Markdown: a guide for product businesses

Meet your new friend, ‘markdown’. If you’re not already acquainted, markdown is simply a way to describe a reduction you make in the price of your product. The reduction can either be permanent or it can be temporary and promotional.

We all reduce prices at some point in our businesses, whether that’s with a view to making space for new stock by clearing products that aren’t selling, or to strategically drive sales. But while reducing prices is easy, reducing prices in a way that stays profitable is more of an art – and a bit of a science.

Let’s begin our guide to markdown by taking a closer look at those two types of reduction; permanent and promotional.

Permanent markdown

Permanent markdown does what it says on the tin. Once you’ve marked the price down, it doesn’t come back up, so you use it when you’re intending to sell all of the stock you have left. Think end of season and mid-season sales. Those ones which always appear at the end of summer, Christmas and then a couple in between. Retailers plan these key events (find out more about retail marketing calendars) and they also plan the lifecycle for each product, when to launch, sell and clear it. Based on that, they will buy or make enough of the product to meet the sales demand (learn more about range planning).

If there’s a little bit left over (or *whispers* you don’t get it right and that to-die-for cactus print bag doesn’t sell as you expected) then that is what you'll find in the End of Season and Mid-Season sales.

It’s a kind of retail detox, clearing out the old to bring in the new.

Promotional markdown

Unlike permanent markdown, promotional markdown is your flexible markdown friend. Because it isn’t permanent, you can use it more strategically to minimise the impact an under-performing product has on your profit, or to maximise your overall profit.

Minimising the impact of an under-performing product

Imagine that cactus print bag that isn’t selling. It will definitely have to go into the Mid-Season sale at 50% off. But what if you could minimise the impact on your profit? By using promotional markdown BEFORE the Mid-Season sale, you can sell some units at a lower discount. So when you get to the sale, you will have fewer units to mark down permanently, at a higher discount. Which means you have more sales and more profit. Clever.

Here’s a handy example…

It’s the 14th February, Valentine’s Day, and you’re selling £10 chocolate roses. You have ten left and you know you won’t sell all of them today at full price. You can’t save them for next year, either, so that means marking them down to 50% off tomorrow.

As you have ten chocolate roses at £10 each, you have £100 of stock (number of products x current selling price = stock value). You decide to run a 20% off promotion and sell each rose at £8 instead of £10. Importantly, your stock is still WORTH £100, because the discount is only for one day, and then will go back up to £10.

With promotional markdown, the sales and markdown are only counted when you sell something. So, if you sell all ten roses at £8 you make £80 sales. And your markdown spend was £20, because:

Number of products sold (10) x Discount Value (£10x20%) = Markdown spend (£20)

What if you hadn’t done that?

You’d have permanently marked them all down to 50% off the next day, giving a new permanent markdown price of £5.

This reduces the value of your stock to £50 as it is a permanent markdown.

e.g. 10 Chocolate Roses x £5 Selling Price (£10 - 50%) = £50 sales

Your markdown spend would have been £50.

That means that by using a promotional markdown of 20% on the first day, you’re £30 better off than if you’d waited and marked them all down to 50% off the next day.

Ker-ching!

Maximising your profit

You know that ‘20% off EVERYTHING’ event (where you just HAVE to buy everything you'd been saving in your basket for weeks)? Or the Black Friday bargain you spotted with 50% off? All the key events like this are planned in long in advance.

Why? Because they’re sales drivers. 

Those clever merchandisers have worked out (on their very large calculators) that if they sell more units they can make the same, or even more profit despite the 20% off. Genius.

They will have bought or made extra stock to meet the increased sales demand of the 50% off Black Friday bargain. Maybe they got a lower cost price for the main component, or perhaps making the stock in bulk saved time. Those are both key factors in reducing costs and increasing profits, after all.

You can work all this out with the Flourish Markdown Calculator. Use it to work out if you’d be better off going for a 10% off promotion, or how much discount you can offer on the cactus print bag, all while keeping an eye on your profit.

A quick word on what might seem like my obsession with profit. 

Please do excuse me, I’m a merchandiser after all. But even merchandisers know that you’ll sometimes do an event to help with your exposure and marketing rather than to make a profit. And that’s absolutely fine, if that’s the plan. It’s knowing if you’re making a profit or not which is really important!

How to use markdown profitably

Once you've decided which type of markdown to use, the next steps are to use it profitably (see, I’m back to the profit talk already!).

First:

Decide how much money the customer will save in order to entice them into buying, and clear or speed up your stock.

For this you’ll need to know: 

• Current selling price

• Cost price

• Fees

• Profit

(Top tip: Your cost price is the only one of those four elements which is fixed – and if you’re not sure what some of these mean, learn more about pricing like a pro…) 

Using the Flourish Markdown Calculator, you can look at the impact of each discount amount or percentage:

• New selling price

• New fees (these change according to the selling price)

• New profit
   

Next:

You need to tell your customers how much the new discounted price is. You can either offer it as a % discount or as a £ discount, even though it’s the same amount.

There’s a simple rule to make your offer sound most appealing to your customer:

• If it’s under £100, off a % discount.

• If it’s over £100, use a £ discount.

For example… 

What sounds better? A £20 t-shirt with 20% OFF! Or with £4 OFF!

Next up, a £200 chair with 20% off? Or with £40 off?

And finally:

Sell sell sell!

Get hold of your Flourish Markdown Calculator today! You’ll enjoy hours of price reduction fun, guaranteed*.

(*not really guaranteed, but some of us get a kick out of it…)