Some would argue that there is no “art form” as regards a markdown. It’s really rather simple isn’t it . . . if it doesn’t sell, then mark it down!
Well technically that’s true but misleadingly too simple. To draw an analogy, an effective markdown is accomplished with a scalpel rather than a meat cleaver. Additionally, there are other elements of the markdown such timing, dollar or percentage amount, either bundled or unbundled with other merchandise and of course how the markdown is implemented and promoted.
As a associated issue, the concept of markdowns can either be reactive or proactive, or markdowns as a preplanned merchandising move designed to enhance sales and gross margin dollars.
Markdowns can either be an expense, i.e. a reduction of margin dollars or as a method of accelerating sales with all associated costs picked up by a third party, such as a vendor.
Thus, the markdown comes in many forms and with many intentions, some of which are reactive while others are proactive with a sales, margins or both objective.
When to markdown
Let’s drill down a bit more: In today’s retailing environment, the legitimacy of the retail price has become vastly diminished. Every day and in every way product is “on sale” when in many, if not most cases, the “markdown associated with the sale was premeditated. In other words the markdown was built into the pricing structure in the form of using fallacious retail prices and with every intention of marking down the product to accelerate sales. This is commonly the game plan when merchandise is direct imported from a foreign country.
In other cases, preplanned markdowns are built into the initial order for product. Typically the buyer negotiates a percentage of their initial order to be shipped at some significant discount or alternatively, the vendor agrees to markdown money to offset the discounts extended to the consumers. In either case, the vendor builds such discounts into their cost analysis and planning.
These types of markdowns drive the sales and preserve the maintained margin of the merchandise class. It is a positive action. The consumers, however, are sometimes purchasing on the basis of perceived value. On the flip side, the reactive markdown is in the form of discounting the retail price purely because the product is not selling well. Such markdowns are a reduction of gross margin necessary to clear out slow moving inventory.
Retail fishing/sporting goods stores commonly have a high percentage of their inventory in “C” class inventory which does not sell well and usually consists of small amounts of older inventory. In addition to consuming cash and slowing down cash flow, such “C” grade inventory accelerates inventory carrying costs such as insurance, shrinkage, handling, interest and opportunity costs.
When you take markdowns and the severity of the markdown is all a part of the “art form.” When taking a markdown because merchandise is not selling, take it early and make it deep enough to insure the products affected will sell quickly and completely.
When placing your early opening orders, anticipate your promotions as well as those markdowns needed to clear out slow moving or obsolete inventory. Prior to releasing your orders, negotiate with the vendors in anticipation of promoting the items or a needed markdown to move out slow moving inventory. Thus you are sharing the cost of markdowns with your vendors.
As we say in retailing, “mark them down and move them out!”