Learn when to mark items down, how to calculate markdown percentages, and how to steer clear of common mistakes.
A retail markdown is a reduction from an item’s original selling price used to improve sell-through rates. Sales, discounts, and clearance events are all common forms of retail markdowns.
Shoppers appreciate markdowns because they feel they are securing a better value. Retailers gain from these price cuts because they assist in liquidating excess inventory.
Below, you will find a comprehensive guide on how to effectively implement markdowns while avoiding common pitfalls like predictability and potential damage to your brand’s reputation.
What are retail markdowns?
Retail markdowns are essentially price reductions. Coupons, discount codes that lower prices, seasonal clearances, and store-closing sales can all be classified as markdowns. Depending on a retailer’s specific strategy, these price adjustments can be either temporary or permanent.
Markdowns are unconditional reductions to a product’s listed price as displayed on price tags. Think of a limited-time, storewide 20%-off sale.
A discount, conversely, is conditional—such as an employee discount, senior discount, or cash discount—and is applied at the point of purchase.
Tip: With Shopify POS, you can create dollar or percentage discounts that are automatically applied to individual items or entire carts during checkout. Once an automatic discount is configured, it functions for both online and in-store transactions.
The three most common categories of markdowns are temporary, competitive, and permanent.
“Some retailers offer temporary sales, for example, 30% off during a particular weekend, which creates a sense of urgency because prices go back up when a sale is over,” says Kate Ashley, associate teaching professor in the Supply Chain and Information Management Group at Northeastern University’s D’Amore-McKim School of Business.
Limited-time sales, buy one, get one (BOGO) promotions, and coupons are all examples of temporary discounts.
To remain competitive, some retailers offer markdownse sells the identical item for a lower price to qualify for the discount
“Price matching is a strategy that allows firms to offer markdowns only to price-sensitive customers who take the time to research prices offered by competitors,” says Kate. “The retailer is able to avoid advertising a marked-down price that might reduce customers’ perceptions of the good’s value.”
End-of-season clearances or price cuts for damaged merchandise are examples of permanent markdowns.
“[Some] retailers may wait longer to mark down items, but then offer steeper and steeper discounts as it gets later into the season. Here, the primary reason for customers to buy early is the risk that the item they want will be sold out by the time it’s offered at a deep discount,” Kate says.
Initial markdown versus additional markdown
Markdowns generally occur in two phases:
Initial markdown. This is the first reduction from the original ticket price. It is typically implemented after an item has been stocked and is often triggered by seasonality or the end of a product’s life cycle.
Secondary markdown. If the product is still not meeting its sell-through goals, a further reduction is applied. This allows you to capture some margin before resorting to deeper discounting.
For example, in late January, you might mark down a parka by 15% for an end-of-season sale. Because the inventory is still relevant to the weather, you might generate interest and sell the remaining 500 units. By mid-March, if 300 units remain in the warehouse, you might mark them down by another 30% to avoid carrying excess stock into the next fiscal quarter.
The primary motivations for businesses to offer discounts are to clear out time-sensitive inventory, increase sales volume, and remain competitive.
When products fail to sell as projected, they become undesirable inventory that occupies space better suited for high-demand items. This can result from shifting trends or simply slow retail periods. Reducing prices helps move this stagnant stock.
Akshay R. Rao, General Mills chair in marketing at the University of Minnesota’s Carlson School of Management, says that “most often, markdowns are monetary discounts to stimulate sales of slow-moving inventory that is most often targeted at price sensitive consumers who have been willing to wait for a price reduction, at the risk of the product being sold out.”
Retailers across many sectors deal with the challenge of perishable inventory—goods that lose value if held for too long.
Kate says, “This can happen because of physical spoilage, in the case of fresh produce or other items with a limited shelf life; technological obsolescence, in industries such as consumer electronics; or items going out of style, for clothing or other fashion goods.
“Inventory is costly, and when a retailer has items on hand that are about to drop in value, markdowns are a way to drive demand and recover at least some portion of the investment in inventory.”
If a rival sells identical or similar goods at lower prices, you risk losing customers. Occasionally, retailers offer discounts similar to their competitors to prevent losing business.
Overstock refers to having an excess of unsold product in storage. The longer inventory remains in a warehouse, backroom, or at a 3PL, the more expensive it becomes.
Inventory carrying costs, or holding costs, encompass everything from storage fees and insurance to depreciation and the opportunity costs of capital tied up in dead stock. These costs accumulate over time, negatively impacting cash flow and profitability. Retailers use markdowns to recoup some of the expenses associated with holding unsold merchandise while making room for new stock.
How to calculate markdown price
Understanding the size of the markdown you are offering can help you effectively advertise these deals and generate interest.
The formula for a retail markdown is:
([Original Price – Sales Price] / Original Price) x 100 = Markdown %
For instance, if you are selling a television originally priced at $500 for $300, your markdown percentage is:
[($500 – $300) / $500] x 100 = 40%
When establishing discount prices, it is vital to consider your profit margin to ensure you are not losing money. Even after a markdown, the sale price should ideally exceed your cost.
If a discounted item still fails to sell, you might consider a deeper markdown. You may only break even in this scenario, but that is preferable to losing your entire investment in the inventory by failing to make a sale.
Markdown percentage and margin impact on the P&L
Markdown percentage measures the magnitude of the price reduction. Margin impact refers to the change in gross profit on the profit and loss statement, where gross margin equals net sales minus the cost of goods sold (COGS). When you mark down an item, net sales decrease, but your costs remain the same, causing gross profit and margin to fall.
Suppose the COGS for the TV mentioned above is $200.
Gross profit before the markdown: $500 – $200 = $300
Gross profit after the markdown: $300 – $200 = $100
In this case, the markdown reduces gross profit by $200 per unit because revenue declined while costs remained constant.
Tips for implementing a markdown strategy
Follow these strategies to ensure your markdowns benefit your business.
Pricing involves more than just profit margins; it also concerns perceived value and creating a sense of urgency. Investigate the retail psychology behind pricing before finalizing your markdowns.
“There are many ways in which retailers can use psychology, but one key tactic is to employ the original reference price to convey the impression of a deal. This is why you see signage that employs [’Was x-dollars, is now y-dollars’] to convey to the consumer how much they are saving,” says Akshay.
Ecommerce fashion brand Nasty Gal, for example, offers a perpetual discount on products to boost perceived value while making the “discounted” prices seem like a great deal.
Another method is to utilize “charm pricing.” Research from the University of Chicago and MIT indicates that prices ending in a 9 (such as $59.99) generate more demand than prices ending in other digits.
Prices ending in 0 are often viewed as prestige pricing, whereas prices ending in 9 are seen as value pricing. Experts suggest setting regular prices with even numbers and offering discounts that end in odd numbers.
“Some retailers offer temporary sales [to] create a sense of urgency because prices go back up when a sale is over,” says Kate.
Using phrases like “today only” or “limited time” encourages consumers to finalize a purchase they might otherwise delay. Black Friday sales are a classic example of how urgency drives the success of markdowns.
According to Akshay’s research, shoppers often prefer discounts that are not tied to specific numbers, even when they are equivalent in value to a numeric discount.
For example, consumers often perceive a BOGO promotion as a better deal than saving 50% on two items. Akshay’s research suggests that offering free items is also an effective markdown strategy.
The way a price is displayed influences how expensive it feels. Researchers refer to this as the pain of paying, where cues that make spending feel like losing money increase discomfort and can reduce the willingness to buy.
Restaurants frequently omit dollar signs and cent digits from menu prices. This approach helps customers disassociate those figures from actual money. Keep price displays clean and consistent. When a markdown is the focus, emphasize the value of the deal, such as “Was $500, Now $300.”
Compliance note: The FTC and other global regulators require that “was/now” pricing reflect a bona fide, established price at which the item was offered to the public for a reasonably substantial period. Avoid price spiking to create artificial discounts. If selling in the EU, anchor all claims to the lowest price offered over the past 30 days.
Localize your markdown strategy
If you operate both physical and ecommerce stores, or multiple shops and an online platform, you do not need to offer identical prices at every point of sale.
If pink pants sell well online but not in-store, mark them down in-store but not online. If they sell well in your Montreal shop but not your Vancouver location, discount them in Vancouver while maintaining the price in Montreal.
Optimize your markdown strategy by location to protect your profit margins.
How are your rivals pricing similar products? Consider offering price matching so consumers choose to shop with you rather than the competition. This can help you secure a loyal customer, which is often more valuable than preserving a small fraction of a profit margin on a single item.
Examine sales data to determine how your discounts contribute to revenue. The customer is central to driving sales of discounted products, and what motivates a shopper varies across different industries and companies.
“Using analytics to measure the customer response to different coupons and promotional strategies is a great way for retailers to fine-tune their markdown strategies and understand what types of discounts have the most favorable long-term revenue impact,” says Kate.
💡 Pro Tip: To see how the discounts you set up are used and the total value of those sales, view the Sales by discount report in Shopify admin.
The rules governing markdowns must be applied consistently. Merchandising leads typically define the markdown framework, but your finance team should establish allowable minimums and maximums.
Guardrails are essential to ensure every markdown is strategic and does not harm your margins. Use these tips to set yours:
Define your limits. Set minimum and maximum discount rates in advance so your team avoids over-discounting during slow months. While there is no universal rule, a minimum markdown might be around 10% to 15%. A maximum can reach up to 60% without signaling to customers that your brand is in distress.
Use firm deadlines. Use Shopify’s discounting tools to set exact start and end dates for your sales. Your first price cut might occur around six to eight weeks after arrival, when new merchandise begins to appear. A second markdown can follow up to four weeks later, depending on how slowly the inventory is moving before it becomes dead stock.
Stay disciplined. Hard deadlines prevent open-ended promotions that train customers to never pay full price. If a markdown is not well-received by customers, the issue is likely not the price, but rather the creative or the product-market fit.
Remember that not every SKU is suitable for a markdown. Some items are restricted by minimum advertised price (MAP) or manufacturer requirements. Additionally, some products should maintain their price integrity, such as bestsellers and signature pieces that define your brand’s premium value.
When retailers offer markdowns, they risk becoming predictable, damaging their brand reputation, and failing to account for product life cycles.
Consider these markdown pitfalls before adjusting your prices.
“The biggest challenge associated with retail markdowns is related to customer behavior,” Kate says. “The frequency and size of markdowns can teach the consumer to anticipate when products will go on sale, buy in large quantities at the sale price, and wait for the next sale, thus harming retailer profitability because the product is never purchased at full price.”
Avoid this hazard by varying the frequency of your markdowns and keeping sales information confidential until it is necessary to share it with staff.
Price is not just about profit margins; it also relates to perceived quality. Marking down prices can make your brand appear cheaper, which is a significant concern for luxury retailers.
“Once a retailer is known to offer significant markdowns, it can be hard to recover the customer’s perception of brand value that is needed to drive full-price sales,” Kate says.
“Advertising a marked-down price … might reduce customers’ perceptions of the good’s value. Some retailers may avoid markdowns altogether, or offer them very rarely, to avoid the pitfalls of reducing prices.”
Failing to consider product lifecycle
Sometimes retailers mark items down prematurely because they fail to consider a product’s life cycle. High-consideration items, such as cars or mattresses, may not sell as quickly as other goods and might not require discounting.
Instead, they could benefit from a marketing boost to increase their desirability. Consider creating a demonstration of how the item is used, changing its display, or working with influencers to boost sales of slow-moving products.
Consider using markdowns at your store
When used strategically, retail markdowns can help you move inventory, build customer loyalty, and create buzz. If discounts are provided without careful thought, they can become predictable and harm your brand’s reputation. Carefully consider what, when, and how to offer retail markdowns for the best results.
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