How to Maximize Profitability with Markdown Optimization
By: James Snyder
Maximum profitability is a foundational goal for every retailer.
Making effective pricing and markdown decisions ensures consistent performance that balances the benefits of offering attractive price points to customers with the need to maintain a consistent price position in your marketplace and avoid erosion. By optimizing pricing and setting strong, consistent business rules, you can position your organization to effectively use markdowns in the most optimal way possible.
Let’s look at the challenges many companies face with optimizing markdowns, the critical objectives of markdown optimization and how Allitix can help your organization realize these advantages.
Why markdown optimization is so important
Large retailers like Amazon and Walmart depend on sophisticated pricing and markdown algorithms to determine the best price for their inventories and to keep a steady flow of products sold to consumers. This is vital for the pacing of inventory, ensuring that items leave warehouses at the expected pace, and making room for the arrival of new shipments without creating overloads within their distribution centers. This inventory management strategy relies on big data to make the right decisions at the right time, ensuring efficient markdown planning to address ebbs and flows in consumer demand.
For many retailers, pricing and markdown optimization are a more reactive practice, based on sales performance and existing levels of inventory. Basing these decisions on existing data, with no projection of future trends, can only be so successful in the long term, especially when larger retailers make effective use of more advanced practices. Pre-set discounts for seasonal products, for example, shouldn’t be the only thing that a business utilizes to determine markdowns and increase the flow of products to customers.
Pricing is one of the fastest ways businesses can impact their profitability. With all of the effort invested in designing, sourcing and bringing them to market, a similar level of attention is necessary for monitoring prices and inventory levels to optimize margin.
Common pricing and markdown challenges for businesses
Making decisions related to markdowns and optimal pricing can be challenging for a variety of reasons. Many companies deal with the following issues:
1. Difficulty leveraging enough information to make good, consistent decisions
Access to data is an increasingly attainable goal for many businesses, whether large or small, in the age of cloud-based storage and with the variety of business management tools available. However, simply having the data on hand, or having notional access to it, is not enough for making effective decisions within a relevant timeframe. Mountains of data simply aren’t actionable without a clear path for utilizing it. Organizations need the right tools and support for conducting analysis in an efficient manner and implementing the pricing and markdown guidance that comes from those processes.
2. Lack of consideration around eroding price position in the marketplace
When implemented correctly, markdowns can keep inventory flowing through an organization and toward its intended destination: the hands of consumers. However, a strategy that relies too strongly on discounts can eventually erode the price position and standards a business sets within its industry and marketplace. Discounts that are too deep, or too frequent, can keep potential customers away until their next purchase is discounted to a level they have come to expect.
Balancing the value of markdowns with the potential issue and finding the middle ground is vitally important for all retailers. Targeted price reductions backed with data encourage brisker sales of low-selling items or those with only seasonal relevance while maintaining overall price position. This approach avoids a situation in which customers only turn to a retailer when there are deep discounts involved.
3. Managing sell-through targets
Setting, meeting and adjusting sell-through targets can mean the difference between brisk sales and stagnant inventory sitting in warehouses. These targets are especially important for seasonal items, which would have to be sold at a deep discount or take up valuable space in a distribution center until the relevant holiday or time of year rolls around again.
Creating effective sell-through targets is an ongoing process, allowing for stronger planning in terms of acquisition, inventory and sales. Businesses need effective solutions for the oversight of this process and for ensuring goals align as closely with real-life performance as possible.
4. High overstock of everyday merchandise
Many aspects of inventory management depend on finding a happy medium between two extremes, whether it’s the appropriate markdown that is neither too mild nor too extreme, or the inventory level that minimizes disruptions without investing too much into inventory at the expense of working capital.
When businesses have consistently high overstock of everyday merchandise, they need to take a more aggressive discount strategy to get their inventory levels back in line. Without the proper solutions for determining the most effective discount, businesses may be stuck trying to sell off their overstock for a much longer period of time.
5. Issues with inventory turns and sell through
Tracking and analyzing inventory turns and sell-through rates helps companies correct their purchasing to more closely align with their performance and make more effective inventory management decisions. This is yet another area where dependable analytics tools make a substantial difference. The increased insight provided by these solutions help companies make the right adjustments at the right time, finding the best possible markdown for the situation. This continues the steady sale of inventory to customers and, crucially, frees up space in warehouses for products that are in high demand.
Achievable objectives with the right markdown optimization solutions
There are three key goals businesses can achieve when they have the appropriate solution in place to analyze and manage markdowns and related pricing considerations.
1. Triangulating price elasticity and inventory
By enabling better decision-making through dependable technology, companies can determine the relationship between price elasticity and inventory. With this valuable information in hand, businesses have the power to hit their sell-through goals and maximize profitability.
2. Carefully reviewing the historical view of pricing impacts
By providing a valuable window into price degradation, companies can make decisions that lead to the best outcomes for their operations.
3. Maximizing GMROI
The gross margin return on investment is a critical financial indicator for businesses that run on selling inventory to consumers. Markdown optimization tools help companies maximize GMROI by providing valuable intelligence related to the right pricing levels.
How Allitix can help
Allitix helps your organization implement a data-driven approach to historical sales information, identifying price elasticity and stock levels throughout your organization and then merging that intelligence with business objectives to set prices that optimize your margin. With decades of retail experience, we know the retail industry and place a premium on the importance of making quick, well-informed decisions. We bring science and process together to develop pricing solutions that provide immediate value, setting objectives related to sales, margin and inventory targets and measuring the results of those actions to refine the process.