Markdown Pricing: How To Clear Inventory While Optimizing Margins

Markdown pricing is a strategic tool that retailers can use to clear out excess inventory while maintaining healthy profit margins. It’s often used by retailers and e-commerce businesses to simultaneously shift stock and increase sales. In this article, PricingHUB explores what markdown pricing is, how it differs from discount pricing, the benefits of the method and how it can be implemented in your own pricing strategy.

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What Is Markdown Pricing?

Markdown pricing (also known as clearance sale price or price markdown) involves reducing prices to increase sales and clear out slow-moving inventory. All good things must come to an end – which is why products have life cycles. However, incessant innovation and technological advancements mean two things.
1) Product life cycles are becoming shorter.
2) Companies are left with an increasing amount of unsold stock.

The goal of markdown pricing is to ultimately avoid excessive erosion of margins while increasing sales on slow-moving inventory.

What is Markdown Pricing in E-Commerce?

A markdown pricing strategy is also adopted by e-commerce stores to shift products sold online. However, it must be approached strategically and analytically in order to optimize margins and clear inventory. E-commerce stores with vast product catalogs require more than just manual efforts. Powerful software is required to analyze large clusters of customer behavior and market data to determine the right time for a markdown, at the right price.
And that’s exactly the role of a pricing tool. By being able to manage thousands of data points instantly, a pricing tool like PricingHUB can help you figure out the best markdown price for your product. Learn more about how a pricing tool can help you leverage your product catalog data to optimize your commercial performance.

Types of Markdown Pricing

There are 5 types of markdown pricing strategies: Clearance sale, competitive markdown, promotional markdown, markdowns for damaged items and season markdown.

Clearance Sale

If a retailer decides to discontinue a certain product line or service, they will put it on clearance. The reasons may vary: low popularity, or the introduction of a newer model. Simply put, a clearance sale is one of the most common ways to shift slow-moving stock.

Competitive Markdown

Markets are often volatile and highly competitive. A competitive markdown is a byproduct of price-matching. To prevent customers from straying or taking their business elsewhere, a price will be lowered to reflect the field.

Promotional Markdown

Urgency is used to prompt customers to take action. A reduced price in a limited time frame incentivises purchases. A promotional markdown comes in different formats: BOGO (Buy One Get One Free), coupons, bulk purchase discounts etc.

Markdowns For Damaged Items

A markdown for damaged goods is applied to goods spoiled post-delivery. This is commonly practiced in retail stores, where a 10% discount is applied due to a stain or damaged packaging.

Seasonal Markdown

A seasonal markdown is typically applied when it’s time to clear out any temporary or seasonal stock.
For example, a leading party and costume provider may apply a seasonal markdown to shift Christmas items.

How To Calculate Markdown Pricing

As we’ve outlined, achieving the optimum markdown price is an amalgamation of data analysis, checking inventory levels, metrics and thorough consideration. For e-commerce stores and online retailers, dynamic pricing tools and systems fueled by machine learning are used to do this. Sourcing the right tool ensures that your bottom line remains unaffected and your margins are not eroded.

However, in its most basic sense, a markdown can be calculated as follows:
Markdown Percentage = (Original Price – New Price) / Original Price × 100

For instance, if the original price of a product is €100, and it’s marked down to €80, the markdown percentage would be:
(100 – 80) / 100 × 100 = 20%

Markdown Price vs Discount Price: What’s The Difference?

Markdown pricing and discount pricing can boost sales by making products more appealing to customers. However, these strategies also reduce prices, which can lead to thinner profit margins and decreased profitability if not managed effectively. Despite their similarities, markdowns and discounts are fundamentally different. Understanding these differences allows retailers to choose the right approach based on their specific goals.

Discount Price

A discount pricing strategy is temporary and weaponizes urgency. It is a proactive method used to attract customers and boost sales volume quickly. Once the promotional period has reached an end, products will return to their original price.

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Markdown Price

On the contrary, markdown pricing refers to a permanent change in the selling cost. It is a reactive method that aims to clear excess or slow-moving inventory. Customers are also attracted by lower prices while helping retailers to offload stock.

How Retailers Benefit From Markdown Pricing

The three main benefits for retailers are a rapid boost in sales, excessive inventory clearance and optimized profit margins.

Boost In Sales

Markdown pricing converts slow-moving stock into quick financial gains thanks to increasing sales. Additionally, markdown prices are an opportune way to attract more price-sensitive customers. They may have been initially hesitant to purchase due to financial constraints. This alignment of perceived value, pricing and timing paves the way for customer engagement and brand loyalty.

Shift Stubborn Stock

Employing this strategy helps retailers make space for new and exciting products. Moreover, it provides a practical approach for businesses with surplus inventory driven by seasonal shifts and unexpected customer preferences.

Optimized Profit Margins

By strategically optimizing prices according to stock levels and carrying out destocking on a regular basis, retailers can optimize and protect profit margins. Additionally, aligning promotions with fluctuating demands allows businesses to match consumer interests and purchasing habits with the optimum markdown price.
In order to match consumer interests, some pricing tools like PricingHUB go even further by calculating the impact of a change in price on product demand. This technique, called “customer-centric optimization,” places price elasticity calculation at the heart of a retailer’s pricing strategy. By assessing elasticity at the product level, retailers can set optimal prices daily, ensuring they maximize profits by responding directly to consumer reactions to price changes.

It is crucial to protect these all-important profit margins. Sales might be skyrocketing but will they lead to sustainable profitability? For this reason, pricing strategies must be carefully managed and monitored.

How To Ensure Your Markdown Strategy Is A Success

We’ve already created an in-depth Markdown Strategies series that ensures your business stays profitable. If you haven’t yet read it, here’s a quick recap of how to implement a successful markdown optimization strategy.

Historical Data Deep-Dive: To implement any strategy successfully, planning is required. Reviewing past sales performances allows businesses to unearth trends and patterns that will influence the markdown price.
Organize Your Objectives: Have your objectives clear. Setting clear goals allows retailers to better measure the success of a campaign.
Identify Products For Price Markdown: Before choosing the products you wish to be rid of, take into consideration the following criteria: stage of product life-cycle, seasonality and slow-moving inventory.
Set Appropriate Markdown Levels: Setting rules can help provide the optimum price point and time to put the strategy into motion. Price elasticity, competitive field and demand should be taken into account at this stage.
Forecast The Future: Using a simulation tool can help visualize the possible impact of a markdown campaign on your business. By testing different price and product ranges, it can determine any potential challenges.
Automate Your System: Automated systems that adhere to your preset guidelines bring consistency and streamline pricing decisions. An analytical and automatic system can help discover the most optimum price points and evaluate campaigns more efficiently.

In conclusion, a markdown pricing strategy can be an extremely useful method of clearing stock and driving sales. However, it should be driven by data, research and rigorously tested with a tool like PricingHUB.

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