Here, in the third and final installment of my three-part blog series outlining the markdown optimization process for retailers using manual methods, I detail the process for calculating an optimal markdown cadence.
Part 1 in the series covers the markdown optimization basics by looking at inventory through a “Seasonality” lens.
If you haven’t read Part 1 yet, you should start there, as the main concepts are introduced and carried through to this piece.
Part 2 describes how to calculate liquidation percentages.
Just a reminder: The markdown process outlined below is meant for retailers with significant amounts of short-lifecycle or discontinued products. Do 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.
I know some retailers don’t have the wherewithal to invest in advanced pricing analytics software. Still, I highly encourage you to explore Impact Analytics PriceSmart™.
Markdown Optimization Process: Standard Markdown Cadence
Retailers should develop standard markdown cadences for particular items or categories based on data analysis and their experience with past clearance activities. Virtually all markdown cadences should include at least three price movements prior to arriving at the final liquidation.
A good, minimal target for the initial markdown percentage is 25 percent—it’s deep enough of a discount to grab customers’ attention and encourage them to purchase but doesn’t give away excessive margin.
Of course, be sure to follow your company’s price-ending business rules. The resulting discount rates may vary from the targets outlined here.
The following examples use a standard markdown progression common in apparel.
An item selling according to plan should begin its markdown cadence with a 25 percent discount at the initial markdown date. Keep the item at the new markdown price for three weeks.
When the third week elapses, take the second markdown of 40 percent off the regular retail price. Again, keep the new markdown price for three weeks.
After this initial six-week clearance period, mark down the item to 60 percent off the regular retail price. Stay the course for another three weeks.
If any items are still available, you should knock off 70 percent from the regular retail price until it reaches its liquidation date.
Feel free to delay the markdown cadence for items tracking ahead of their initial markdown date’s target Liquidation Percentage; say, you’ve liquidated 90 percent of total units available instead of the anticipated 75 percent. In such cases, you may initiate a markdown cadence resembling the following example.
At the sixth week, mark it down 40 percent off the regular retail price and keep it at this initial markdown price for three weeks. Then mark it down to 60 percent off the regular retail price and keep it there it reaches its liquidation date.
Markdown Optimization Process: Accelerated Markdown Cadence
Conversely, for styles tracking behind their preclearance target liquidation percentage—say, you’ve liquidated only 50 percent of total units available to sell instead of 75 percent—you may want to accelerate the markdown cadence, pulling forward the Initial Markdown Date so you reach your target inventory by the Liquidation Date. It could look like this.
When the fourth week elapses, take 40 percent off the regular retail price. Again, the new markdown price stays at the 40 percent discount for four weeks.
Next, mark it down 60 percent off the regular retail price. Hold the price for another four weeks, then discount the item 70 percent until it reaches its Liquidation Date.
Markdown Optimization Process: Conclusion
While the above method does not deliver all the benefits of an advanced pricing solution, it goes a long way toward addressing the most egregious problems related to the liquidation of aging goods.
Because this approach is tied to the peak selling period and the target liquidation rates, it compensates for a tardy start to the clearance process. In addition, by setting a standard markdown cadence, it counters the tendency to take discounts that are too shallow to move through excess inventory. The method ties the markdown cadence to the liquidation performance of each item, giving you flexibility to respond to oversell and undersell situations.
It’s important to emphasize that markdown cadences—especially Deferred and Accelerated—are highly subject to the retailer’s judgment and analysis. You may elect to impose steeper discounts, elongate markdown periods, defer items to later Liquidation Dates, or take other actions based on the item’s performance, inventory levels, market conditions, etc.
Markdown Optimization Process: That’s All, Folks!
This wraps up my three-part series of blogs outlining a strong markdown optimization process for retailers who, for whatever reason, are not using advanced pricing analytics software.
Part 1 covers the markdown optimization process basics.
Part 2 covers how to calculate liquidation percentage.
Thanks for reading!
Take the Next Step
If you’ve read the series, I’m sure you’re tired of hearing me say this but it’s true:
I’d be selling you short if I didn’t encourage you to check out our industry-leading pricing optimization software, Impact Analytics PriceSmart.