Markdown
Max Pechonis · Founder, Rebridge ·
A markdown is a permanent cut to an item's price. A jacket that started at $60 and is now $42 has been marked down $18, which is 30% off what it started at. Shops take markdowns to sell through stock that is not moving at full price.
Two numbers share this name, and they are not the same sum
This is the part that trips people up, so it is worth getting straight before anything else.
When you say a jacket is 30% off, you mean one price tag. When a buyer says markdowns ran at 15% this season, they mean something completely different: the markdown money taken over the period, as a share of what the shop sold.
Both are called markdown. Only the second one tells you whether you bought too much.
Working out the markdown on an item
Take what it was, subtract what it is now, and divide by what it was.
A $60 jacket now at $42 is $18 off. $18 divided by $60 is 0.3, so a 30% markdown.
Always divide by the original price. Dividing by the new price is the common mistake and it makes the number look bigger than it is: $18 over $42 comes out at 43%, which is not what you did and will not match your books. The customer is comparing against the old price, and so should you.
Working out your markdown rate for a period
Add up the markdown money you took, then divide by what you sold.
$45,000 of markdowns against $300,000 of sales is 15%. That is your markdown rate for the period.
This is the figure a buying plan carries, and it is read as a warning light. A category running well above what you planned usually means one of two things: you bought more than the demand was there for, or you bought the wrong things. Either way the correction belongs in the next order, not in more markdowns.
Published rates by trade vary enormously and sources disagree with each other, so a figure from somebody else's shop is not worth planning against. Your own last two seasons are.
A markdown is not a discount
These get used interchangeably in conversation and they are different things in your books.
A markdown changes the item's price. The ticket changes, it applies to everyone, and it stays changed until you change it back.
A discount comes off at the till for one customer. Staff purchases, a loyalty deal, a goodwill gesture. The item's price never moved.
They cost you the same money and they mean different things. A rising markdown rate says you bought wrong. A rising discount rate says something about how you are selling. Counting them together hides both.
Why buyers watch it so closely
Markdowns are where a buying mistake finally shows up in money.
Stock that does not sell at full price is not a problem on the shelf. It becomes one when you cut the price to move it, because every dollar of markdown comes straight off your margin.
That is also why markdown sits inside a buying plan rather than beside it. Planned markdowns are part of what you expect to sell, so they shape the open to buy for the months ahead. Unplanned ones tell you the plan was wrong.
Questions
How do I calculate a markdown percentage?
Subtract the new price from the original, then divide by the original. A $60 item now at $42 is $18 off, and $18 divided by $60 is 30%. Always divide by the original price, never the new one.
Why not divide by the new price?
Because it overstates what you did and will not reconcile against your books. $18 off a $60 jacket is 30%, but dividing by the $42 it now sells at gives 43%. The customer is comparing against the old price, and your accounts are too.
What is a markdown rate?
The markdown money you took over a period as a share of what you sold. $45,000 of markdowns on $300,000 of sales is a 15% markdown rate. It is a different number from the percentage on any one ticket, and it is the one a buying plan budgets.
What is a good markdown rate?
There is no figure worth quoting without a category and a trade attached, and published rates disagree with one another enough that borrowing one is a bad idea. Your own last two seasons are the honest comparison.
Is a markdown the same as a discount?
No. A markdown changes the item's price for everyone until you change it back. A discount comes off at the till for one customer and the price never moved. They cost the same money and mean different things, so counting them together hides both.
What is a markdown cancellation?
Putting a price back up after a temporary reduction, usually after a sale ends. It reverses part of the markdown you took, which is why plans track markdowns net of cancellations rather than gross.
Do markdowns affect my open to buy?
Yes. Markdowns you expect are part of your planned sales, so they feed the stock plan and the open to buy for the months ahead. Markdowns you did not expect are a sign the plan was wrong, and the fix belongs in the next order.
When should I take a markdown?
Earlier than feels comfortable, is the conventional answer, because stock that is not selling at full price is not going to start. The practical trigger most buyers use is weeks of supply: if a category is carrying far more weeks than the season has left, waiting only costs more.
Does a markdown change what the stock cost me?
No. What you paid is fixed the moment the order is received. A markdown changes what you get back, which is why it comes straight off margin rather than off cost.
How does markdown relate to sell-through?
They are two ends of the same story. Sell-through tells you how much of what you bought actually sold; markdown tells you what it cost you to move the rest. A high sell-through reached only through heavy markdowns is not the same achievement as one reached at full price.