Your merchandise is NOT like fine wine

Your merchandise is NOT like fine wine
Tags: Consumer Behavior, Marketing
April 16, 2011

Like most retailers, you probably have a consistent strategy in place for pricing products when they come in. But do you have the same consistent strategy in place to review and determine the selling performance of those products? In other words, do you have a markdown strategy in place for slow-selling products that is consistently executed in your store?

If not, the time to talk markdowns is now. Retailers must develop a process for reviewing sales and determine if markdowns should be taken to move products out of stock. Doing this on a consistent basis is a key component to maximizing your inventory turnover and improving cash flow for your business.

Let's discuss some of the reasons that your business might need to lower the ticketed retail price of merchandise in your store. Price reductions typically come in 3 different categories:

1) There are buying related causes. This is where most stores need to address markdowns. Included in this category are reductions due to assortment errors. There are also timing errors that you didn't catch such as late shipment or ordering too much. Or perhaps you ordered from a new vendor and you misjudged the quality of the merchandise. Another buying related cause could be a supplier error such as late, damaged or incorrect shipments.

2) Another category where markdowns would need to be taken is selling related causes. In essence, the product isn't selling at the ticketed price to an acceptable level on a weekly basis. A good rule of thumb for retailers to use is a minimum sell-thru of 5 percent weekly during regular selling periods. If the merchandise you are reviewing isn't selling at least 5 percent a week that should be a basis for determining to take a markdown.

3) And lastly, there are operational related causes that may require you to take a markdown. These include damaged or dirty merchandise, odd lots or consumer shifts for certain products you carry. Depending on the reason that a markdown needs to be taken, retailers must enact a strategy to finish the liquidation of the distressed product.

How much of a reduction to take, and when to take the reduction must be decided. This is THE most critical decision after pricing that happens. When products sell, every retailer wins, but having a strategy for dealing with merchandise that isn't selling, after everything you have tried (correct pricing, marketing activities) is where retailers can either maintain, or give away their ultimate profits.

There is no single right answer for when any retailer should reduce prices in their stores. Whether retailers choose to enact a temporary markdown, or a permanent one, retailers must analyze each product as it relates to their overall pricing strategy. Here are some key factors to look at when reviewing when to take markdowns and how much to take them for:

a. Type of merchandise

b. Store image

c. Length of selling season

d. Nature of target customer

e. Size of initial markup

f. Availability of selling and storage space

g. Retailer's sales promo policies - "mini" sales vs. "big-event" sales

As mentioned earlier, a general rule of thumb is that products should sell-thru at a minimum of 5-7 percent per week. When you get to a 60 percent overall sell-thru, you should take a first markdown, usually a 25 percent reduction. This cycle should generally take 10-12 weeks.

If you think about how many times you go to market (2 major markets and perhaps 2 minor markets in between) this makes sense. Each time you go to market, you are purchasing a 'season's worth' of merchandise, so after 12 weeks, if the merchandise sells well, is typically time to get marked down. If you have slower moving merchandise (a sell thru of less than 2-3 percent per week) you may want to consider taking a markdown with a greater discount: somewhere between 33-40 percent off. And you may decide not to wait the entire 10 or 12 weeks.

Remember this: Merchandise is NOT like fine wine, it does NOT get better with age. If your customers have "spoken" and they don't like the products you have chosen, no matter how you have priced them, they will not sell. This leads to a serious lack of cash flow and in some cases, can lead to a lack of new products flowing in because there is no money to pay for them! Remember, a good overall pricing strategy and a coordinating markdown strategy is a key component to your stores' ultimate success. Take the time to choose a strategy that aligns with your business goals, and then continue to monitor how the strategy is working on a monthly basis. This effort on your part will go a long way to building your brand as a unique and important store in the marketplace, and one that keeps your customers coming back time and time again.