Getting markdowns right: Four questions to answer

Getting markdowns right: Four questions to answer

A retailer’s markdown strategy should provide data-driven answers to the following four questions:

1. Selecting the right items: What items should be put on clearance, given their performance during the season?

To identify which items to mark down, a retailer should compare each item’s performance in the current season against the sales plan for that particular item. A simple data-visualization approach can help merchants easily identify which items in the portfolio are overperformers and which are underperformers.

2. In the right places: Where should items be put on clearance, given performance across store clusters or channels?

Ideally, a retailer would conduct item-level analysis for each store or store cluster rather than applying the same markdown strategy across all stores and channels. Store clusters could be derived based on, for example, climate zones, locations (rural versus urban), assortment tiers, or store sizes. An apparel retailer might find that certain swimwear SKUs sell well throughout the year in some of its urban stores in the Northeast United States. It could then apply markdowns more selectively, instead of simply marking down all swimwear in all Northeast US stores during the colder months.

Similarly, some markets might require more frequent price changes than other markets. By differentiating its markdown strategy based on consumer preferences and shopping behaviors in each location, a retailer can ensure that it is investing its markdown dollars where they’ll make the biggest difference.

The same logic applies to channels. Digital channels can more easily accommodate differentiated markdown approaches since pricing changes are easier and faster to execute digitally—and can be done without adversely affecting customer experience.

3. At the right times: When should items be marked down?

At best-in-class retailers, merchants and planners run scenario analyses to determine the timing and frequency of markdowns. Typically, they apply markdowns in phases, starting with a smaller discount—and then, depending on how the discounted items perform, further lowering prices a few weeks later. A typical mistake that retailers make is failing to revisit markdown decisions: an item could remain on the shelf for weeks if the initial markdown wasn’t deep enough.

4. At the right price: How deep should markdowns be to achieve margin and sell-through goals?

For an item identified as a markdown candidate, a retailer can derive the right clearance price—one that optimizes for both gross margin and sell-through—using consumer-centric analytical models and coherent business rules. Discount depth can vary across categories or SKUs. There are, of course, trade-offs between simplicity and precision: applying the same discount rate to all products within a category requires little effort from store associates, whereas applying differentiated discounting depths is a much more time-intensive exercise for store staff.

To optimize markdown pricing, top-performing retailers use industry-leading analytics and modeled elasticities that are grounded in full-year consumer pricing behavior, with specific adjustments for markdown.