price reduction applied to a product to accelerate its sale. Unlike discounts offered during promotions or for special groups like seniors, markdowns are direct and unconditional reductions that may either be temporary or permanent.
For example, a grocery store may lower the price of perishable items that are about to expire, or a clothing store might mark down winter coats at the end of the season to clear out inventory.
Different Types of Retail Markdowns
Retailers use various types of markdowns, depending on the situation and their goals. Here are the most common approaches:
1. Temporary Markdowns:
These are short-term price reductions designed to create urgency and boost sales in a short time. Examples include weekend sales, buy-one-get-one (BOGO) deals, or limited-time coupons. For instance, a convenience store might offer a Friday-only discount on energy drinks to drive foot traffic.
2. Competitive Markdowns:
If your competitors are offering similar products at a lower price, you risk losing customers. Price matching or temporarily lowering your prices can help retain business. Tobacco shops, for example, may temporarily discount popular cigar brands when a nearby store drops its prices to stay competitive.
3. Permanent Markdowns:
These markdowns are used for clearance or to sell off discontinued items. If certain products are not selling well or are taking up too much shelf space, a permanent markdown can help move them quickly. Grocers may use this strategy to clear out products that are nearing their expiration dates.
How to Calculate Markdown Pricing
To ensure you don’t unintentionally hurt your margins, it’s crucial to calculate markdowns carefully. Here’s a simple formula to determine your markdown percentage:
(Original Price – Sale Price) ÷ Original Price × 100 = Markdown Percentage
For example, if you reduce the price of a six-pack of sparkling water from $12 to $9, the markdown is 25%.
Next, you need to account for your cost of goods sold (COGS) — the price you paid for the product. If your COGS is $7.50, then even with the markdown, you still make a $1.50 profit per unit. However, if the sale price drops below your COGS, you’ll be losing money. While it might be acceptable to take a loss on unsellable stock, be careful not to make it a regular practice.
Your POS (point of sale) system can help you make these calculations and ensure you’re making informed decisions. By accessing real-time sales data and margins, you can set markdowns that protect your profitability.
Tips for an Effective Markdown Strategy
To make the most of markdowns, follow these best practices:
1. Leverage Data for Decision-Making
Your POS system can provide valuable insights into which products are slow-moving and which items are in high demand. If an item hasn’t sold in weeks, it may be time for a markdown. Use data on inventory aging and sales velocity to inform your decisions.
2. Mark Down at the Right Time
Timing is everything when it comes to markdowns. Misjudging when to apply a discount can result in lost sales. For example, grocery stores often reduce prices on fresh produce in the evening to clear out stock before closing, while liquor stores typically mark down holiday stock after the rush to make room for new inventory.
3. Keep Customers on Their Toes
If customers begin to notice a regular markdown pattern, they may start waiting for discounts before making purchases. Keep your markdown schedule unpredictable to maintain interest and encourage full-price sales. Rotate markdown items and avoid announcing discounts too far in advance.
4. Experiment with Pricing Psychology
Small tweaks to how prices are presented can make a big difference in consumer behavior. For example, pricing an item at $9.99 instead of $10 can make it seem like a better deal. Show the original price next to the sale price to highlight the discount and consider using bundle deals like “3 for $5” to increase sales volume.
5. Tailor Your Markdowns to Specific Locations
If you operate multiple stores or sell both in-store and online, consider applying different markdown strategies depending on the location. For example, if a certain product sells better in one store than another, you can offer a discount in the low-performing store without affecting the other locations.
How Your POS System Can Enhance Markdown Strategy
To successfully implement markdowns, your POS system is your best ally. With access to data on inventory turnover, sales trends, and profit margins, you can make smarter pricing decisions. Here’s how your POS system can help:
- Track which items are moving and which are not
- Set up alerts for slow-moving or aging inventory
- Analyze the impact of markdowns on sales and margins
- Run reports to review past markdown performance and refine your strategy
By using your POS system to make informed, data-driven markdown decisions, you can ensure that you’re not just cutting prices but doing so strategically to improve your bottom line.
Conclusion
Retail markdowns are a powerful tool for clearing inventory, responding to market conditions, and driving customer engagement. When used effectively, they can improve cash flow, keep your shelves stocked with fresh items, and help you stay competitive. By leveraging data, timing markdowns correctly, and using your POS system to guide decisions, you can create a markdown strategy that works for your store and your customers.
