Markdown Mystery
Unveiling the Impact of Targeted vs Blanket Markdowns on Profitability
Did you know that a 20% markdown is really a 25% hit on your profit? Sounds crazy, right?
A 20% markdown at retail price means the product is sold at 80% of its original price. Remember the cost does not change.
Here is an example of the math:
You have an item that sells for $100 at retail.
The wholesale cost of the item is $45.
IMU = (100-45)/.100 = 55%
A 20% markdown at retail = $20. So, the item sells for $80 at retail, but the cost is still is $45.
—————————————————————————
The new margin dollars is 80-45=$35, versus the original margin of 100-45 = $55
35/80= 43.75 MMU or gross profit
Therefore…
The original profit is 55%
The new profit is 43.75%
Markdown % is 55 - 43.75 = Markdown % of 11.25
Cost of markdown is 100-IMU = 11.25 / (100-55)
11.25 / .45 = 25%
Why it matters
There is a tendency at promotional periods like the holiday season to take blanket markdowns. So if you run a 20% off storewide event you will really take a 25% hit on your profit. Additionally, your customers will cherry-pick your best sellers, and leave you with less effective inventory. Chances are a good portion of what was cherry-picked would have sold at full price.
The result is a triple-edged sword to profit and cash flow. The good stuff has to be rebought so that is a drain on cash, the good stuff would have sold at full price so there is lost margin, and the leftover goods now need to be sold at a deeper discount.
The better strategy is to take targeted markdowns on selected inventory that has either not sold well or is now very broken up in its assortments. Those targeted markdowns can be deeper cuts so the promotional message of storewide is now offset by a stronger discount message.
As we progress in the final two months of 2023, markdown strategies are important. We want to not lose profit in areas where we can still maintain full margins and at the same time we want to turn slow-selling inventory into cash.
Wishing you a very successful holiday season.
Onwards and Upwards,
Marc
If you have any questions or feedback, please let us know in the comments section below.
You can also contact Management One directly for more information. We are always happy to discuss your results and share solutions for you and your indie retail business.