Definition of Markdown

A markdown is a reduction in the original selling price of a product or service to encourage sales, clear inventory, or remain competitive in the market. It is commonly used in retail, seasonal sales, and promotional pricing strategies.

For example, if a store initially prices a jacket at $100 and later reduces it to $75, the markdown is $25, or 25 percent of the original price.

Purpose of Markdown in Business Pricing

Markdowns play a critical role in business strategies by:

• Helping businesses clear out excess or outdated inventory.
• Attracting customers through promotional pricing and discounts.
• Adjusting prices to match market demand and competition.
• Increasing sales volume by making products more affordable.
• Minimizing losses on slow-moving or seasonal merchandise.

How Markdown Is Calculated

Markdown Formula

Markdown Percentage = [(Original Price - New Price) ÷ Original Price] × 100

Example Calculation

• A store reduces the price of a product from $80 to $60.
• Markdown Percentage = [(80 - 60) ÷ 80] × 100 = 25 percent.

This means the product is now 25 percent cheaper than its original selling price.

Types of Markdown

Promotional Markdown

• Temporary price reductions to boost sales during a specific period.
• Example: A clothing store offers a 20 percent markdown during a holiday sale.

Clearance Markdown

• Applied to unsold inventory to free up space for new products.
• Example: A retailer discounts last season’s shoes by 40 percent to make room for new stock.

Seasonal Markdown

• Adjusts prices based on demand fluctuations during different seasons.
• Example: A store marks down winter coats by 50 percent at the end of winter.

Competitive Markdown

• Used to match or undercut competitors’ prices.
• Example: An electronics retailer reduces smartphone prices to stay competitive with rival stores.

Markdown vs. Markup

Feature	Markdown	Markup
Definition	A reduction in price from the original selling price	An increase in price over the cost price
Purpose	Encourages sales, clears inventory	Ensures profitability and covers costs
Example	A store reduces a $100 item to $80	A business marks up a $50 item to $75

Example: A markdown lowers product prices to attract buyers, while a markup increases prices to generate profit.

Advantages and Disadvantages of Markdown

Advantages

• Boosts customer demand and sales.
• Helps businesses quickly sell excess inventory.
• Improves cash flow by converting unsold products into revenue.

Disadvantages

• Reduces overall profit margins.
• Can lead to customer expectations of constant discounts.
• May signal weak demand or overstocked inventory.

Related Terms

• Discount – A reduction in price, often for a limited time or a specific customer group.
• Price elasticity – The degree to which demand for a product changes in response to price adjustments.
• Revenue management – A pricing strategy that maximizes profitability by adjusting prices based on demand.

Interesting Fact

Retailers strategically plan markdown cycles, and in some industries, up to forty percent of annual retail sales come from discounted or marked-down items.

Statistic

According to Statistics Canada, markdowns and discounts account for over twenty-five percent of total sales in the retail sector, reflecting their importance in driving consumer demand and inventory turnover.

Frequently Asked Questions (FAQ)

1. Why do businesses use markdowns?

Markdowns help businesses clear inventory, attract customers, and remain competitive in the market.

2. How do markdowns affect profit margins?

Markdowns reduce profit margins but can increase total sales volume, offsetting some of the lost revenue.

3. Can markdowns be reversed?

Yes, if demand increases, businesses can adjust prices back to their original levels or reduce the discount amount.

4. What is the difference between a markdown and a sale?

A markdown is a permanent price reduction, while a sale is typically a temporary discount for a promotional period.

5. How do retailers decide when to apply markdowns?

Retailers analyze inventory levels, seasonal demand, and competitor pricing before applying markdowns.