What is a Markdown in Retail?
Markdowns Cost Retailers Tons of Money Each year
Markdowns are the discount you take on merchandise in your retail store from the original sale price marked. Compared to a sale or promotional event, a markdown (in its purest form) is when you change the list price to a lowered price permanently.
For Example: If you have a tennis raquet on your shelf that is listed at $300 and you decide to change the list price to $250, you have just taken a $50 markdown. You do this because the raquet has been on the shelf for too long and it is time to get it out the door. When you first bought it, you paid $150. So your IMU was $150 or double the cost. This is referred to as keystone pricing. Now, when you sell it, you will not get 50% gross margin; the new markdown price will yield a 40% margin.
When I was on the board of governors at the University of North Texas, we were asked to review the degree plan for retail buyers. One thing that jumped out at me right away was the lack of math. In fact, there were only three hours of math (one class) required to earn a degree as a retail buyer. In my 26 years of retail, the one thing I learned (over and over) was that buying was 10% "fashion eye" and 90% math. In other words, it was more about planning to get rid of the merchandise before you bought it.
If you do not understand the math and the reality that you will have to markdown a % of the items you purchased, then you will leave lots of money on the table. Retail buying is about math not "eye." It's about planning for the good and the bad.
We tend to fall in love with our buying decisions (I know I did) - sometimes to the detriment of our store. Markdowns are inevitable. But markdowns done right can be healthy. They keep the store fresh and inviting. Many retail store owners think they can sell the item for the original price "if they just give it a little more time." Customers vote early on your merchandise. Be smart and markdown items sooner rather than later.
To help with this, use a calendar. Plan your markdowns to occur after the items have been in the store for a certain period of time. In my shoe stores, we automatically marked down an item after 60 days (if it was not a regular, replenishable item.) Then we took the next markdown at 90 days and then the final one at 120. This process put pressure on me as the owner to use an open-to-buy system that kept my inventory in check. It also kept inventory from becoming so old that I got nothing for it.
As a general rule, use the following model I like to call the Rule of 1/3rds. If you buy 10 radios, then you will sell 1/3 at full price, 1/3 at 25% off and 1/3 at 60% off. If you do the math, you will quickly convince yourself to buy 7 versus 10 in the first place. In other words, the more backstock you have of an item the more likely it is to be marked down at some point.
Another thing to consider when analyzing your markdowns is inventory turnover. There is a direct correlation between inventory turnover and markdowns. A high turnover usually means fewer markdowns. A lower inventory turn usually means higher or more markdowns.
Last tip on markdowns, use dating on your purchases from the vendors to help your cash flow and offset the "ding" of markdowns when they happen. Dating is when the vendor gives you extra time to pay for the merchandise after it is delivered. For example, most invoices are due within 15 to 30 days after they are shipped to you. Dating is when the vendor gives you more time to pay. The benefit is that you might actually sell it before you have to pay for it!