Newport Beach, Calif. – May 24, 2011– The word “markdown” is enough to make most
retail executives cringe. Markdowns are often associated with margin degradation and
profit loss – and some companies believe that cutting prices for their products could
negatively impact their brand image. But it might be time to reevaluate that perception.
“Although inevitable, retailers have historically viewed markdowns as a necessary evil
designed to help sell old or slow-moving inventory,” said Peter Leith, director of
product strategy, JustEnough Software. “However, in an era of intense competition
among retailers, growing demand for consumer price transparency and the mounting
threat of inflation, businesses are starting to rethink their pricing strategies – and thus,
their perception of markdowns.”
Recent research supports this shift: 48 percent of companies surveyed for Retail
Systems Research’s 2011 annual pricing report said they have deployed or are in the
process of rolling out markdown planning and forecasting solutions. Another 33 percent
of survey respondents are evaluating or exploring solutions to help improve these
capabilities.
Proactively Thinking About Markdowns
What does it mean to have a markdown plan in place? Instead of simply slashing prices
at the end of the season in an effort to offload unwanted products, retailers should
determine early on which items they are willing to reduce in price over time and for how
much.
“Taking a more proactive approach to markdowns will help retailers better manage
product lifecycles and stock levels,” Leith said. “For example, if an item begins to fall
behind its expected rate-of-sale, the retailer can tweak the product’s price to ensure it
sells out by the end of the season. Price drops – even if relatively small – attract today’s
discerning shoppers, who can actively monitor and compare prices anywhere and
anytime via mobile technology.”
Using markdowns as a lever to keep traffic in stores consistently high can also improve
product turnover and help keep inventory fresh and appealing to shoppers.
Understanding how to treat markdowns as part of the overall planning process enables
retailers to further refine their assortments, ensuring that they meet the needs of their
customers. This, above all else, will deliver the margin improvements today’s retailers
seek.
All of the above-mentioned benefits – increased foot traffic, better product lifecycle
management and a fresher mix of products – help retailers reach the ultimate goal of
strategic markdown planning: reducing the number of stock write-offs at the end of a
selling season.
Strategies to Execute a Well‐Defined Markdown Plan
Deciding to implement an effective markdown planning process is one thing – but
actually doing it is another. JustEnough Software, a leading provider of demand
management solutions for retailers, suppliers and brand owners worldwide, recommends
the following strategies to help companies make the most out of their markdowns:
- Start with a plan. A markdown plan means nothing if it’s not tied into the
overarching financial plan. Retailers should start by determining how much they
are willing to spend on markdowns in order to hit their financial targets. It’s
equally as important that retailers are able to not only execute on the markdown
plan once it’s in place, but also monitor it in real time. This ensures that pricing
adjustments can be made as the season progresses.
- Consider price elasticity. An obstacle retailers may encounter as they embark
on creating markdown plans is understanding how markdowns can impact a
product’s rate-of-sale. Price elasticity is key to overcoming this challenge. Price
elasticity is a calculation that shows the change in demand retailers can expect
when they alter the price for a particular product. Incorporating price elasticity
into the plan can play a dramatic role in the quest to make markdowns a strategic
part of the pricing process.
- Plan markdowns at different levels. Retailers must be able to plan markdowns
at both the product and aggregate levels – all while maintaining complete
visibility into current inventory levels, price elasticity and product rate-of-sale.
This gives retailers a holistic view of their markdown strategy, enabling them to
see how potential price cuts could affect a particular product category or how
they might impact the ability to reach margin or revenue targets.
- Effectively manage product lifecycles. Markdowns can play an important role
in product lifecycle management. Smart retailers will leverage effective
markdown planning to not only ensure that there is less stock left over at the end
of the season, but also to better manage new product introductions and phaseouts.
A plan supported by advanced technology will be able to calculate which
products are expected to exceed their phase-out dates, as well as provide an
estimated sell-through timeframe.
Leveraging Technology for Improved Markdown Planning
Retailers that avoid putting a markdown plan in place may experience increased
obsolescence, cannibalization of new product lines and decreased sales. The impact
could even extend to the store as new and old products are shoved together on shelves
or displays, resulting in cluttered and disorganized stores that even the most loyal
customers will find difficult to shop in.
Technology is a key factor when it comes to creating an effective markdown plan. The
use of outdated systems or disjointed spreadsheets to manage a markdown plan will
only deliver inadequate results. Retailers should look for advanced technology that
integrates with the rest of their retail planning solutions. This will help them both
effectively plan and execute their markdowns, as well as constantly monitor how they
are doing against the plan using real-time data.
JustEnough Markdown Planning provides an intuitive, interactive tool that planners
can use to set multiple markdown structures with complete visibility into inventory,
revenue, margin impacts and price elasticity. To learn how JustEnough is helping
leading retailers create markdown plans that drive store traffic, reduce excess inventory
and effectively manage product phase-outs, visit www.justenough.com.
- “Optimizing Price in a Transparent World,” Retail Systems Research, April 2011
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