the truth about markups & markdowns
Post on 09-May-2015
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The Truth About Markups & Markdowns
Paul EricksonSenior Vice President
www.rmsa.comInfo@rmsa.com
initial markup (IMU)
difference between markup & margin
markup• initial markup and
maintain markup• retail aspect• from buyer’s perspective
margin• initial margin and
gross margin• accounting aspect• from business owner’s
perspective
retail method of calculation
retail method of calculation
original selling price - cost / original selling price
• Example: $100 - $40 / $100 = 60%
keysto
ne
pricin
g?
Zizzybaloobah/Fickr
“…I multiple the cost by
2.2…”
“…that’s what I always price
it at…”
“…I double the cost and then add
a $1 or $2…”
three key elements
markdownsoperating expenses
desired net profit
three key elements
markdownsoperating expenses
desired net profit
three key elements
markdownsoperating expenses
desired net profit
three key elements
IMU formula
IMU = (markdown% +
operating expense % + desired net profit %) / 100% + markdown%
.06 + .40 + .20
1.0 + .20
= .55
markdowns =20%
operating expenses =
40%
desired net profit =
6%
IMU 52.5% 55%
MDS 20% 20%
MMU 43% = $430K 46% = $460K
EXP 40% = $400K 40% = $400K
NET 3% = $ 30K 6% = $ 60K
annual sales $1,000,000
52.5% 55% $9.00 cost $9.00 cost
$19.00 retail $19.99 retail
pricing for profit
psychology of pricing
competitive pricing
competitive pricing
multiple pricing
discountpricing
loss leaders
know yourcompetition
customerservice
competitive pricing
multiple pricing
discountpricing
loss leaders
know yourcompetition
customerservice
competitive pricing
multiple pricing
discountpricing
loss leaders
know yourcompetition
customerservice
competitive pricing
multiple pricing
discountpricing
loss leaders
know yourcompetition
customerservice
competitive pricing
know yourcompetition
customerservice
multiple pricing
discountpricing
loss leaders
steering clear of cost-base pricing
steering clear of cost-base pricing
determine price when
writing order
decide on price before
knowingcost
determine price when
writing order
decide on price before
knowingcost
steering clear of cost-base pricing
then makedecisionto buy
=determine price when
writing order
decide on price before
knowingcost
steering clear of cost-base pricing
initial markup review
initial markup review
rightproductprice?
determine each product
categoryseparately
steer clear of cost-base
pricing
use psychologicalpricing when
possible
key expensesgo up, so should IMU
initial markup review
rightproductprice?
determine each product
categoryseparately
steer clear of cost-base
pricing
use psychologicalpricing when
possible
key expensesgo up, so should IMU
initial markup review
rightproductprice?
determine each product
categoryseparately
steer clear of cost-base
pricing
use psychologicalpricing when
possible
key expensesgo up, so should IMU
initial markup review
rightproductprice?
determine each product
categoryseparately
steer clear of cost-base
pricing
use psychologicalpricing when
possible
key expensesgo up, so should IMU
initial markup review
rightproductprice?
determine each product
categoryseparately
steer clear of cost-base
pricing
use psychologicalpricing when
possible
key expensesgo up, so should IMU
markdowns
Advertising 3.3%
Occupancy cost 8.0%
Payroll 19.5%
Markdowns 23.6%
Expense Percents
Retailers are losing over $200 billion a year due to markdowns.
--United States Census Bureau & National Retail Federation
decision making
best laid plans of mice and men
the calculation
markdown percent calculation
total retail markdown $net sales
(sales after markdowns)
= 25% $ 20$ 80
Example:
the good and the bad
the good
keeps inventory
fresh
assures good cash
flow
cost of doing
business
the good
keeps inventory
fresh
assures good cash
flow
cost of doing
business
the good
keeps inventory
fresh
assures good cash
flow
cost of doing
business
the bad
higher than other expenses on the income
statement
raises the cost of goods sold and result in a net
loss
the bad
higher than other expenses on the income
statement
raises the cost of goods sold and result in a net
loss
four factors
four factors
current on
hand
current rate
of sale
desired stock turn
season’s end
four factors
current on
hand
current rate
of sale
desired stock turn
season’s end
four factors
current on
hand
current rate
of sale
desired stock turn
season’s end
four factors
current on
hand
current rate
of sale
desired stock turn
season’s end
seasonal system
seasonal system
give time for
acceptance
season’s time line
season ending
deadline
seasonal system
give time for
acceptance
season’s time line
season ending
deadline
seasonal system
give time for
acceptance
season’s time line
season ending
deadline
root causes of excessive markdowns
root causes
poorbuying
too large
assortments
duplication overbuying
root causes
poorbuying
too large
assortments
duplication overbuying
1. 70% of your sales come from inventory less than 3 months old
2. Recognize short shelf life
3. Recognize slow sellers in season
Overbuying
Do not advertise % or specific $ offat this time!
“Just Reduced”
psychological pricing
math of psychological pricing
original price: $38.00
25% off
original price: $98.00
20% off
psychological pricing
$29.99
psychological pricing
$79.99
= $28.50
= 21% off
= $78.00
= 18% off
same message?
25% off plus “take an additional 15% off” = 40% off
=36.25%
50% off plus “take an additional 20% off” = 70% off
=60%
markdown rules
markdown rules
planplanplan
use a budget…don’t be
under
price points not
percentages
learn from every
markdown
pay your tuition
markdown rules
planplanplan
use a budget…don’t be
under
price points not
percentages
learn from every
markdown
pay your tuition
markdown rules
planplanplan
use a budget…don’t be
under
price points not
percentages
learn from every
markdown
pay your tuition
markdown rules
planplanplan
use a budget…don’t be
under
price points not
percentages
learn from every
markdown
pay your tuition
markdown rules
planplanplan
use a budget…don’t be
under
price points not
percentages
learn from every
markdown
pay your tuition
markdown truths
markdown truth #1
• Always explain to your customer why the items are marked down
markdown truth #2
• Overbuying is the number one cause of excessive markdowns
markdown truth #3
• Your first markdown is the cheapest!
markdown truth #4
• The price you paid has nothing to do with the markdown price
markdown truth #5
• Learn from every markdown
markdown truth #6
• Always keep your markdown items at the back of the store!
markdown truth #7
• Nurture your customers who do not shop you on price alone
• commit to lean inventories• maintain liquidity• avoid the last buy• use an open-to-buy plan
and follow it
final word on markdowns
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