A markdown is any reduction in the price of a product. Inventory markdown pricing strategies can lead to increased sales and profits if applied correctly.
While the idea of lower prices driving higher profits may initially seem counterintuitive, the allure of lower prices is a proven way to increase sales and bring customers to your products and brand. By boosting your conversion numbers and selling through inventory at a faster rate, the goal is to make up for any markdown price reductions with higher order volume. Furthermore, attracting new customers creates the opportunity for repeat business in the future.
The Sellercloud omnichannel growth platform makes it easy to both set and adjust the pricing of all the products in your catalog, across all of the places where you sell from one convenient interface. This combination of control and convenience means that you can spend less time manually marking down product prices across individual channels and spend more time focusing on scaling your e-commerce business to the next level.
All that being said, it is crucial to remember that markdowns can be a profitable strategy only if done for the right reasons and in the right ways.
The Best Reasons to Markdown Your Inventory
There are many valid approaches to using markdowns as a profit-boosting strategy in e-commerce. Some focus on generating revenue, others aim to reduce costs, and still more seek to do both simultaneously.
Some of the most reliable ways to use markdowns to improve your bottom line include:
- Use markdowns to reduce your carrying costs. Warehousing, 3PLs, and marketplace-based storage fees can be expensive. In most cases, the more space your inventory takes up, the more you are paying to store it. This can be problematic if your inventory sell-through rate is low.
At some point, the cost-benefit to storing unsold inventory versus selling that inventory off at a markdown tilts in favor of getting merchandise out the door. Even slim profit margins may prove to be more profitable than continuing to pay carrying costs indefinitely. - Use markdowns to pave the way for new products. Every SKU has its own lifecycle. As the end of that journey approaches, there comes a time when you need to begin clearing out older, less desirable products to make room for new ones. Markdown pricing can help you liquidate old stock and eke out whatever remaining profit and customer attention you can from sunsetting SKUs.
- Use markdowns to win the Buy Box and bring new customers to your brand. Sometimes long-term value of exposure is worth more than a short-term reduction of your profit margins. Carefully timed markdowns that make your product the most affordable on a particular marketplace can get your products in front of fresh eyes. What’s more, if you have a plan for how to capitalize on these new customers with a remarketing plan, you can reap the benefits of a temporary markdown long after the price has returned to normal.
However, of the three reasons listed here, this is the one that can get you into trouble if used incorrectly. Relentless pursuit of the Buy Box can create a major drag on the value of your products and brand. Moreover, the odds of losing out to competitors that over-rely on a lowest price repricing strategy could make this a losing battle before it even begins.
Speaking of which…
The Worst Reasons to Markdown Your Inventory
For all their potential value to your e-commerce business, markdowns can also lead to problems. Reducing prices for the wrong reasons can create both short- and long-term issues for your online retail success.
Some markdown mistakes are more egregious than others:
- Thinking markdowns are the key to competing with the retail giants is a major mistake. There are definitely ways in which smaller e-commerce businesses can carve out their share of an online retail market, but competing on price is not typically one of them.
Amazon, Walmart, and other marketplaces and retailers like them have access to volume purchasing and logistical capabilities far beyond what most e-commerce businesses do. This, combined with their incredibly high sales volumes, means that these industry leaders can generate profits on margins that are far thinner than their smaller competitors. Constantly marking down your prices to the lowest levels won’t work for you the way it does for the heaviest hitters. - Marking down prices to simply increase orders is unlikely to lead to a boost to your bottom line. Abusing markdowns can depreciate the value of your products and your brand. If customers come to expect regular sales and discounts, you will become harder pressed to sell products at full price and ,in turn, justify their true value.
Increased order volume can quickly become a vanity metric if you aren’t also paying attention to the associated profitability impacts of your increased sell-through rate. While you may be bringing in new customers, you are hamstringing your ability to get the maximum value out of their repeat business if they never purchase any of your products at their full retail prices.
- Using markdowns to compensate for purchasing too much inventory is a costly long-term strategy. It essentially amounts to putting a bandage on a much larger problem.
Finding the sweet spot for how much inventory to keep on hand is a critical calculation for any retail business. It is also something that needs to be consistently re-evaluated. If your business’s plan involves ordering inventory so far beyond your customers’ demand that you need to regularly rely on markdowns to move it, you are setting your business up for potential disaster.
Sellercloud Can Help You Avoid the Worst Markdown Pitfalls.
The difference between effective and ineffective markdown strategies can be small, but the impacts can be significant. Of the many benefits provided by a unified e-commerce growth platform like Sellercloud is the ability to identify and execute the right parameters to get the most out of a markdown.
Grow Your First-Party Sales
Third-party marketplaces are excellent venues to get an e-commerce brand off the ground. Tapping into these established customer bases provide strong launching points to establish and scale a business. That said, transforming your third-party sales into a first-party business opens up entirely new opportunities for growth. For example, markdowns can be used to help build first-party sales in a way that third-party marketplace terms of service (specifically their strict communication limitations) make impossible.
Sellercloud empowers sellers with the tools and data they need to achieve omnichannel success across both first- and third-party channels.
Approach Repricing the Right Way
Sellercloud makes it easy for you to adjust product prices across multiple channels at once. It also supports integrations with some of the industry’s best third-party repricers.
Rather than marking down your prices by simply undercutting your competitors’ lowest levels, you can make more nuanced decisions based on metrics like your purchasing costs, carrying costs, and others. Sellercloud’s variety of reporting features put these figures at your fingertips and eliminates the need to “go with your gut” when it comes to the ideal markdown prices. Repricing tools take things further and allow you to set automations and pricing thresholds to ensure that you’re never selling products at rates outside your comfort zone.
Order and Carry the Right Amount of Inventory
Sellercloud’s inventory management features ensure that you always know how much inventory you have and where you have it. Predictive purchasing takes things further by issuing notifications or initiating automated purchase orders when stock runs low.
All of these features eliminate the need to get into a cycle of over-purchasing and then marking down your surplus. Instead, you can use actual sales performances to dictate the ideal buffer inventory levels to keep on hand. The result: eliminate backorders and overselling while saving markdowns for more effective uses.
For more on how Sellercloud’s family of tools and software can help you create and execute growth-focused e-commerce strategies, contact us directly for a free demo today.
