A price markdown is a deliberate reduction in the selling price of retail merchandise. It is used to increase the velocity (rate of sale) of an article, typically for clearance at the end of a season, or to sell off obsolete merchandise at the end of its life.
The timing and level of markdowns in a selling season is critical to maximising return on sales. This is often measured as revenue realization: the proportion of the potential original selling price achieved. For example, a revenue realization of 50% means that only half the potential full-price sales value was achieved by the end of the season. It is also important in minimizing terminal inventory, i.e. the amount of merchandise left when the season is finished.
A recent trend has been to use demand optimization software to establish the most desirable timing and level of markdown. Optimization techniques can be used to determine where the best combination of revenue realization and terminal inventory is going to come from, for example, comparing a tactic of low-level markdowns from early in the season against one of later, deeper reductions.
Rules to help you manage pricing.
- Layer usage metrics into your pricing model to better align with value.
- Do not discount. Use other concessions as necessary.
- Focus on economic value drivers for cost and risk.
- Plan for more than one possible future.
- Build a holistic value proposition that include emotional, economic and especially community value drivers.
Relationships will matter no matter what happens
Communicate with your customers and make sure you understand how the pandemic is impacting them personally, their business and their customers. No one understands all of the implications of the pandemic, and the only way to find out is to ask and to listen.
You’re listening for changes in value drivers, the value that you’re providing your customers and the value that your customers are providing to their customers. Emotional, Economic and Community value drivers all matter, but for the short term it is emotional and community value drivers that will come to the fore.
Don’t offer discounts
There’s going to be pressure to offer discounts. Resist this pressure. Instead of offering discounts, look at making concessions on terms of trade. Defer payment terms if you can. Allow customers to carry volume commitments forward.
If there’s a serious drop in use due to the pandemic, consider extending the subscription for a period of months. If you fail to acknowledge the current economic conditions, as reflected in the use of your service and the value it delivers, you may contribute to higher churn. In uncertain times, you want to be doing what you can to reduce churn.
You’ve started worrying about money. So have your customers.
If you define value drivers based on how you impact unit economics (Customer Acquisition Costs, Lifetime Value of a Customer and so on), take a close look at everything you can do to help your customers reduce or manage their own churn.