Welcome to this blog for determining liquidation percentage, the second installment in my three-part series outlining the markdown optimization process for retailers using manual methods. I understand some retailers don’t have the wherewithal to invest in advanced pricing analytics software. Still, I highly encourage you to explore Impact Analytics PriceSmart™.
In Part 1, I covered the basics of this markdown process by looking at inventory through a “Seasonality” lens. If you haven’t read it already, you should start at Part 1 as the main concepts I introduced are carried through to this piece.
Just a reminder: The markdown process outlined below is meant for retailers with significant amounts of short-lifecycle or discontinued products. You should not use this markdown process for recurring basic and core items; rather, you should manage inventory for these items by manipulating future orders and changing planned promotions.
Ready? Let’s go!
Markdown Optimization: Liquidation Percentage
As I described in Part 1, this markdown management approach is based on the seasonality characteristics of products. You first identify an item’s week of peak demand and then select a week shortly after to begin marking it down. This markdown kickoff date is determined by the target Liquidation Percentage you’ve set for that item.
Liquidation Percentage is a metric representing the percentage of units sold out of the total units available. It is calculated slightly differently in preseason (planned) than midseason (actual).
Liquidation Percentage Calculation: Preseason or Planned
Prior to the season, you’ll calculate Planned Liquidation Percentage based on the Cumulative Planned Sales Units (season-to-date unit sales) for the relevant week (Week X) as shown below.
Determine the target Liquidation Percentage at the initial markdown date during assortment planning using a company benchmark, typically 75-85 percent. Then peg the initial markdown date to the week in which you expect the item to reach the Planned Liquidation Percentage.
Example: The Knit Tops buyer acquires 6,000 units of a basic tee shirt in a new seasonal pattern that you targeted to sell in the Spring/Easter timeframe. The Planned Liquidation Percentage for this item is 75 percent on its initial markdown date, meaning you plan to sell 25 percent of these units during the markdown period.
Using the above benchmark, here’s how to determine the week in which this Planned Liquidation Percentage is attained. We see the Planned Cumulative Unit Sales for Week 18 are 4,574. The Planned Season On Order Units are 6,000. Since it is a new item, the Season Beginning Inventory Units is zero.
If the print tee style in the example above sells according to plan, you begin marking it down in week 18. If the item is outperforming the plan, delay the markdown process accordingly. If the item is underperforming to plan, start the markdown process sooner.
Base your liquidation date—the effective end date for the markdown process—on company policy or on contracts in place with third-party providers. This may represent the date that products are marked out-of-stock, transferred to a liquidator, shunted to an outlet store, or whatever final disposition strategy you execute. The markdown period is the time between the initial markdown date and the liquidation date.
During the season, as selling weeks elapse, calculate Actual Liquidation Percentage as below.
Example: The same patterned tee shirt has been selling for 16 weeks. Now the Buyer wants to evaluate if the initial markdown should still take place in week 18. To do this, calculate the Actual Liquidation Percentage for week 17 and compare it to the Planned Liquidation Percentage for that week.
In this example, the Actual Cumulative Unit Sales for Week 17 are 4,189 (slightly below the Planned Cumulative Unit Sales). The Inventory Units On Hand are 1,811. The Inventory Units On Order are zero since all deliveries have been received by this date.
This style’s Planned Liquidation Percentage for week 17 is 69.9%. The Actual Liquidation Percentage for that week is 69.8%. The style is performing quite close to the plan and should be marked down on schedule.
This is Part 2 in a three-part series of blogs outlining a strong markdown optimization process for use by retailers who, for whatever reason, are not using advanced pricing analytics software.
Part 1 covers the markdown optimization process basics.
Part 3 will cover how to determine the markdown cadence.
Take the Next Step
I’d be selling you short if I didn’t encourage you to explore our industry-leading pricing optimization software, Impact Analytics PriceSmart.