Start Styling Your Markdowns for Success: Five Strategies for Profitable Discounting

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Start Styling Your Markdowns for Success: Five Strategies for Profitable Discounting

By Cheryl Sullivan, Chief Marketing & Strategy Officer, Revionics - 04/24/2017
For apparel retailers, as for others, it's a frightening and hostile environment. The rise of Generation Z reflects the always-on shopper who can price-compare 24/7 and who remains very cost-conscious in the wake of the Great Recession.  The days of shopper brand loyalty are gone – today price is king, and consumers' expectations change more rapidly than ever.  The rise of omnichannel commerce, fast fashion and demanding delivery expectations is taking its toll on apparel retailers across the landscape.

Add social media to the mix, and you see the influence of peer reviews, YouTube stars and friend behaviors shape shopper expectations before they ever think to interact with a retailer in the store. There is a reason business for the big discount chains such T.J Maxx, which has said it may open up to 1,300 more stores, are booming. At this breakneck pace of change, last season's – or even last month's – hottest items are headed to the clearance racks.  But marking down too soon, too often, too deeply or at the wrong cadence is a formula for stagnant sales growth, shrinking profit margins and diminished brand value.

How does an apparel retailer take an orderly, structured approach to markdowns in order to optimize business results in this turbulent environment?  In an industry where merchandisers have traditionally been noted for their ability to predict trends in color, design, and more, the increasingly unpredictable shifts in shoppers' tastes and the speed at which new trends gain traction can wreak havoc.  The markdown cadence that worked optimally last year or last season may be completely out of synch with your business today and tomorrow.

So the vexing dilemma remains: how do you know when to take that first mark? And when you do move forward with a mark, how can you know whether you've got it right or wrong?  Fortunately, advanced markdown solutions are available to monitor complex and evolving demand signals in real time to enable rapid course-correction from any mis-predictions that may have entered the mix, and they are both predictive and prescriptive – they tell you what to do. Leveraging machine-learning science, you can systematically monitor your assortment and their inventory levels across channels, while identifying changes in shoppers' behavior and their price sensitivities across your entire assortment. 

While considering your pricing rules, budget constraints and new practices such as enabling buy online pick-up in-store, the science can make precise recommendations on how long to keep selling at full price and tell you when it's time to take that first mark and how deep of a discount to take.  At the same time it will dynamically create a full markdown plan, recommending the number and cadence of future marks and then dynamically regenerate that plan as the season progresses. And the science is powerful enough to predict with startling accuracy what is likely to happen in the future, so you can simulate different strategies and predict their outcome.

Here are five strategies to rethink your markdown approaches to not only survive but thrive in today's cut-throat retail environment.

Know your customer.  Today retailers have an unprecedented amount of data that can be effectively analyzed for very highly focused insights into your customer segments, including variations in shopper behavior by geography and zone.  Algorithms can quickly isolate true demand signals and detect changes in shopper preferences in near real time, so you aren't caught unaware as style, cut and color preferences change at the speed of social media.

Challenge your existing strategy.  Instead of repeating mark depths and cadences from prior seasons or gut feel, reverse your thinking and learn to manage by outcomes. Work backwards and ask the hard questions about analytical capabilities, data streams, consistency, and brand. Once your business goals and price image are clearly established, it becomes easier to strike the right balance of revenue, margins and inventory clearance targets.

Leverage science-driven technology that is prescriptive to gain real-time insights and respond to market changes and shopper behaviors in-flight.  Because price and inventory are so intimately entwined, an optimized markdown approach forecasts inventory depletion as a function of time and price, delivering discount recommendations that address the product across its entire lifecycle, including the timing and depth of each mark to ensure you sell-through your inventory and maximize your margins.  

Know all your options. The discount recommendations can be as surgical as the store-SKU level. They can also target at the style-color level to align with your business goals. Driving store-SKU specific cadence and depths lets you target markdowns to fit each market's shopper patterns, rather than adopting a sledgehammer approach of one-size-fits-all.  And conducting what-if scenario analysis lets you plan, anticipate and adjust for customer needs and marketplace shifts.

Structure for long-term growth.  Today's machine-learning price and markdown optimization tools can free up tens of millions of dollars in working capital to fund innovation that directly engages – and retains – your customers.  The multi-channel markdown optimization approach also aligns retailers with the reality of how their shoppers compare and shop across multiple channels and processes.

With this science-driven approach, retailers can dynamically adjust their markdown plans, with unexpected market shifts, while profitably selling through their inventory.

It's a fiercely competitive environment, but that doesn't mean you have to accept low profit margins as the cost of doing business. A markdown strategy that carefully accounts for customers' perceptions of price — and leverages data to optimize prices — is a means to end the damaging cycle of kneejerk markdowns, and a new path toward a long-term healthy business.

Cheryl Sullivan is chief marketing & strategy officer, Revionics, a global provider of profit optimization services and solutions.

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