Retail Definitions:
Markdowns vs. Discounts
A markdown in its simplest term is any reduction in the Original Retail price (cost + IMU).
When the selling price is lower than the Original Retail price, we have a markdown. Independent will often discuss this in terms of "discount," which is calculated by dividing the markdown dollar amount by the Original Retail price. This is what the customer sees (a 20% discount from the retail price).
For the purposes of our analysis, we are often instead thinking about markdown %, which is calculated by dividing the markdown dollars by the actual selling price (or Net Sales, at a class or business level).
Because of its relation to actual net sales, the markdown % is a better indicator of how a business's cash potential was impacted by markdowns.
Busting the myth of markdowns
Many retailers believe - usually under the influence of accountants - that markdowns should be avoided at all costs because they increase your COGS as a percentage of your revenue. This is true, but irrelevant to the success of your business. You’ve already bought and paid for the merchandise, so your job is now to use that merchandise to generate as much cash as you can, as quickly as you can.
Crucially, it’s not just how much you sell it for, it’s how quickly you sell it so you can replace it with fresh product. One of the keys in retail is to keep the merchandise and the cash flowing through inventory turnover. If you weren’t going to replace the merchandise you sell with new merchandise, it might make sense to wait longer to try to sell an item at full price, but in reality, you should use the cash and space freed up by moving out one product to bring in another that you will hopefully sell faster at a higher margin.
At Management One, we generate a monthly analysis on markdowns and our independent retail clients are provided a forecasted monthly budget for them. Yes, you should actually have a target level of markdowns in your business. If you don’t, that’s usually a sign that you’ve bought into one of the common misconceptions about markdowns. By analyzing trends in your retail data expressed through Retail ORBIT®, our certified M1 Retail Experts can offer knowledgeable advice on how to optimize your markdown strategy.