How Do You Get End-of-Season Markdown Pricing in Retail Right? Take These Three Essential Actions for Better Results
Soon, retail & e-commerce organizations will have to prepare for the 2020 winter sales season. Pricing/category managers will spend lots of time and effort on defining the appropriate end-of-season discount or so-called markdown for each product. Taking into account the difficult year most retailers have experienced, getting markdowns right is an absolute priority.
To improve this process, we have developed dedicated pricing algorithms - that have been proven to increase turnover 4-10% for omnichannel retail and up to 30% for pure on-line players.
In short, here is how.
The Two main Reasons Why Markdowns Can Be Improved
What are the main shortcomings?
We have come to believe that the two main shortcomings of the traditional approach to markdown pricing are ‘not knowing how products respond to markdowns’ and ‘having an unclear or incorrect goal’. How a product will respond to a given price change is often guessed based on experience - rather than estimated using data. Moreover, even if the guess proves to be correct, what the optimal price for a product is often remains unclear.
Try it yourself with our End-of-Season Markdown Pricing Simulator!
Try your hand at setting the markdown prices at the beginning of a sales season in a fictitious example.Try to choose the right markdown for these products. Imagine you are at the start of the sales period and can set the markdown once for the entire period. Information to support this decision is displayed when hovering over the icons.
Click the button once you are satisfied with your settings to see how far you are from the optimal markdown to maximize your profits
> Simulate your own end-of-season strategy here!
The First Reason: Not Knowing How Products Respond to Markdowns
Based on the available information, the logical response is to select higher markdowns (lower prices) for products with high inventory relative to sales. However, we have witnessed first hand this does not always result in optimal solutions. The reason for this is that a crucial piece of information is missing: how will the volume sold respond to a change in markdown price?
This is a variation on the well-known concept of price-elasticity from economics. Suppose we assign a 20% markdown to a product. If the volume sold changes by more than 20%, the product is said to be elastic. If the inverse is true, the product is inelastic.
Going beyond this binary classification in two groups, it is of great interest to know precisely how elastic a product is to determine the optimal response. Without this crucial piece of information, selecting the right markdown is impossible.
The Second Reason: Having an Unclear or Incorrect Goal
A good estimate of the price elasticity must be combined with a clear objective to set optimal markdowns. However, in practice, we have observed that retailers select several different - and at times, conflicting - objectives.
The most frequent are the maximization of gross margin, the aim to liquidate all inventory by the end of the season and the maximization of total turnover. While all seem like sensible objectives, not all are equally important.
Three Essential Actions We Advise Retailers Take, to Get Markdown Pricing Right
Action Nr. 1: Use your data to predict price elasticity
We are convinced that having a good estimate of the markdown price elasticity is foundational for improved markdown pricing. Having an accurate estimate of this variable implies that the effects of a price change can be calculated rather than guessed.
Action Nr. 2: Revise Whether You're Aiming for the Right Target
Merely having a measure of elasticity is not sufficient to improve profits. As mentioned before this requires a clear definition of the objective and a solution technique that can optimize for this objective. However, not all objectives are created equal. The basic premise being that the chosen objective should be a good proxy for the profitability of a retailer.
Action Nr. 3: Provide User-Friendly Tools to the Decision Maker
Most retailers like to update their markdowns weekly. Typically this means that a category/pricing/buying professional will each Monday what the impact was of last week's discounts.
This is a task that for most still requires a lot of manual work with tools such as Excel, working under time pressure and thus reverting to simple rules of thumb.
We therefore strongly advocate for making data and augmented insights readily available to free up time for careful consideration of pricing decisions - focusing on products where price changes matter most.
Would you like to learn even more?
Read our full whitepaper on why markdown pricing is so difficult and three essentials actions you can take - described in more detail - right now, by clicking here.
