Selling products below their intended cost, sometimes at a loss, to boost sales and managing a high volume of customers while competing with competitor brands, especially in fashion, isn’t easy. But figuring out how much to markdown and when to minimize losses is often harder.
Not having a single average markdown percentage in fashion for ballpark purposes doesn’t help. For perspective, most brands have a markdown range between 10% and 70%, with the average falling between 30% and 40%, depending on the brand’s product types, positioning, and marketing strategies.
This begs the question–should you even be marking down during sale season? We believe so, for better inventory management.
This begs the question–should you even be marking down during sale season? We believe so, for better inventory management.
Discounting is an Inventory Management Strategy in a Post-pandemic World
Buyers and planners are getting bolder and planning discount strategies to experiment more when buying to keep up with ever-shifting fashion trends. This has resulted in leaner product life cycles that can be managed with in-season discounting.
Margin Loss Preferred to Inventory Holding Costs
You know you’re losing money if your inventory isn’t flying off the shelf. Most planners tackle this in one of two ways–selling off the product at a discount, incurring margin loss, or holding their inventory, incurring inventory holding costs. Here’s a glimpse of what they are dealing with.
- Margin Loss: This is the difference between the original selling price and the discounted price. It directly impacts your profitability per item.
- Inventory Holding Costs: These include storage fees, insurance, potential obsolescence, and the opportunity cost of tying up capital in unsold goods. These costs increase over time.
Smart planners are now choosing gross margin loss over the cost of holding inventory. They’re using analytics to monitor sales performance and predict future inventory pile-ups to plan discounts proactively rather than reacting to poor inventory situations season-on-season.
Here are a few things smart planners consider when building discount strategies and tactics to lower markdown loss optimally.
The Smart Discount Pricing Strategy Almanac:
Creating a discount pricing strategy based on inventory performance is a great way to maximize sales and minimize losses during a sales event. Here are some top-line evaluation methods one can use, focusing on inventory movement and potential revenue generation:
1. Categorize Inventory by Performance:
- Sell-Through Rate (STR): Calculate the percentage of items sold over a specific period. This helps identify fast and slow-moving items.
- Days on Hand (DOH): Divide the current inventory level by the average daily sales to determine how many days the current inventory will last.
- ABC Analysis: Classify items into A (high-value), B (moderate-value), and C (low-value) categories based on their sales and profit contribution.
2. Identify Slow-Moving and Aged Inventory:
- Set thresholds: Define what constitutes slow-moving inventory (e.g., items with a sell-through rate below a certain percentage or DOH above a certain level).
- Analyze aging: Determine how long items have been in stock and categorize them by age (e.g., 30 days, 60 days, 90+ days).
3. Analyze Sales Data and Trends:
- Historical Sales Data: Review past sales performance for each item, considering seasonality, trends, and promotions.
- Markdown Performance: Analyze the impact of previous markdowns on sales and profitability.
4. Develop a Markdown Calendar:
- Plan Timing: Consider seasonality, upcoming promotions, and competitor sales.
- Phase Markdowns: Start with smaller discounts and gradually increase them if items don’t sell.
- Coordinate with Promotions: Align markdowns with other marketing efforts for maximum impact.
Discounting engines typically help with all of the above as they are software solutions designed to automate and optimize the application of discounts in various retail scenarios. But the Increff MS Markdown Optimisation module takes it one step further.
Increff’s Markdown Optimization Module for your Inventory’s Markdown Management
Increff MS Markdown Optimisation module runs comprehensive discount engine logic. It evaluates sales, stock data for store and type clusters by grouping relevant attributes and defines the best discount strategy for your inventory. Here are a few more reasons to be interested in it.
- True Style Lifecycle and Not Just Aging of a Style Consideration
Increff’s discounting module considers the absolute age of each SKU and evaluates it against its planned lifecycle to check if it’s leading or lagging enabling proactive markdown management. This means whether or not a style is older or if it doesn’t sell, the system will automatically assign a discount so your inventory isn’t filled with overstock.
- Style Health Consideration
Without careful consideration to style health, you might have to encounter stock outs for bestselling old styles right before your sale. Increff factors this in helping you set higher markdowns on broken inventory.
- Custom Style Grouping
Many inventory management systems only allow you to document set styles. So, if your brand has multiple style variations within a single group, visibility of the exact number of products is difficult, making marking down less accurate.
Increff lets you create custom-style groupings, meaning you can place multiple groups within the same category. Think collared t-shirts and polo t-shirts can all be placed under shirts but analyzed separately and accurately by the discounting software.
- Target Discount Optimisation through Forward ROS Projection
Increff optimises final discounting as per company level targets using statistical projection of forward rate of sale (ROS). So, you can identify the best discounting action based on your targets for discount and overall sell-through.
- Price Elasticity Consideration
Your discounting software shouldn’t be suggesting discounting if it doesn’t work. Increff considers the price elasticity factor in subsequent cycles basis actions taken in the last cycle. This ensures continuous correction , especially when the discounting does not impact the rate of sale.
- Discount engine customization
With Increff, you can provide benchmarks for discount engine logic according to your business trends and set overrides at multiple levels to control discounting of exclusive merchandise.
Conclusion
With trend cycles lasting less than a few weeks and planners experimenting with buying strategies, product life cycles are only going to grow leaner. This calls for proactive inventory planning and management by means of discounting.
Increff helps retailers with both those things with granular data analytics to inform buying and pricing, trend-based allocation and replenishment and sell-through and organizational goal-based markdown optimization. Try Increff for yourself. Book a demo here.
Author: Shrutika Joshi
