Markdown refers to a discount on a product. For example, a product may be originally priced at $150, but during a sale, the product is marked 25 percent off to attract more consumers. You can determine the sale price once you know what the markdown is. Calculating the markdown and analyzing how the profits are affected will help you determine the best pricing strategy for your product. This will ultimately help you manage your business better and maintain profitability. Learn how to calculate markdown with the simple formula below.
Determine the original price of the product.
Decide on what the discount rate will be based on your analysis of sales, expenses and profit. For example, if you want to determine what a profitable discount rate would be for a product that costs you $130 and that you sell for $150, you can analyze how a 10, 15 and 20 percent discount rate affects your profitability.
Multiply the original price by the discount rate. In our example of a $150 product with a 10 percent discount, the markdown would be $15 ($150 x .10). To determine the sale price, subtract the markdown from the original price. In this example, the sales price would be $135 ($150 minus $15).
Calculate the markdown using the other rates in a similar manner
15 percent - Markdown is $22.50 ($150 x .15) and the sale price is $127 ($150 minus $22.50) 20 percent - Markdown is $30 ($150 x .20) and the sale price is $120 ($150 minus $30)
From this analysis, you can see that it would not be profitable to discount the product at 15 or 20 percent because the sale price would be $127 and $120, respectively, while your cost is $130 for the product. You would be losing money. Hence, the best discount rate to use is 10 percent.
Be sure to use a few different discount rates to see how various scenarios are played out. Then choose the most efficient rate.