Are All markdowns Evil?

Markdowns are most retailers’ biggest nightmare, whether you are a small independent running store or a chain operation. You know that they are a necessary evil – particularly at this time of the year - but the key factor here is how ‘evil’ should we let them become. Using a red pen with restraint can really mean the difference between building and breaking a business. Before we decide when and how to markdown for growth and not disaster, let’s take a step back and find out more about what Markdowns are all about.

What are Markdowns?

Markdowns are defined as reductions in the selling price caused by promotions, old inventory, or slow-moving inventory. Markdowns are always planned at the dollar level and they are calculated as a percentage of sales by dividing them by your net sales (i.e., $25,000 Markdowns ÷ $300,000 net sales = 8.3% Markdown).

There are two types of Markdowns that you would normally use: Regular and Promotional Markdowns.

 Regular Markdowns are usually taken at the beginning of the month. These Markdowns are permanent reductions in the selling price of the item. You change the price on the item and also record the new price in your computer. Even if you don’t sell any that month, you still need to account for them.
 Promotional Markdowns are essentially “Sale” Markdowns that are taken at the cash register when customers pay. The item is maintained in the system at regular price but will scan at the sale price when the sale is made. You only incur this type of Markdown when the customer pays and they generally are for a set promotional time frame.

There are also two different systems that you can put in place when planning for your Markdowns: Seasonal and Progressive System.

 If you use the Seasonal System, you reduce the price of your stock only at the end of the season. The timing is the same for all products in stock. The benefit of this system is that it protects your customer by giving them time to get used to the merchandise while at the same time protecting your image as a full price retailer.
 In the Progressive System, Markdowns are taken to meet inventory turnover goals. They are taken on a regular schedule and they allow you to clear all stock by the out date. Often a set percentage is used at each step.

Are Markdowns Good Or Bad?

I tend to view Markdowns as “tuition that we pay for an education about our customer.”

Not all the shoes or other products you buy will meet your customer’s expectations for functionality, comfort, price or style. Some will sell more than you predicted. Others will not sell at all. There are many reasons for that. Changes in consumer’s taste, declining spending power (something we are seeing more and more these days!!), a risk you took with a line too advanced for your market, being new to a market, ordering too many or too little, and many more reasons. No matter what the reason for your Markdowns, if you take them and learn your lesson about your customer’s preferences, they are worth the price. Conversely, if you don’t keep track and closely review your Markdowns and use that information to plan your inventory assortment for the next season, the price you will pay for not learning from the Markdown are yet more Markdowns next season. And I am not just talking about just the price of the Markdowns, but the price you pay in profitability losses and customer confidence that if they occur season after season often results in failure of the business.

Not all Markdowns are bad. However, there is an optimum amount of Markdowns that you should strive to achieve. The following chart provides you with a list of the optimum percentage of Markdowns for different categories of product. It also lists some of the possible causes of Markdowns and situations when too few Markdowns could indicate inventory problems.


If You Have Too Many Markdowns If You Have Too Few Markdowns Optimum Amount Of Markdowns
Overbuying (Cheaper By The Dozen) Perfect Buying (not likely!) High Fashion Women’s Clothes 18%
No P.O.S. Data Lots Of Old Merchandise Men’s Traditional Clothes 11%
Greed Boring Assortments Fashion Shoes 14%
Ignoring Competition No Challenging Of Customers Athletic Shoes 8%
Repeats Over Valuing Inventory Outerwear 15%
Early Or Late Receipts Socks 2%

There are other causes for Markdowns besides those we talked about earlier. Here is a list of additional ones:

 Buying on bad records – your inventory historical data is not accurate and therefore your orders do not reflect actual sales from previous seasons.

 Buying co-op or dating – If you buy the quantities often set as a minimum to earn co-op dollars or extended payment terms, sometimes those larger quantities are just Markdowns waiting to happen.

 Over paying / over pricing – ultimately, the price has to be right, i.e., what the market will bear.

 Buying too many –- if historical data is available (i.e., if you didn’t just open the store), use that data as your basis for placing orders. Look at your sales from last season and only order more if you have evidence that there’s going to be an increase in demand or if you are going to do more to promote the sale of those products (advertising and other marketing initiatives).

 Buying from too many vendors – when buying from too many vendors, prices might not be as advantageous since quantities are generally too small or you may have late or early delivery issues, inconsistent quality, etc.

 Bringing in too early – timing is key in inventory management, particularly with ‘hot’ products. If the market is not ready yet, the products will sit there for quite some time and you know that’s a cost to your business. That is space that you are paying a rent and many other expenses on and unless you get your money back in sales, it’s not going to be profitable for your store.

 Bringing in too late – again, if the product is ‘hot’, unless you have it when the customer wants it, they are not going to wait and they will go somewhere else to get it.

 No plan to sell – sales planning is essential to make sure you know how much, when and how you are going to sell the products you buy. Before you order any product, think of how and why it will sell.

 Repeat orders – whenever you repeat on something that is selling well, Murphy works overtime and the item often comes in late when your customer has already bought them somewhere else. Avoid repeats on fashion items, not basics.

 Breaking size, color, assortment – just having a few of an item doesn’t make for a great display and offering for the customer. This is very common at season end and is considered normal.

 Competition – while I do not encourage retailers to fight the price war against their competitors (nobody wins and it’s too ‘bloody’), you sometimes need to follow their lead. You will do this if you do not have a compelling reason to explain to you customer why your price is higher, such as, a more complete assortment, better service and product knowledge and better ambience.

 Soiled, damaged – can’t sell it full-price, can you?

 End of season – this should be the most common Markdown reason and it’s to clear out the old to make room for the new.

 JNDs (Just Noticeable Differences) –- often you buy from prototypes and not production samples and the articles that arrive are not exactly what you originally bought, sometimes these slight differences in fabric or style can lead to Markdowns.

 Poor display / hidden – when you first notice a slow or no selling article, go out and look, is it still in the stockroom and not even on display? Is it hidden behind other product? If you are not rotating your stock constantly on your displays you can end up with good articles not being seen.

 Last in, first out on basics (LIFO) – this happens when new arrivals on a current article are sold before the older one in stock. Always put the new behind the old.
Rules For Effective Markdowns

Here are some rules you should follow to ensure the effectiveness of your Markdowns and that they do not impact the profitability of your store:

 Plan, plan, plan, and plan again for Markdowns – This is the first rule and the most important one. You should never take a Markdown without knowing why.

 Have a budget – You must always have a budget for Markdowns and make sure that you follow it and try to always spend what you budgeted.

 Base the Markdown on the actual performance of the product – The amount of the first Markdown is determined by the rate of sale, the desired inventory turn, and the on-hand amount of product. The greater the inventory available for that product and the slower the rate of sale, the higher the Markdown.

Markdown Tips

 Ignore cost – What you paid for an item has nothing to do with the Markdown price. The Markdown price is determined by what customers will pay. So, if you paid $40 for a product that didn’t sell at all for the last 6 months, don’t be afraid of marking it down to $20 if that’s what the customer is willing to pay.

 Use price points, not percentages – Customers often cannot figure out percentages off a product. It is better to say “save $20.00” than “save 30%”.

 Make the first Markdown work – The first Markdown is always the cheapest because if you have to come back and mark it down again you not only wasted time and missed a sale but you also added additional labor costs.

 Group them into price points – You should have a table with all $30 items, another with $40 items, and yet another with $50 items. This makes it easier for customers to shop the Markdown area.

 Keep them in separate areas – You should never use valuable retail space for Markdown items but rather less valuable areas – often the back of the store.

 Maintain a regular return policy – You should never say all sales are final on Markdown merchandise. You should keep your regular return policies in effect, although it is reasonable to shorten the return time to seven days.

 Don’t regret the fast sale – If the item sells right away, you should never say: “I could have sold it for more!” Rather, you should be happy it is gone and learn your lesson.

 Notify good Customers first – If possible, you should send out a sale post card to your good customers so they have first chance on Markdown items.

 Track high-Markdown vendors – You should run a report on your discounts by vendor and see which vendors are responsible for the majority of your Markdowns.

 Learn the best price points – Often certain categories sell better at certain price points. For example, a T-shirt will often sell more at $19.99 than it would at $23.99.

 Remember that you can have too much of a good thing!


Markdown Steps

Following is a map of the key steps you should take when planning Markdowns.




Markdown Logs

Even if your computer system does not track Markdowns by type, you can use an old tried and true “Markdown Log". It is a simple spreadsheet used by many retailers that allows manual tracking of Markdowns at point of sale by entering the reason for each Markdown into the spreadsheet.

Markdowns – Final Thoughts

Markdowns are taken to more honestly value your inventory and to improve your store’s cash flow position. Markdowns are a much better strategy than hoping that the merchandise will simply disappear (have you noticed that it is never the ugly stuff that is shoplifted?). You will never avoid Markdowns, but if you plan for them, take them when necessary and learn from each one, you will keep your inventory clean and have a much better offering for your customers.
Jim Dion, founder and president of Chicago-based Dionco Inc., is an internationally known consultant, keynote speaker, trainer, and author of the best-sellers Retail Selling Ain’t Brain Surgery, It’s Twice As Hard, and Start and Run a Retail Business. The excerpt here is from his soon to be published book: The Complete Idiot’s Guide to Starting and Running a Retail Store, which will be available starting in April from http://www.amazon.com

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