24 JAN-FEB 11
The word itself strikes fear in the hearts of most retailers. Call it by whatever term you wish—price adjustment promotion or just plain sale the translation is the same and conjures up all sorts of negative emotions. The fact remains however that any reduction in the retail price is really a markdown.
Most folks in the retail business have an inherent disdain for the very word. Taking too many markdowns represents failure in some area or another. Overbuying duplication poor timing of deliveries bad assortment planning are all recognized causes of markdowns. Excessive markdowns raise the cost of goods sold and result in a reduction in gross margin. When margin levels fall below those of operating expenses the store has a net loss.
To more fully understand this retail nemesis let’s uncover some truths about markdowns.
Truth #1:
Markdowns are the tuition retailers must pay for the education they receive from their customers. A lot can be learned about how to buy and price merchandise from past mistakes. If you really want to know where you screwed up carefully survey your markdown rack.
Truth #2:
Since markdowns are a way of life as well as an important part of the retail business it is important that a markdown plan be established. Base the markdown plan around the turnover goals of the company. For example if your turnover goal is 3 times it is important to make sure that stock is sold within a seventeen-week period.
Truth #3:
Always explain the markdown to your customer. If you fail to inform your customer that the markdown is for a special buy end-of-season clearance weekend-only promotion or other reason you risk customers not believing your prices and every sale turning into a mini-auction.
Truth #4:
Overbuying is the Number One cause of excessive markdowns. Stores don’t go out of business due to high markdowns. They go out of business because they can’t pay for their overbuying. If your turnover goal is 3 times you should be careful not to buy more than you can sell within a four-month time frame.
If you buy more than you can sell
You Are Predestined to Experience
Either excessive markdowns and reduced margins or slow turnover and poor cash flow. Faced with this option it is always better to take the markdowns clear the inventory and generate cash. I have never seen a store go out of business because turnover was too fast and cash flow was too strong… never! On the contrary I have seen several stores go under with healthy gross margins on their profit and loss statements.
Truth #5
Most retailers have heard of and would agree with the axiom that the first markdown is the cheapest. What this really refers to is that the first price reduction is an effective one. A “cheap” markdown does not refer to a low percentage reduction that does not significantly generate increased sales. A markdown of 30% that moves merchandise is therefore “cheaper” than a 20% markdown that does not produce the desired results.
Truth #6
The price you paid has nothing to do with the markdown price. The customer does not care what you paid for the product nor should you. When you get to this point in the sales cycle your only concern is how quickly you can convert the inventory to cash. From time to time I encounter stores that are reluctant and in some cases even refuse to mark anything below cost. I have never been able to understand the logic behind this thinking. I suppose the mindset is that money is being lost when in reality much more lost revenue is at stake by not getting cash out of slow-selling stock and replacing it with new product. Worse yet is packing goods away in the backroom and dragging them out again next year. Your cost is not relevant in a markdown pricing decision.
Truth #7
In most cases it is a good practice to keep markdown merchandise at the back of the store. You want…
Ritchie Sayner
The Truth About Markdowns
Ritchie Sayner
continued on page 29
Published in the January-February 2011 issue of Shoe Retailing Today copyright ©2011 National Shoe Retailers Association Tucson AZ www.nsra.org. All rights reserved.
29 nsra.org to one of their salons and increase cus-
Customer Willingness to Pay
“What we found was that there was room to increase their prices 10 to 12% without any significant drop in volume” Sjofors says. Upon completion of a large study like this clients receive an executive presentation as well as summary and data books of the study’s findings. This particular project took three months to complete from start to finish.
Downward Pricing Pressure and Sales
Pricing is one of the most important messages that you can send about the quality of your product. “I was in Las Vegas for a trade show recently and I needed a haircut” Sjofors says. “The salon closest to my hotel advertised a male haircut for $8. Did I go there? No.”
Companies cut prices with the belief that it will increase sales volume which is not necessarily true. In fact sales may drop because customers begin to believe that the company’s products are of inferior quality.
WalMart was so successful with the message of low prices and “rolling back prices” that six years ago the business stopped growing because too many people started to think of WalMart as too cheap. WalMart changed their message from low prices to “live better.” “What WalMart did is just as relevant for one independent shoe store” Sjofors says. “If you plaster your store with discounts people think it is too cheap. It is a message of inferiority.”
Discounting isn’t always a bad idea however. Understanding when to do it is important; a sale on last season’s collection is a good example.
An increase in price helped translate to an increase in volume for the hair salon chain. This is not always the case. Using the trial and error method a company may change the price of a $32 product to $29.95 for one month and see what happens. They may then increase it to $34.95. You may lose 1% in volume but more than compensate for it in increased profitability. Analysis like this with top-selling products can produce significant results over time.
For smaller companies that may not have the budget for the type of in-depth study conducted for the hair salon…
Chain
Atenga will make recommendations based on a company’s existing sales data. A data analysis project of this type might take closer to 10 days.
Sjofors and Brown work practically with retailers to optimize prices tweaking them to capture every increase in customers’ willingness to pay. If companies really want to do things right they need to look at their past performance and set goals — increase sales by 4% next quarter for example.
When a company works with Atenga to move toward optimized prices clients generally realize a 5-to-15% increase in revenue. Returns diminish after companies have gone through this process a few times.
“People treat pricing as an afterthought and there are all kinds of ways to do this better” Brown says. “Find out the customers’ perceptions of value and leverage them. This is applicable to every retailer.”
“As the country is coming out of this recession there is a growing interest in pricing in general because suddenly people have some breathing room” Sjofors says. “I would like retailers to understand that there is often a better way a different way to approach pricing and maybe it is worthwhile to find out more about it.”
Following common rules of thumb to set prices is certainly easier than developing a pricing strategy. But in an era when tailoring the shopping experience to the customer’s expectations is becoming sound business practice developing a pricing strategy may soon be an essential component in shaping the experience.
Contact Information
Per Sjofors can be reached via blog Twitter or LinkedIn. Contact him at:
- http://bestpracticepricing.blogspot.com
- http://www.twitter.com/psjofors
- http://www.linkedin.com/in/persjofors
Customer Engagement
Keep your customers exposed to new full-price products at every opportunity. Exceptions to this would be store-wide sale events or seasonal clearance time when a large majority of items are on sale.
Truth #8
Nurture your good customers who do not shop you on price alone. This is where added value comes in.
Into Play
The cosmetics industry does a great job of this by offering gift-with-purchase items. Thank-you notes to good customers also go a long way in showing a customer that you value their patronage.
Understanding these truths and employing sound markdown management should help turn what to some is a negative part of the business into a positive.
Ritchie Sayner is vice president of business development at RMSA Retail Solutions. For a no-cost evaluation of your store’s markdown strategy contact rsayner@rmsa.com.
One of the principles experience has taught him is that two very different mindsets are at work in business on each side of the Atlantic.
Summary of Article
The article discusses the concept of markdowns in retail emphasizing their inevitability and the importance of strategic planning to manage them effectively. Markdowns often viewed negatively are essential for learning customer preferences and managing inventory turnover. The article highlights the need to explain markdowns to customers avoid overbuying and focus on converting inventory to cash while also suggesting that the first markdown should be impactful and that the price paid should not influence markdown decisions.
“Excessive markdowns raise the cost of goods sold and result in a reduction in gross margin.”
Real-World Examples of Markdown Strategies
Markdowns are a critical aspect of retail pricing strategy. Here are some real-world examples that illustrate the application of effective markdown strategies in the retail industry.
- A major clothing retailer implements a markdown plan based on their turnover goals. By analyzing sales data they set a target to sell inventory within a specific period such as 17 weeks to minimize excessive markdowns and improve cash flow.
- An electronics store uses the first markdown principle reducing prices by 30% on slow-moving items to effectively clear inventory. This strategy helps them avoid prolonged sales periods and ensures that markdowns lead to the desired increase in sales volume.
- A boutique shoe store educates customers about markdowns during end-of-season sales clearly communicating the reasons behind price reductions. This transparency builds trust with customers and prevents the perception of markdowns as a sign of inferior quality.
