Here is a handy guide for retailer markdown optimization, including specific strategies for omnichannel retailers and details on how AI retail merchandise planning software and quantified benefits can help:
Introduction to Markdown Optimization
- Markdown optimization is the strategic planning and implementation of price reductions to maximize sales and profits on retail merchandise. The goal is to sell through inventory while minimizing losses on slow-moving or excess stock.
Benefits of Markdown Optimization:
- Reduced working capital – Selling inventory quickly frees up cash flow.
- Fewer write-offs and losses – Minimizes inventory that must be discarded or sold at a total loss.
- Higher turnover – Strategic markdowns keep inventory fresh and moving.
- Improved profits – With the right timing and promotion, markdowns can improve the bottom line.
Example ROI for a Fortune 2000 Retailer:
- With $10 billion in annual revenue, a 10% optimization of markdowns equals $1 billion recaptured revenue.
- If the retailer currently has a 3% profit margin, 10% optimized markdowns would result in $30 million increased profit.
- A $1 million investment in AI markdown software that enabled a 10% markdown optimization would result in a 3000% ROI.
Omnichannel Markdown Strategies:
- Match prices across channels – Consistent pricing is key for omnichannel retailers. Customers expect prices to be the same across online and offline channels.
- Complementary promotions – Offer free shipping deals online to match brick-and-mortar promotions and drive traffic between channels.
- Leverage online data – Use ecommerce data on product performance to inform markdown decisions across channels. Slow sellers online may need promo pricing in-store as well.
Steps for Markdown Optimization:
- Analyze sales data – Review sales reports and inventory levels regularly to identify slow-selling items and excess inventory. Perform markdown analysis by category, product type, color, size, etc.
- Plan markdowns ahead of season – Work backwards from the desired sell-through date to schedule the optimal timing and depth of markdowns. Plan markdowns for the season as a whole.
- Implement promotional markdowns – Offer periodic promotional markdowns on select merchandise to encourage purchasing and lower inventory levels. Discounts should be large enough to drive sales.
- Markdown seasonal merchandise – Aggressively markdown merchandise once it is out of season to sell through the inventory while consumer interest still exists. Discount seasonal items deeper the longer they are on the floor.
- Packaway off-season merchandise – Once merchandise is sufficiently marked down, pack away unsold merchandise to save floor space. Storing off-season merchandise in the retailer’s warehouse/distribution center prevents it from accumulating on the sales floor.
- Plan clearance markdowns – Schedule clearance sales or designated clearance sections for deeper discounts on merchandise approaching end-of-life to liquidate merchandise. Use signs and advertising to generate customer excitement.
- Liquidate old inventory – Discount very old merchandise aggressively, often below cost price just to eliminate the aged goods from inventory. This may be done through liquidation or off-price sales events. Removing very old inventory makes room for newer merchandise.
- Analyze results – Review sales reports after markdowns and events. Analyze which promotions and discounts were most effective by category, product type, etc so future markdowns can be improved.
Here are some additional strategies for markdown optimization:
Seasonal Markdown Strategies:
- Analyze sell-through rates by season – Look at historical sales data to determine optimal timing for season markdowns. Mark down winter coats earlier if sell-through is slower.
- Schedule incremental markdowns – Mark seasonal items down gradually, with deeper discounts as the end of the season approaches. This prevents early over-discounting.
- Promote new season early – Transition floorsets to upcoming season merchandise right after key holidays to focus marketing on new arrivals and avoid deeper discounts on out-of-season goods.
Non-Seasonal Markdown Strategies:
- Review product lifecycles – Understand at what point in a product lifecycle deeper markdowns will be needed to sell through inventory before it becomes obsolete.
- Repurpose evergreen merchandise – Transitionevergreen goods like t-shirts or basic denim to clearance sections before fully liquidating to continue selling through stock.
- Test promotional pricing – Use short-term percentage-off promotions on slow sellers to gauge price sensitivity before permanent markdowns.
Leveraging AI & Data Analytics:
- Track markdown performance history – Maintain records of past markdowns and sales lift to guide future discount rates and timing.
- Set automated reorder points – Let data tools track inventory levels and automatically initiate reorders at optimal points.
- Report on profitability by SKU – Identify which products deliver highest ROI to guide merchandising, promotion, and markdown decisions.
AI and Machine Learning for Markdowns:
- AI markdown software like OmniThink.AI can analyze vast amounts of sales data, inventory levels, and other factors to identify optimal markdown rates and timing.
- Machine learning algorithms get smarter over time, continually refining markdown strategies based on updated sales data and results.
- AI markdown software can automatically optimize and execute markdown planning across thousands of products based on retailer-configured strategies.
- AI can catch fast-moving trends and adjust markdowns in response to real-time market conditions.
