Markdown
A markdown is a reduction in the original retail selling price of merchandise. This price drop occurs after the product was initially priced by adding a markup percentage to the cost of the merchandise. Markdowns are typically used as a strategic measure to drive sales, clear out old inventory, or respond to market competition and consumer demand.
Key Concepts
- Original Retail Selling Price: The initial price set for a product, determined by adding a markup to the cost.
- Markup: A percentage added to the cost of merchandise to arrive at the original selling price.
- Cost of Merchandise: The purchase price of the product before any markup or markdown.
Examples
- Seasonal Clearance: A retailer marks down winter coats at the end of the cold season to make room for spring merchandise.
- Inventory Reduction: An electronics store might markdown last year’s TV models to accelerate sales before introducing newer models.
- Competitor Price Match: A store reduces prices to match or beat a competitor’s pricing.
Frequently Asked Questions (FAQs)
What differentiates a markdown from a discount?
- Markdown: Refers to a price reduction below the original selling price.
- Discount: Can apply to various forms of price reductions, including sales, promotions, and coupons, not necessarily below the original selling price.
Why do retailers use markdowns?
Retailers use markdowns to clear out unsold inventory, attract price-sensitive customers, and stay competitive in the market.
How do markdowns impact profit margins?
Markdowns can reduce profit margins if not managed carefully, as they lower the selling price below the original planned margin. However, they can also increase overall sales volume and turnover rates.
Are markdowns part of a permanent pricing strategy?
Markdowns are typically part of promotional or clearance strategies rather than a permanent pricing strategy. However, consistent markdowns may be used in certain retail models, such as outlet stores.
Related Terms
- Discount: A reduction from the usual price, which could be temporary or seasonal but not necessarily below the original selling price.
- Markup: The amount added to the cost of a product to determine its selling price.
- Clearance Sale: A sale typically offered to clear out goods at reduced prices.
- Price Elasticity: The measure of how sensitive the quantity demanded of a good is to a change in its price.
Online References
Suggested Books for Further Studies
- “Retail Management: A Strategic Approach” by Barry Berman and Joel R. Evans
- “Pricing Strategies: A Marketing Approach” by Kent B. Monroe
- “Retailing Management” by Michael Levy, Barton Weitz, and Dhruv Grewal
Fundamentals of Markdown: Retail Pricing Basics Quiz
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