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October 15, 2008
Markdown Is Your Friend
Recently I heard the story of a retailer who never took markdowns because she believed that taking markdowns was a sign of business failure. This surprised me because markdowns are a necessity for most retailers, allowing them to create cash flow and generate open-to-buy.
Of course, it’s important to know when and how to take markdowns if you want to optimize their effectiveness, so I thought we would explore that idea here. In determining when to take markdowns you need to gauge the lifecycle of the product in question. I realize that product lifecycle may be a new concept to some of you.
Basically, it’s a way of measuring how long a certain product will be in demand and when it should be liquidated from inventory. Most goods have a seasonal demand cycle, especially in apparel. So, a spring suit will typically have a lifecycle of five months, spanning the spring season. Other products, such as “basic” apparel like tee shirts, may have a much longer lifecycle, however.
Once you know the product’s lifecycle, you can then determine whether the product is likely to sell-thru before it is no longer in demand by looking at its past sell-thru rate. Let’s say you landed those spring suits I mentioned above and a month into their sales cycle you have a sell-thru rate of 10%. Because the suits only have a lifecycle of five months, you are unlikely to sell more than 50% of your inventory, leaving you with carryover product and tied up cash flow. What’s more, because your money is tied up in those suits, you are inhibited from purchasing newer, in-demand items.
To clear out those suits, you need to take a markdown. Retailers typically go through three markdown cycles known as first markdown, second markdown and clearance markdown. They usually follow the pattern of 30% off, then 50% off, then 70% to 80% off. Your first markdown is your most important markdown and typically a profitable markdown. It needs to be done when there is still some demand for the item, and it has to be deep enough to catch the shopper’s attention. Remember, a 10% markdown at the end of a product’s lifecycle probably won’t help you attain sell-thru. Think of the old adage: “The First Markdown is Always the Cheapest Markdown.”
A good rule of thumb for first markdowns is to begin taking them three-quarters the way through a product’s lifecycle, and then gauge the item’s performance week by week, taking additional markdowns if necessary.
Now, in this instance, I have been talking about permanent markdowns and not promotional markdowns, which are a different beast.
Promotional markdowns are planned markdowns that are used to kick start a season or just grab attention. In weak retail cycles like the one we’re in right now, retailers tend to use a lot of promotional markdowns to garner interest. Many of the big box retailers are already running Christmas promotions on new fall merchandise, for example. Promotional markdowns tend to be less steep and they are sometimes couched as “Buy One, Get One 50% Off”. They can be strong marketing tool and can certainly generate traffic.
So, markdowns are generally not a sign of business failure. They are powerful tools that can help retailers generate cash flow and increase profitability, if used correctly. In fact, we believe so much in the power of markdowns that we are creating a software tool that will allow retailers to better plan their markdowns. Stay tuned – this is some exciting stuff!
Posted by Blacks at October 15, 2008 04:51 PM
