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The Truth About Markups & Markdowns
- 1. The Truth About Markups & Markdowns
- 2. Paul Erickson Senior Vice President www.rmsa.com Info@rmsa.com
- 4. difference between markup & margin markup margin • initial markup and • initial margin and maintain markup gross margin • retail aspect • accounting aspect • from buyer’s perspective • from business owner’s perspective
- 5. retail method of calculation
- 6. retail method of calculation original selling price - cost / original selling price • Example: $100 - $40 / $100 = 60%
- 9. “…that’s what “…I multiple I always price the cost by it at…” 2.2…” “…I double the cost and then add a $1 or $2…”
- 11. three key elements operating desired markdowns expenses net profit
- 12. three key elements operating desired markdowns expenses net profit
- 13. three key elements operating desired markdowns expenses net profit
- 14. IMU formula
- 15. IMU = (markdown% + operating expense % + desired net profit %) / 100% + markdown%
- 16. operating desired markdowns = expenses = net profit = 20% 40% 6% .06 + .40 + .20 1.0 + .20 = .55
- 17. annual sales $1,000,000 IMU 52.5% 55% MDS 20% 20% MMU 43% = $430K 46% = $460K EXP 40% = $400K 40% = $400K NET 3% = $ 30K 6% = $ 60K
- 18. pricing for profit 52.5% 55% $9.00 cost $9.00 cost $19.00 retail $19.99 retail
- 22. competitive pricing multiple discount loss pricing pricing leaders know your customer competition service
- 23. competitive pricing multiple discount loss pricing pricing leaders know your customer competition service
- 24. competitive pricing multiple discount loss pricing pricing leaders know your customer competition service
- 25. competitive pricing multiple discount loss pricing pricing leaders know your customer competition service
- 26. competitive pricing multiple discount loss pricing pricing leaders know your customer competition service
- 28. steering clear of cost-base pricing
- 29. steering clear of cost-base pricing decide on price before knowing cost determine price when writing order
- 30. steering clear of cost-base pricing decide on price before knowing cost determine price when writing order
- 31. steering clear of cost-base pricing decide on price before knowing cost then make = decision to buy determine price when writing order
- 34. initial markup review determine right steer clear of each product product cost-base category price? separately pricing use key expenses psychological go up, so pricing when should IMU possible
- 35. initial markup review determine right steer clear of each product product cost-base category price? pricing separately use key expenses psychological go up, so pricing when should IMU possible
- 36. initial markup review determine right steer clear of each product product cost-base category price? pricing separately use key expenses psychological go up, so pricing when should IMU possible
- 37. initial markup review determine right steer clear of each product product cost-base category price? pricing separately use key expenses psychological go up, so pricing when should IMU possible
- 38. initial markup review determine right steer clear of each product product cost-base category price? pricing separately use key expenses psychological go up, so pricing when possible should IMU
- 39. markdowns
- 41. Expense Percents Advertising 3.3% Occupancy cost 8.0% Payroll 19.5% Markdowns 23.6%
- 42. Retailers are losing over $200 billion a year due to markdowns. --United States Census Bureau & National Retail Federation
- 43. decision making
- 44. best laid plans of mice and men
- 48. the calculation
- 49. markdown percent calculation total retail markdown $ net sales (sales after markdowns) Example: $ 20 = 25% $ 80
- 50. the good and the bad
- 51. the good keeps assures cost of inventory good cash doing fresh flow business
- 52. the good keeps assures cost of inventory good cash doing fresh flow business
- 53. the good keeps assures cost of inventory good cash doing fresh flow business
- 54. the bad higher than raises the cost of other expenses goods sold and on the income result in a net statement loss
- 55. the bad higher than raises the cost of other expenses goods sold and on the income result in a net statement loss
- 57. four factors
- 58. four factors current current on rate hand of sale desired season’s stock end turn
- 59. four factors current current on rate hand of sale desired season’s stock end turn
- 60. four factors current current on rate hand of sale desired season’s stock end turn
- 61. four factors current current on rate hand of sale desired season’s stock end turn
- 62. seasonal system
- 63. seasonal system give time season’s season for time ending acceptance line deadline
- 64. seasonal system give time season’s season for time ending acceptance line deadline
- 65. seasonal system give time season’s season for time ending acceptance line deadline
- 67. root causes of excessive markdowns
- 68. root causes poor too buying large assortments duplication overbuying
- 69. root causes poor too buying large assortments duplication overbuying
- 70. 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
- 71. Do not advertise % or specific $ off at this time!
- 72. “Just Reduced”
- 75. math of psychological pricing original price: original price: $38.00 $98.00 25% off 20% off = $28.50 = $78.00 psychological psychological pricing pricing $29.99 $79.99 = 21% off = 18% off
- 76. same message? 25% off plus “take an additional 15% off” =36.25% = 40% off 50% off plus “take an additional 20% off” =60% = 70% off
- 77. markdown rules
- 78. markdown rules plan use a price points plan budget… not plan don’t be percentages under learn from pay every your tuition markdown
- 79. markdown rules plan use a price points plan budget… not plan don’t be percentages under learn from pay every your tuition markdown
- 80. markdown rules plan use a price points plan budget… not plan don’t be percentages under learn from pay every your tuition markdown
- 81. markdown rules plan use a price points plan budget… not plan don’t be percentages under learn from pay every your tuition markdown
- 82. markdown rules plan use a price points plan budget… not plan don’t be percentages under learn from pay every your tuition markdown
- 83. markdown truths
- 84. markdown truth #1 • Always explain to your customer why the items are marked down
- 85. markdown truth #2 • Overbuying is the number one cause of excessive markdowns
- 86. markdown truth #3 • Your first markdown is the cheapest!
- 87. markdown truth #4 • The price you paid has nothing to do with the markdown price
- 88. markdown truth #5 • Learn from every markdown
- 89. markdown truth #6 • Always keep your markdown items at the back of the store!
- 90. markdown truth #7 • Nurture your customers who do not shop you on price alone
- 91. final word on markdowns • commit to lean inventories • maintain liquidity • avoid the last buy • use an open-to-buy plan and follow it
- 93. Thank you! Paul Erickson www.rmsa.com perickson@rmsa.com Info@rmsa.com
Editor's Notes
- <Paul> There are many outside influences that affect profitability and your bottom line. You setting the right price is a crucial step toward achieving that profit. Initial Markup (IMU) is probably the most fundamental concept in retailing. Markup IS retailing! Your ability to buy goods, add markup and resell them is what this business is all about … and always has been about since ORG opened the first spear shop in caveman days.And without markup, there would be no paying of expenses, advertising, giving back to the campus … and in fact there would be no profit at all.So, I challenge you, are you looking at increasing IMU as a way to increase maintained margins?
- <Paul> Sometimes retailers use the terms markup and margin interchangeability but we really shouldn’t. As campus retailers we should understand the terms and use they accordingly.Markup, used with the terms, initial and maintained markup, IS strictly a retail term. Markup refers to the pricing of goods taking into account just the good itself.On the other hand, margin is from the accounting perspective, used with the terms initial and gross. Margin takes into account expenses.
- <Paul> Let’s make sure we are all speaking the same language.
- <Paul> When I say initial markup, I am using the RETAIL METHOD of calculation and am referring to the markup % placed on the goods when they are received from the manufacturer. Maintained Markup (MMU) is what is left after taking into account the cost of markdowns.Almost ALL retailers use the retail method in calculating IMU. That is why when you double the cost price the IMU is 50% of the retail price … as opposed to the cost method which would be 100% markup.
- <Paul> Doubling the cost paid for merchandise was once the rule for pricing products. It is referred to as Keystone markup and is no longer used as often as it once was. But why did we just double the cost? What does the term “Keystone markup” mean and where did it originate? Certainly doubling the cost would be easy for ORG to calculate at the CAVE MAN SPEAR SHOP … “spear cost ORG one rock … ORG sell for two rocks”The term “keystone” markup has been around so long there is practically no definitive answers on where it came from.
- <Paul> According to the National Retail Federation there used to be an ACTUAL “markup key” in the very early days of cash registers. This practice predated individually ticketed items and pricing was often times handled right at the point of sale. Remember … prior to the end of the 19th century when Timothy Eaton in Canada pioneered a radical new concept called FIXED PRICING in which every item in the EATON stores would have a price on it … bartering was very common in retail.
- <Paul> Over the years I have often asked retailers to define THEIR initial markup.Their answers are quite interesting and run the gambit from doubling the cost and then adding $1 or $2 to a multiplier of 2.2 or 2.3 as an example. OR … when asked why that item was ticketed at that specific price “that’s what I always price it at” …. More on that later …..These answers would lead anyone to the conclusion that most retailers truly can’t explain what initial markup was intended to cover.
- <Paul> There are many outside influences that affect profitability and your bottom line. You setting the right price is a crucial step toward achieving that profit. Initial Markup (IMU) is probably the most fundamental concept in retailing. Markup IS retailing! Your ability to buy goods, add markup and resell them is what this business is all about … and always has been about since ORG opened the first spear shop in caveman days.And without markup, there would be no paying of expenses, advertising, giving back to the campus … and in fact there would be no profit at all.So, I challenge you, are you looking at increasing IMU as a way to increase maintained margins?
- <Paul>Markdowns … the word itself strikes fear in the hearts of most retailers. Call it by whatever term you wish, price adjustment, promotion, or just plain sale … the translation is the same and conjures up all sorts of negative emotions. The fact remains however that any reduction in the retail price is really a MARKDOWN. And that markdown is an expense every bit as real as rent or payroll … but this is an expense that you don’t write a check for. It shows up by increasing your cost of goods sold.
- Many think markdowns are something that just happens at the end of the season … after the final peak sales weeks at the end of the season. But the truth is that, more often than not, excessive markdowns result from decisions made and actions taken and not taken much earlier … frequently before the season even starts.
- Here’s what typically happens. Because … being the eternal optimists that we generally are as retailers … we anticipate a nice increase in sales … this season’s merchandise will be better … the weather will break just right … and the goods will arrive right on time. Then we buy more than the traffic in our store will bear.
- <Paul> Once the inventory is bought and then received early in the season to set the store in order to support optimistic sales increases. Yet those early season plans frequently don’t pan out, because they may have been unrealistic and were predicated on everything breaking just right. The inventory begins to back up right away. Then the next round of deliveries come in, but the initial deliveries haven’t sold through yet … and the retailer quickly becomes overstocked, making it difficult both to display merchandise and for customers to shop.As the inventory backs up, your core customers --- the backbone of any successful retailer --- see the same assortments 2, 3, 4 visits in a row, further depressing sales and sell-throughs and further backing up inventories.
- <Paul> Once mid-season markdowns are taken in an effort to bring inventory back in line, customers become incentivized to defer their purchases until prices get further reduced. Your core customer is smart; they can sense when you are overstocked. They understand that if they wait they can probably buy that hoodie cheaper. This customer reticence feeds the cycle even further.
- <Paul> What does this mean for your store … your core customer is waiting for that hoodie to go on sale.By the time the term, a your unbridled optimism has given way to the realization that inventory is too high, cash is too low, that when those clearance markdowns are taken, the impact is pretty significant.
- You probably have an inherent disdain for the very word markdowns … most retailer do. Taking too many markdowns represents failure in some area or another.BUT not all markdowns are necessarily bad …. There are acceptable markdowns that are part of the cost of doing business.
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- <Paul> It is important to understand the root causes for excessive markdowns.
- <Paul> While poor buying, bad styles, incorrect sizes and price points, buying minimums that are too large to absorb, duplicate items … etc. can all be factors ….
- <Paul> THE NUMBER ONE CAUSE OF EXCESSIVE MARKDOWNS IS …..
- Overbuying. Buying more merchandise that you can profitably sell within a reasonable period of time. What is that period? Depends on the merchandise type. BUT ALL inventory, with the possible exception of gold & fine cabernet … depreciates over time and has a defined shelf life. If a category has a goal of 4 turns … then we should never buy more than what we can sell in 3 months. And markdowns decisions take place within that defined time frame.
- <Paul> When you take in season markdowns, what is the better approach? <ANIMATION> DO NOT ADVERTISE % OR SPECIFIC $ OFF AT THIS TIME! Signage declaring JUST reduced without specific % or $ will save you markdown $ and improve your bottom line.PLUS … customers love brand new discounts. The word JUST is important
- <Paul> Signage declaring JUST reduced without specific % or $ will save you markdown $ and improve your bottom line.PLUS … customers love brand new discounts. The word JUST creates the urgency and creates the importance.
- Psychological pricing is used when prices are set to a certain level where the consumer perceives the price to be fair. The most common method is odd pricing using figures that end in 5, 7 or 9. Every study done on this … for decades … has shown that consumers tend to round down a price of say $9.95 to $9 , rather than round up to $10.
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- <Paul> <Animation> At clearance time, the rules change. Today’s clearance customer has clearly fallen in love with “take an additional % off”. Started from the large chain stores as a way to easily record point-of-sale markdowns. Today it as become part of the retail lexicon. What’s interesting is that its marketing power is such that the actual selling price is actually higher than what you would think to move the item.SLIDEIn both instances “take an additional” is less of a total markdown.
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- <Paul> In addition to these rules there are some general truths about markdowns.
- <Paul>Always explain to your customers why you are doing it. If we fail to explain to them that this is end of season, damaged or defective, overstock, special purchase etc. then we run the risk of them never believing any of our prices and turning each interaction with them into a mini auction
- <Paul> Control your inventories. Overbuying is the number 1 cause of excessive markdowns. Have a good buy plan. If you want 4 turns, never buy or stock more merchandise than you can realistically sell in 13 weeks. Remember … merchandise is perishable & scarcity breeds demand
- <Paul> Everyone believe this? It’s true but not for the reasons most retailers believe. You need to make the 1st markdown work!
- <Paul> Cost has absolutely nothing to with the amount of markdown that needs to be taken
- <Paul> We can profit from a loss if we are educated on WHY we took the markdown. We have much to learn from our customers on pricing.
- <Paul> Where your customer has to search for them. Drag them through the whole store & tempt them with new items first.
- <Paul> The average retail store in the United States typically has less than 100 really good customers. Rank your customers by gross profit. Send them thank you cards. Maintain close relationships. Add value to what you do for them. Become more than an item provider in their lives. There is one retail sector that never takes a markdown. Do you know what it is? Cosmetics … they gift.FREE …. I love free!
- <Paul> We have had some great questions so far, but let’s go ahead and open the floor for additional questions, thoughts, and comments.<Be prepared to throw out questions to get discussion started.>We’ll we are coming up on <time>. Thank you everyone for your time today and the <great> discussion. And now, I’m going to turn it back over to Glenda for some final instructions.