- What is Markdown Pricing?
- What Are the Types of Price Markdowns?
- The Problem with Old Markdown Approaches
- Revolutionizing Markdown Strategies with Competera
- Real-World Application
This oversight could be costing retailers a substantial $300 billion annually, impacting profits. In this article, I, Alex Galkin, CEO, and Co-founder of Competera, will take you on a journey into the future of Markdown and Promo Optimization.
We'll explore the limitations of traditional methods and demonstrate how our innovative approach can reshape your pricing strategies, ensuring you adapt to the evolving retail environment and protect your revenue.
Markdown pricing is a technique used by retailers to cut the price of a product to increase sales and clear out inventory. It is crucial to prevent needless waste and loss and maintain seasonal items' profitability.
Products that aren't selling well or are nearing the end of their seasonal lives should be marked down in price. In some circumstances, businesses may use markdown pricing to entice new clients by providing discounts on particular products. Markdowns are one of the pricing methods.
Discount and markdown price meanings are often used interchangeably, but there's a difference. Every markdown is a discount, but not every discount involves a price markdown. While they might mean the same to buyers, and to stores, a discount is usually for wholesale at checkout, while a price markdown specifically lowers the retail price.
For a markdown pricing example, let’s say that in a shoe store, reducing a $25 shoe by 20% makes it $20. If a loyalty discount of $5 is applied, customers pay $15 instead of $20, illustrating how discounts impact spending. Loyalty, friends and family, and employee discounts cater to various business needs and customer relationships.
Price markdowns in retail can be categorized into 4 main types.
First, there are promotional markdowns, encompassing temporary price cuts, circular promotions, coupons, and endcap promotions.
Second, clearance markdowns occur when a retailer discontinues an item, often due to outdated styles or subpar products, aiming to clear excess inventory.
The third type involves markdowns for damaged items, where post-delivery spoilage or damage leads to reduced prices.
Finally, competitive markdowns result from price matching, such as a retailer matching a competitor's price. Notably, these markdowns often lead to chargebacks to vendors to recover some or all of the markdown costs.
Traditional retail markdown strategy relies on historical data and assumptions. Why doesn’t it work? Leading “Big 4” consulting firms have a reasonable approach to markdowns, but it's limited in its adaptability and relevance. For instance, when planning seasonal markdowns, it relies on guesswork about the season's timing and often doesn't consider how specific products perform during the season.
The root of the problem lies in the uncertainty of external factors, such as unpredictable weather, trends, etc. In practice, apparel retailers often end up with unsold inventory. They struggle to determine when to start their sales, whether it's in October or November, due to unpredictable factors like weather. Even expensive computer systems can't accurately predict the weather, making it hard to plan marketing and sales activities effectively.
Moreover, markdown pricing strategy matters now more than ever because retailers are facing fierce competition. Most industry observers predict supply chain disruptions and overstocked inventory to stay for a long time. So, to stay ahead of the curve, you need to be agile in your pricing strategies.
Given the inherent uncertainty of the future, retailers have to rethink the markdown in the retail approach. While you can anticipate certain events like Labor Day or Black Friday, a significant portion of resources is consistently tied up in unsold inventory. With Competera you are provided with the tools to create an agile and effective markdown pricing strategy that adapts to current market conditions:
Introducing a Semi-Automated Promo-Markdown Calendar:
Dynamic product clusters: First, you’ll formally cluster your products. Let’s avoid rigid categorization but understand the distinctions between new stock, the current season, last season's products, etc.
Pre-Define Markdown-promo calendar for a year: Within these months, you can outline strategic blocks that dictate main actions. For instance, you plan for profit gain when a new collection is launched. Then, you incorporate a mid-season boost to spur sales, particularly if they are lagging. Finally, you have the stage markdown where we systematically reduce prices towards the end of a season.
The Shift Towards Dynamic Pricing Campaigns: What sets this approach apart is the shift from manual decision-making to dynamic pricing campaigns. Your managers are no longer required to spend countless hours predicting season start dates. Instead, they define specific criteria for product entry into various sales periods. These criteria are based on your key business KPIs, such as the desired sales-through rate and product stock levels.
The Role of Algorithms: Competera's deep learning algorithm takes your criteria and seeks to optimize the discount levels for each SKU, balancing the need to maximize sales while minimizing the loss of gross profit. This algorithm ensures that your SKUs are automatically transferred to different sales periods, depending on their performance, all while maintaining your target metrics. As you closely monitor performance, you can make real-time adjustments based on the data and metrics gathered. If the algorithm detects a need for more aggressive or less aggressive strategies and observes sales trends, you get the ability to fine-tune our pricing parameters.
To illustrate the effectiveness of our approach, we've included a few screenshots showcasing real-world examples of how Competera's dynamic pricing campaign works.
In practice, our algorithm has proven its capability. It has successfully analyzed a wide range of products from renowned global brands, earning the satisfaction of our end-users. This means businesses can now streamline their calendar planning and coordinate marketing efforts more efficiently.
End-users, your pricing managers, benefit from this approach, simplifying their calendar planning and aligning marketing efforts with pricing strategies.
For instance, with Competera you can determine precisely when to kick off marketing campaigns in support of their markdown or promo seasons. Conversely, you can act swiftly when marketing signals that the right time for a sale has arrived to meet their KPIs while maintaining optimal stock levels.
Plus, you get the ability to plan promotional and markdown events with confidence. You can now coordinate marketing strategies and pricing adjustments with precision, ensuring that they achieve their KPIs and maintain healthy stock levels.
In addition, our platform includes a user-friendly interface with the added feature of providing a preview of the expected impact of pricing strategies for the upcoming 2, 3, or 4 weeks. This empowers you to anticipate the outcomes of sales and take informed action. The result is a substantial improvement in business performance, with increased sales and a reduction in the quantity of gross profit left on the shelves.
Сompetera's markdown pricing approach equips you with the agility to navigate shifting market dynamics, optimize your pricing strategies, and shift the attention of the pricing manager to oversee performance and tune the limits rather than work on the SKU level. When you're prepared to take the next step, Competera is here to assist you and innovate your pricing strategies, keeping you ahead in the fiercely competitive market - reach out to us whenever you're ready.