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Markdown Profitability



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WHAT | WHY | WHEN | HOw


What is Markdown?

A reduction in the price of your product.


why it is important to you

At some point you'll need to use markdown in your business.

Whether it's to clear products that aren't selling, making
space for new stock, or to strategically drive sales.
Whichever way you use it, profit should always be the key focus.
 

Let's learn how.


WHen do you use it?

There are two types:

PERMANENT
When you reduce the price forever. 

PROMOTIONAL
When you discount it for certain amount of time.

 

Let's have a look at when we could use markdowns.


Permanent

This markdown does what it says on the tin.
Once you've marked it down, it doesn't come back up, so if you use it, you
are intending to sell all of the stock you have left.

Think of End of Season & Mid Season Sales. Those ones which always appear at the end of Summer, Christmas and then a couple in between.

Retailers plan for these key events, something I talked about in the Trading Calendar InsightThe lifecycle for each product is planned (when to launch, sell and clear it) and so is having enough of the product to meet the sales demand. (You can learn more about Product Lifecycles & Sales Demand in the Range Planning Insight).

However, sometimes there's a little bit left over, you don't get it right and that to-die-for cactus print bag doesn't sell as you expected, then that's what you'll find in the End of Season and Mid-Season sales.

Think of it as a retail detox. Clearing out the old to bring in the new.


PROMOTIONAL

This is your flexible markdown friend.

Because it isn't a permanent markdown, you can use it more strategically to maximise your profit or minimise the impact on it.


MINIMISE

Let's look at that cactus print bag that isn't selling.
It will definitely have to go into the Mid-Season sale at 50% off.
But what if you could minimise the impact on your profit?

How?

By using a promotional markdown BEFORE the Mid-Season sale, you can sell some units at a lower discount. So when you get to the sale, you will have fewer units to mark down permanently, at a higher discount. Which means you have more sales and profit.

Clever.

+ HERE'S A HANDY EXAMPLE

ROSES ARE RED
(Or made from Chocolate in this case).

It's the 14th February, Valentine's Day.

You are selling £10 Chocolate Roses and have 10 left.

You know you won't sell all of them today at full price and you can't save them for next year. That means marking them down to 50% off tomorrow.

As you have 10 Chocolate Roses, you have £100 of stock.

  • Stock Value = Number of Products x Current Selling Price
    e.g. 10 Chocolate Roses x £10 Current Selling Price = £100 Stock Value

You decide to run a 20% off PROMOTION.
Each one is now £8.

  • Calculating the new Selling Price:
    = ((Current Selling Price x (100%-Promotional Discount %))
    e.g. ((£10) x (100% - 20%)) = £8

Your stock is still worth £100.

Why?

Because the discount is only on for a day and then they will go back to £10.
With a PROMOTIONAL discount, the Sales and Markdown only count when you sell something.

You sell all 10 and make £80 sales.

  • Sales = Number of Products Sold x Selling Price AFTER Discount
    e.g. 10 Chocolate Roses x £8 Selling Price (£10 - 20%) = £80 sales

Your markdown spend was £20.

  • Markdown Spend = Number of Products Sold x Discount Value
    e.g. 10 Chocolate Roses x £2 Discount (£10 x 20%) = £20 Markdown Spend

What if you hadn't done that?
You would have permanently marked them all down to 50% off the next day.

  • Calculating the new Selling Price:
    = ((Current Selling Price x (100%-Promotional Discount %))
    e.g. ((£10) x (100% - 50%)) = £5

You would have reduced the value of your stock to £50 as it is a PERMANENT markdown.

  • New Stock Value = Number of Products x Markdown Selling Price
    i.e. 10 Chocolate Roses x £5 Markdown Selling Price = £50

If you sold all 10 at 50% off, then your sales would also equal £50.

  • Sales = Number of Products Sold x Selling Price AFTER Discount
    e.g. 10 Chocolate Roses x £5 Selling Price (£10 - 50%) = £50 sales

Your markdown spend would have been £50.

  • Calculating your Markdown Spend:
    = (Original Stock Value - New Stock Value)
    e.g. £100 - £50 = £50

That means you're £30 better off than if you'd waited and marked them all down to 50% off the next day.

Ker-ching!


MAXIMISE

You know that '20% off EVERYTHING' event (where you just HAVE to buy everything you'd been saving in your basket for weeks)? Or the Black Friday bargain that is 50% off? (So you HAVE to have it).

Those sales are all key events that are planned in advance.

Why?

Because they are sales drivers.
Those clever Merchandisers have worked out, (on their very large calculators), that if they sell more volume (A.K.A. units), they can make the same, or even more profit despite the 20% off.

Brilliant.

They will have bought, or made extra stock to meet the increased sales demand of the 50% off Black Friday bargain. Maybe they got a lower cost price for the main component, or making in bulk saved time, all key factors in reducing costs and increasing profits.

Savvy.


All of this can be worked out with the Flourish Markdown Calculator.
It can help you decide whether you should do that 10% off promotion,
or how much discount you offer on your to-die-for product, all while
keeping an eye on your profit*.

(*Sometimes you will do an event to help with your exposure and
marketing rather than making profit, which is also fine!)


how to use markdown profitably


Now you've decided which type of markdown you need,
the next steps are to use it profitably.

 

STEP 1:

Decide how much money the customer will save to entice them
into buying, and clear or speed up sales of your stock.

 

To do that, you'll need to know:

 
  • Current Selling Price
  • Cost Price
  • Fees
  • Profit

Your Cost Price is the only one of the four elements which is fixed.

Using your Flourish Markdown Calculator, you'll be able to look at
the impact of each discount amount or percentage and see your:

 
  • New Selling Price
  • New Fees (these change according to the Selling Price)
  • New Profit
     

STEP 2:

Decided your discount amount?
Check!

Now you need to show it to your customers.
But how?
You could choose to offer it as a percentage discount
or a monetary discount, even though it's the same value.

Choices, choices!

Here's a simple rule to make your offer sound appealing to your customer.

Under £100?
A percentage discount.
£20 T-Shirt
20% off sounds better than £4 doesn't it?

Over £100?
Use a monetary discount.
£200 Chair
£40 off sounds better than 20% doesn't it!


STEP 3:

Sell it!


Ready to calculate?