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The Art of Discounting: Part II

Now that you’ve learned what a markdown is and the importance in using a markdown, let’s take a step further. In the second part of the blog series, you will learn how to create and implement a markdown plan with excess inventory, and where to start.

6. How do I create a successful markdown plan?

The best and most effective long-term inventory solution is to come up with a markdown plan.

You will never be able to sell ALL of your inventory at full price. Excess inventory is inevitable, however you can still plan for managing markdowns to incentivize customers to purchase. Even then, there will be “leftovers” – inventory typically left forgotten in the warehouse and eventually sold to off-price buyers at an unfairly low margin.

These “leftovers”, while the least appealing, are actually a huge opportunity for brands to increase cash flow and ultimately drive their business forward. And this can start with a markdown plan that doesn’t just start when the inventory has sat in the warehouse for months. Instead, a successful inventory markdown strategy will begin almost immediately when the product hits the stores, and the planning comes even before that. Even then, it’s not just about the plan, but being able to actually implement it. Sounds daunting, but it’s not as hard as it would initially seem.

To begin creating your markdown strategy, ask yourself (and try to answer) these questions. Your answers will allow you to understand your numbers, inventory and selling patterns.

How much do you want to spend on markdowns?

As in how much can you afford given your company’s financial goals? Every company in financial planning has projected growth and revenue goals that they are expected to hit by their shareholders, investors or lenders. This number has been calculated with a margin for markdowns. Know this number and what it means in terms of your selling rates and what percentages off you can give throughout a season.

What is the price elasticity of your inventory?

Price elasticity is a calculation that shows the change in demand expected by retailers when they change the price of a product. It allows brands to understand the way price can impact the demand for a product. If a brand decreases the price of a product and the demand increases at a pace that exceeds the discount offered, there is price elasticity. Thus, it is critical to know what you should markdown versus what products to leave at full-price in order to optimize your sell-throughs and manage brand equity.

What are your overall markdowns?

Understand how your inventory works together: the relationship between one markdown and the rest of your available merchandise. You want to know what related products from your brand are selling at what prices — maybe you always have to markdown your t-shirts but sell out of your jeans. This insight can tell you if your product pricing is out of line with the price-point of your customers. It can help you evaluate if you should be making that product at all. It can identify that your customers are going elsewhere to buy that same item. Or maybe, your customer base just doesn’t want it. So, limit the likelihood of excess inventory and the need for multiple markdowns by reinvesting cash into the areas that DO sell well.

What are your product trends?

There is plenty of new technology out there whose specific purpose is to track data trends, which for you as a brand means trends in what is selling where, when and at what price. This information is powerful, helping you know what percent off is needed to    drive purchase, when markdowns are needed, when product should be pulled off the shelf and when it should be sold to off-price retailers. Basically, this visibility into your merchandise and customer behavior helps you plan product phase-outs and lifecycles better, which will ultimately strengthen the precision of your markdown strategy.

7. Okay. So now what?

Many of these questions can be answered fully with the visibility and transparency that the right technology solution and foundation can offer. To put it simply: invest in technology.

Most companies ignore their internal backend systems that have seen limited innovation in decades. These legacy systems typically form the foundation of the company’s operations. Such legacy systems span inventory management, image management, markdown optimization and invoicing. While about 36% of brands have a plan of how to go about this, 72% are still in the process of looking into updating their systems.

In order to create and implement a successful markdown plan, these backend systems need to be updated or replaced in order to bring the visibility and structure to your overall business performance required to implement a markdown plan.

Now that you are armed with some markdown insight, start sourcing technology for your company and answering these questions. You will soon be on your way to effectively implementing your markdown plan, optimizing your inventory investments and growing your business!