The Markdown Shift
Pricing strategies that focus solely on reducing retail price can be costly mistakes.
Crushing promotional calendars from some of the globe's biggest retailers, tough competition, shoppers comparing retail prices online, and a new wave of e-commerce companies make this a critical area right now, with implications for your brand and seasonal profit picture.
Are markdowns a necessary evil?
The industry's approach to retail markdowns: they are no longer seen as a necessary evil to eliminate old inventory. Today, large "leading" retailers use markdowns to drive traffic and increase sales, creating a highly competitive value-driven pricing environment. So, for these large brands, markdowns are a necessary and positive tool.
This environment pressures buyers, store owners, merchandise planners and sales reps to keep retail prices competitive and win customers over. It can challenge us to find new ways to stay ahead in this markdown-driven market. If we don't change our strategies to compete with markdowns and discounting, then there is a risk that we may lose our customers, who are drawn away by markdown prices from competitors.
The markdown shift is transforming how retailers operate - and it comes with opportunity. Here's what you need to know and what you can do about it.
What this shift means for fashion retailers
The race to the pricing bottom is a quick one. And it inherently involves more products cheaper, dragging down the markdown price, shortening the selling season, and selling greater volume, thus leading to excess inventory and pressured gross margin.
To combat lower profit levels, brands work to decrease an item's cost instead of raising the product's original price. Thus, a general product quality decline leads to shorter product life cycles, which drives consumer behavior to shop more frequently.
Where does that leave us?
with excess volumes of inventory
lower gross margins at the end of the selling season
a shorter selling season or product life cycle
greater price reductions
and consumer behaviour that demands a significant markdown pricing strategy to boost sales.
Implications for the future of retail markdown strategy
On the one hand, intense markdown strategies can bring more customers into stores, increasing sales volume – which is great news for buyers, planners, store owners, and sales reps hoping to make a "plan" at the end of the season.
However, markdowns and discounts also drive retailers' profits down. And we've trained the consumer to expect reduced prices all the time. In addition, large retailers are purposefully buying more merchandise than can be sold at full price to take broad, deep markdowns on their products. Thus, driving the overconsumption prevalent in the fashion industry today.
A sea of change in fashion and sports retail
The strength of the dominant markdown strategy today is in direct conflict with growing consumer sentiment: a demand that brands and retailers be sustainable and transparent.
Price transparency - a myth
Transparent pricing strategies in fashion involve breaking down the costs of an item and what is involved in putting the product together, including production, to provide a clear justification for their retail prices.
Research suggests that price transparency positively affects consumer perceptions of a brand and their intentions to purchase its products. This reporting is especially relevant for younger, more socially conscious shoppers.
While price transparency is becoming a significant factor for consumers, brands are reluctant to share this information. Price transparency has become "open to interpretation," meaning brands are transparent about some factors that affect pricing but rarely the actual cost of a garment. Everlane, an early adopter of transparent pricing, has since stopped sharing the actual price of their garments and instead focuses on being "transparent" in other ways.
Retail markdowns are a sustainability issue
By making broad and deep markdowns part of their business growth strategy, brands and retailers intentionally purchase more merchandise than they can sell at regular prices. They use overconsumption, driven by price discounts, to increase sales and gain market share. This is the first sustainability issue from the current markdown environment: it drives overconsumption.
There is a second sustainability issue: decreasing garment quality and life cycles. As mentioned earlier, the race to increase profits despite the heavy price discounting has led to lower-quality apparel. This lower-quality merchandise has a shorter life cycle, feeding again into the cycle of consumption.
Markdowns are a sustainability issue because they intentionally drive the cycle of more significant discounts from excess inventory, overconsumption, and shorter product life cycles.
New markdown strategies for retailers
While price markdowns are often a highly effective way for retailers to generate sales, there needs to be a balance in how we approach price reductions. Consumers are no longer willing to accept significant price cuts at the expense of reducing quality, long-term reliability and upholding wasteful practices. As brand credibility and demand for sustainability grows, price markdown strategies must consider consumer sentiment.
We can turn to strategies like enhancing consumer experiences with unique product offerings and localized events. We also can add services to our product offerings that create value without reducing our price points.
If we adjust our strategies accordingly when faced with tough price competition, we might take advantage of a potential growth opportunity and make decisions that build our profit margins.
Plan to take fewer markdowns
We can plan to take fewer markdowns. Reduce our planned markdown rate from 40 percent to 30 percent to 20 percent...and on. This strategy will mean buying less inventory. Not only will we make more regular price sales, it may also drive our inventory efficiency metrics. And, of course, it will reduce the volume of product we don’t need.
Shorter lead times and a supportive supply chain can make this easier, especially if you are nervous about under-purchasing. Partner with brands or suppliers with available-to-sell stock in-season or quick repeats.
Test Made-To-Order
Made-to-order is the anti-markdown strategy
Similarly, the inventory reduction strategy is slowly testing a made-to-order approach, thus purchasing only inventory that is pre-ordered by your customer. This will require a significant shift in your supply chain for existing brands. Increasingly brands that want to eliminate waste or at least wasted inventory from their purchasing are looking at these options. EMMYDEVEAUX is one fashion brand that has had success with the model.
Opting out of key discounting events
Patagonia opted-out of the key post-holiday sales season and prioritized employee wellness over retail markdowns.
Allbirds, Everlane, Veja, REI, have all boycotted seasonal discounting events like Black Friday. Drawing attention to the overconsumption and wasteful discounting by refusing to participate in Black Friday, these companies are making a statement about what kind of future they want the industry to create.
Using promotional events to fundraise
As large corporations increasingly prioritize profits over sustainability and ethical labor practices, many companies are choosing to shun the consumerist holiday and instead focus on raising awareness and donating to causes related to social justice. This move aligns with the changing attitudes of modern consumers, who increasingly prioritize ethical consumption over simple consumerism.
Patagonia was one of the first fashion brands to respond to criticisms of Black Friday and turn it into an opportunity for good. Patagonia has been discouraging shoppers from participating in Black Friday since 2011, when it launched its "Don't Buy This Jacket" campaign, donating all proceeds from selling their iconic jackets to grassroots environmental organizations.
In 2016 the company donated 100 percent of their sales to underfunded non-profits – amounting to $ 10 million for the day. This was a bold move for Patagonia - one that turned the traditional idea of Black Friday on its head and demonstrated how large corporations could leverage their reach to benefit social causes. The initiative was highly successful, garnering positive press coverage and inspiring other companies to follow suit and donate profits from Black Friday sales to charitable causes.
Markdown optimization and localization
Markdown optimization and localization are two strategies companies can use to reduce the volume of markdowns. Markdown optimization involves adjusting markdown pricing regularly to maximize profit margins, while localization allows companies to better target their marketing by considering regional or market-specific trends.
By utilizing these strategies, businesses can ensure that their inventory moves quickly without making drastic markdowns, thereby reducing their overall losses. With proper implementation, markdown optimization and localization can be an effective way for businesses to minimize the markdowns they need to stay competitive.
What does this mean for your markdown strategy?
Inaction is not an option. Future proof your markdown and pricing strategy today.
Intense markdowns and discounts from fashion retailers require buyers, planners, store owners, and sales reps to re-strategize their operations to compete in today's fast-paced environment. These strategies can work for environmentally conscious brands to those focused on turning a profit – something larger retailers don't have to worry about because they've worked discounts into their initial mark-ups.
Inaction is no longer an option. Staying ahead of the markdown trend requires an unwavering commitment by retailers to remain highly competitive every day.
The decision you face today is strategic: how will you be competitive in today's retail markdowns environment and build your markdown strategies for success tomorrow?
The Profitable Markdowns Online course
Learn how to make the most of markdowns with this online course from ProductLytics. Gain an in-depth understanding of how consumer behaviour, brand strength, and the commerce of markdowns interplay to help strengthen your strategy.
See what the Profitable Markdowns course is about.
“I hadn’t quite thought about our markdown strategies in that way before. This was a very insightful course.”
“We were a retail business that was thinking pricing strategy only without also considering our retail markdown strategy. Our retail store was able to maximize profits after employing the actionable retail markdown strategy builder from the Managing Markdowns course.”