Retail markdown strategy: timing, depth and budget

A markdown is the moment a store admits that a product will not sell at the price it was first given. Taken early, it clears space and recovers most of the money on the shelf. Taken late, it leaves a season's stock to be sold at a loss or carried into next year. This guide covers what counts as a markdown, when to act, how deep to go, how to budget for it and how to keep the ticket honest.

The companion post on initial markup explains how the opening price is set.

What is a markdown in retail

A markdown is a permanent reduction in the selling price of goods the store already owns. The new price replaces the old one on the ticket and in the price file, and the reduction is recorded against the retail value of inventory. If a jacket was priced at $40 and now sells at $28, the store has taken a $12 markdown on every unit still on hand. The reduction belongs to the stock, not to a customer, and is planned as a one-way step.

Markdown vs discount

The two words are often used as if they meant the same thing. A discount is a temporary reduction offered at the register for a defined period or group, such as a weekend promotion or a trade price. The ticket price stays the same and returns when the promotion ends. A markdown changes the ticket price for good.

That distinction matters for records. Promotions are measured against the sales they generate; markdowns are measured against the stock they are applied to. headoffis records each manual sale at the unit price paid after discounts and before tax, so the reason for a lower price belongs in your pricing notes.

Why stores take markdowns

Most markdowns trace back to a handful of causes:

• Over-buying. More units arrived than the stores can sell at full price before the next range lands.
• Seasonality. Swimwear in September has a short remaining life at full price.
• Broken size or color runs. The popular sizes sold out and the leftovers will not move on their own.
• Damage or shop wear. Scuffed packaging, faded display pieces and returns that cannot be resold as new.
• Discontinued lines. The supplier replaced the product, or the store dropped it from the range.

The open-to-buy guide explains how markdown dollars feed back into next season's budget.

When to take a markdown

Early and small beats late and deep. A product that is behind plan after a quarter of its selling season rarely catches up, and every week at full price shrinks the window in which a modest reduction will work. Watch the sell-through percentage of each line against the point in the season and act when it falls behind.

Before acting, confirm that the product was on the floor and findable, that recorded sales are complete, and that stock at other locations is not already thin. The dead stock review covers that investigation.

A three-step cadence

A markdown cadence is a planned sequence of reductions with dates attached, decided before the first one is taken. The first markdown depth is modest, aimed at customers who liked the product but balked at the price. The second is deeper and goes after bargain hunters. The final step clears whatever is left.

The fictional table follows 25 units bought to sell at $40, with the sales at each step invented to show the arithmetic. Markdown dollars are the gap between the original $40 and the price paid, per unit sold.

The original retail value of the 25 units was $1,000. The store recovered $556 and recorded $444 of markdowns, so 44.4% of the planned retail value was given up. The free markdown calculator works out the per-unit reduction, the percentage and the total for any single step from the numbers you enter.

How to calculate markdown percentage

Divide the markdown amount by the original selling price and multiply by 100. For the first step above, ($40 − $28) ÷ $40 = 0.30, or 30%. For a group of items, add the markdown dollars across every unit sold and divide by the sales those units produced: $444 against $556 is a markdown rate of 79.9%. Shopify's retail math guide lists this and the related formulas.

Setting a budget for markdowns

A markdown budget is a planned allowance, expressed as a percentage of net sales, for the reductions a category is expected to need over a season. Suppose a fictional store plans $60,000 of category sales and allows 10%, giving $6,000 of markdown dollars to spend. If a category exhausts its allowance by mid-season every year, the fix is upstream, in buying depth or in the markup planned at the start.

Truthful "was" prices on the ticket

A reduced price is nearly always shown beside the former price. In the United States, the Federal Trade Commission's guides at 16 CFR 233.1 say a former price should be one at which the item was offered to the public on a regular basis for a reasonably substantial period. A figure invented to make the reduction look larger does not qualify. Other countries and some states have their own rules, and they differ, so check what applies to your stores. This is general information, not legal advice.

Keep the price history with the markdown record so you can show it. Once the price is decided, the free sale sign maker prints a sign from the figures you type and saves nothing.

Markdowns and sell-through

The measure of a markdown is what happened to sales afterward. In headoffis, Sales & stats shows units sold, sales value and an estimated sell-through of units sold ÷ (units sold + current stock) for the trailing 7, 30 or 90 days, by product and location. Compare the weeks before and after each step. If units barely moved after a reduction, the problem is not the price. If the second step emptied the shelf in days, the first was too shallow. The standalone sell-through calculator does the same arithmetic from figures you type.

Markdown pricing is not a failure. It is the planned end of a product's life at full price, and a store that plans it keeps more of its money than one that waits.

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