Markdowns – A strategic business tool for Inventory planning.

As most of my readers know that I am very passionate about Retail management and have been responsible for managing some of the regional brands in terms of Retail operations, Brand management, merchandising planning, Sales, Visual Merchandising.

I have always noticed that most of Retail CEOs/ CFOs often takes a downward look when it comes to “Markdowns”. I recall, my previous boss (who is also my mentor) used to give me a very awkward and nasty look every time I proposed using Markdowns as Marketing tool/ event.

My article will talk about as to how markdown planning can help retailers increase sales, improve margins and better manage product lifecycles.

It is my attempt to clear some concepts and convince senior management to adapt to this wonderful planning tool which can prove to be very effective in their Inventory Planning goals.

Markdowns are often associated with margin degradation and profit loss—and some companies believe that cutting prices for their products could negatively impact their brand image. Although inevitable, retailers have historically viewed markdowns as a necessary evil designed to help sell old or slow-moving inventory.

A) View Markdowns as a function of Price Elasticity: Matching Perceptions with Pricing.
An example of a markdown would be if you had a sweatshirt for sale that was originally priced at Dhs 100 and after one month of slow sales, you decide to markdown the sweater to 20% off, making it Dhs 80 at retail.

Although you just lost Dhs 20 of your intended markup on that sweatshirt, in return, you are also inviting more people to purchase it at a price they may prefer vis a vis the original Dhs 100 price. Since the shirt had not been selling well at Dhs100, offering a nice, mark downed price can often result in sales that would not happen otherwise. Hopefully a 20% discount will do the trick, however often you will find that you need to continue your markdown strategies based on slow sales, moving product from 20% off to 30%, 40% and more if necessary.

Most Retail CEOs and CFOs (especially organizations run by finance professionals and not by Retail mindset professionals) often confuse Markdowns with Discounts model.

A discount is a reduction in the price of an item or transaction based on the customer making the purchase. Many retailers offer discounts because they find that customers return to their store versus others because of the discount provided to them. Discount offers “Instant gratification”.

Customers often enjoy the advantages they feel that discounts often give, such as being a preferred customer and therefore getting special treatment. Some boutiques & Spas offer friends and families discounts, which benefits both the retailer and those getting the discounts. It’s a win-win on both sides.

Both a markdown and a discount can be temporary or permanent, depending on how you market them to your customers.

An example of a temporary discount would be "Get a discount equivalent to your waist size". If your waist size is 32 then avail 32% discount on your purchases.

A temporary markdown example would be if you had a one day sale, offering mark downed prices for only a specific amount of time.

A discount strategy is more Tactical whereas Markdown strategy is more organic in nature. Both should be an integral part of the marketing mix.
I recall the statement of Sir Martin Sorrell (CEO, WPP- an advertising agencies conglomerate), who once quipped, “Discounts are like bad cholesterol and Markdowns are like good cholesterol; there has to be less dependence on discounting model, instead push more brand-building efforts”.

B) Using Markdowns to control Inventory Ageing:

You can use both discounts and markdowns as part of your sales strategy to help make the most out of your inventory sell thru and ultimately, your sales goals.

Wasting your retail floor space with products that are not selling will not help you at all, so consider how markdowns and discounts may be able to work for you in your sales strategy.

C) Tie your Markdown planning with your financial plan- how much hit are you willing to take in markdowns?
A markdown plan means nothing if it’s not tied to the financial plan. Retailers should determine how much they are willing to spend on markdowns to hit their financial targets. This information ideally flows either from CFO/ CEOs while preparing budgets for next fiscal.

It’s equally as important that retailers are able to not only execute on the markdown plan once it’s in place but also monitor it in real time. This will ensure that adjustments can be made as the season progresses.

D) Determine early on which items you are willing to reduce in price over time and for how much:
It implies whether you want to run it on category or on specific collections. Monitor its sales-through rate and then decide the markdown %.

E) Managing Product lifecycles more effectively:

Smart retailers will leverage effective markdown planning to not only ensure that there is less stock left over at the end of the season but to also manage new product introductions and phase-outs.

Caution to Retailers who shy away from Markdowns strategy:

Retailers that avoid putting a markdown plan in place may experience increased cannibalization of new product lines and decreased sales.

The impact could even extend to the store level as new and old products are shoved together on store shelves or displays, resulting in cluttered and disorganized stores that even the most loyal customers will find difficult to shop in.

A Perfect example is “ Part Sale” that we find very commonly in retail stores these days in the Middle East, wherein new merchandise is being sold with that of discounted merchandise in separate enclosures or gondolas.

I would like to end my article by sharing a video wherein an industry practitioner and a successful retailer Mr Kamel Shaban, MD -Capacita brands, has offered one valuable tip to Inventory planners and Merchandise Managers as to how they can use Markdown strategy to keep “freshness of assortments” in their stores by avoiding discounting model trap.

           
In case if any of my readers, want to know & streamline Inventory planning strategy for their brand then I would be more than glad to share my ideas acquired while practising & closely following this topic.

You can reach me on riteshmohan@yahoo.com in case this topic also excites you.



About the author:
Ritesh Mohan is a passionate retail professional with over 20 years in the retail sector, handling some of the biggest brands in beauty, fashion and fragrances retail & FMCG sector. He has been instrumental in the growth of some of the regional brands as well in Middle East region. He specializes in Retail management, Product development, Brand management, Retail Operations, Sales Management, Business Management & Empowering business owners with his wisdom & experience of around two decades in the industry.