Managing Markdowns: Why Prevention Is Better Than The Optimization Cure

Markdown Optimization has become all the rage of retailers and retail technologists, but what is a markdown and how should we optimize it? A simple definition is a reduction in price, or the amount by which a price is reduced. To mark down is to alter price in order to raise demand.

At one time retailers called this exercise ‘clearance' and marked down the price of their goods just once a year, if ever. That was in the annual sale, a time when demand was low and the retailer wanted to clear excess stock in order to make way for new products. Today markdowns are a continuous process for the retailer. Clearance sales are seldom annual events. They may be seasonal, and in the fastest moving retailers – fashion in particular – the retailer may choose to mark down items literally every week.

For some retailers the process of marking down products has shifted from being an exercise designed to manage the end of the product's life to becoming a promotional tool in itself…and customers have noticed.

Whether actively promoted or not, if markdowns are near-continuous, regular shoppers become accustomed to the process. This not only increases off-price demand, but also can decrease full-price sales. As some retailers assume ever more aggressive markdown strategies, the net effect is a serious erosion of price and more importantly margin much earlier in the product's lifecycle. Promotions are one of the reasons commonly given for Kmart's near demise. It has been estimated that some retailers actually sell less than ten percent of their products at full price – their customers have been trained well.