11.13 Markdown
Markdown
Flashy signs in a retail store announce, “40% off, today only!” Excitedly you purchase three tax-free products with regular price tags reading $100, $250, and $150. The cashier processing the transaction informs you that your total is $325. You are about to hand over your credit card when something about the total makes you pause. The regular total of all your items is $500. If they are 40% off, you should receive a $200 deduction and pay only $300. The cashier apologizes for the mistake and corrects your total.
Although most retail stores use automated checkout systems, these systems are ultimately programmed by human beings. A computer system is only as accurate as the person keying in the data. A study by the Competition Bureau revealed that 6.3% of items at various retail stores scanned incorrectly. The average error spread is up to 13% around the actual product’s price![1] Clearly, it is important for you as a consumer to be able to calculate markdowns.
Businesses must also thoroughly understand markdowns so that customers are charged accurately for their purchases. Businesses must always comply with the Competition Act of Canada, which specifically defines legal pricing practices. If your business violates this law, it faces severe penalties.
The Importance of Markdowns
A markdown is a reduction from the regular selling price of a product resulting in a lower price. This lower price is called the sale price to distinguish it from the selling price.
Many people perceive markdowns as a sign of bad business management decisions. However, in most situations this is not true. Companies must always attempt to forecast the future. In order to stock products, a reseller must estimate the number of units that might sell in the near future for every product that it carries. This is both an art and a science. While businesses use statistical techniques that predict future sales with a relative degree of accuracy, consumers are fickle and regularly change shopping habits. Markdowns most commonly occur under four circumstances:
- Clearing Out Excess or Unwanted Inventory. In these situations, the business thought it could sell 100 units; however, consumers purchased only 20 units. In the case of seasonal inventory, such as Christmas items on Boxing Day, the retailer wishes to avoid packing up and storing the inventory until the next season.
- Clearing Out Damaged or Discontinued Items. Selling a damaged product at a discount is better than not selling it at all. When products are discontinued, this leaves shelf space underused, so it is better to clear the item out altogether to make room for profitable items that can keep the shelves fully stocked.
- Increasing Sales Volumes. Sales attract customers because almost everyone loves a deal. Though special marketing events such as a 48 hour sale reduce the profitability per unit, by increasing the volume sold these sales can lead to a greater profit overall.
- Promoting Add-On Purcha