In a perfect world, you'd sell the last piece of your inventory right before new stock came in without any delays or slow periods. That rarely happens, though. In most cases, any one of a number of factors will cause certain items to sell more slowly than you'd planned. You may receive unneeded push orders from your corporate headquarters, or your company's buyer might make an error in judgment when ordering seasonal items. In order to move that merchandise off the sales floor, sometimes you have to discount, or markdown, merchandise and sell it at a lower price. Knowing the appropriate markdown percentage allows you to compensate for lower gross sales in your bottom line, helping you to narrow down the sales results in your monthly profit and loss report.
Why Mark Down Prices?
Items can be marked down to clear prior stock, to get rid of poor selections, to hold special sales events, to sell off broken assortments or to meet the competition's pricing. You can create a markdown that's either permanent or temporary. Temporary sales include those for special occasions, such as Back to School sales or Black Friday sales events. But if you bought a large selection of school backpacks right before the local school board outlawed all but clear backpacks, you might need to permanently mark down your stock as you advertise to a smaller market base.
Retailers naturally try to avoid markdowns at all costs, but they're an inevitable part of doing business. When faced with the choice of hanging onto merchandise that won't sell or selling items at a lower price, it only makes sense to convert that extra inventory into cash on hand.
Calculating the Markdown Percentage Vs. Discount Percentage
Both numbers are important in terms of business accounting, but your markdown percentage and the percentage you've discounted your merchandise isn't the same number. When you've put a $100 sweater on sale for $60, you've cut $40 off the price. That's a 40 percent discount, but this isn't the same as a markdown percentage.
In order to get the markdown percentage, take the amount of money you've discounted the merchandise at and divide it by the sales price. For example, if you're stuck with an overstock of those $100 sweaters, you can put them on sale for $60. The difference between these two prices is $40. Take this $40 discount and divide it by the sales price of $60 and you'll get a markdown percentage of 67 percent.
- Be sure to use a few different discount rates to see how various scenarios are played out. Then choose the most efficient rate.
Victoria Bailey has owned and operated businesses for 25 years, including an award-winning gourmet restaurant and a rare bookstore. She spent time as a corporate training manager in the third-largest restaurant chain in its niche, but her first love will always be small and independent businesses. Bailey has written for USAToday, Coldwell Banker, and various restaurant magazines, and is the ghostwriter for a nationally-known food safety training guru.