Markdowns are price reductions applied on the original price of the product, in order to accelerate its sale velocity and generate cash.
Markdown (%) = (Original Price – Sale Price) ÷ Original Price x 100
Markdowns are expressed as a percentage of original price and are calculated by deducting the sale (reduced) price from the original price and then dividing the result by the original price and multiplying by 100 to get the percentage
Read Also: Retail Math 101
Discount Formula Example
Let’s say that an item normally sells for 70$ (original price) and will now be marked down and sold at 55$
Discount (%) = (Original Price – Sale Price) ÷ Original Price x 100
Discount (%) = (70 – 55 ) ÷ 70 x 100 = 15 ÷ 70 x 100 = 21.4%
So this item will be sold at 21.4% discount or is marked down by 21.4%
Use our online discount calculator
Retailers know from the time they plan their buying that they are going to sell part of the inventory at full price initially and then start subjecting it to different levels of markdowns until it is cleared.
So when they plan their Open to Buy, they factor these markdowns into the process to accurately calculate the required purchasing budget.
For example when you buy 100,000$ worth of inventory, you can plan to sell 25% of it at full price (i.e at the intake margin).
Then after few weeks on the floor, you will start applying the first markdown to it, say 25% off. This markdown will clear another 30% of the inventory.
After another few weeks, you will apply the second markdown, a deeper discount, to it; say 50% off, and this clears another 30% of the inventory.
At the very end you will then apply a final clearance markdown of 75% off and clear the remaining 15% of it; or even 13% and the rest is then written off as obsolete stock.
This process is called planned markdowns.
This is a very important planning step, because sales and margins get affected by markdowns, and so the final profitability of the business.
That’s why it is a best practice to create a plan and stick to that plan throughout the year.. unless there is a need for a different strategy.
Which takes us to the next point..
Retail Markdown Strategy
Markdowns are a very powerful weapon and tool for any retailer to use as part of their strategy . They are used to influence the demand on the products, and drive sales and cash flow.