Tips to Minimize Markdowns

As surely as January follows December (and July follows June), clearance season follows each and every peak selling season. And, just as surely, many independent retailers look at their sales floors and see far too much inventory left over that has to be cleared out. On the one hand, they know that with deep enough markdowns they’ll be able to move most of it through, but on the other they’d rather be transitioning their customers into new, fresh merchandise that could be sold at full retails and full margins.

The essential point to remember is that clearance markdowns are the result of earlier decisions made to bring in more inventory during the season than could be sold at full retails. Minimize those mistakes and you will minimize your markdowns.

Here are tips to help you minimize your markdowns: 

1. Plan your sales. Invariably when I start working with a client that’s struggling with markdowns they are also not in the habit of planning their sales. Whether the planning process is rather sophisticated or pretty basic is less important than the fact that there is a process in place designed to come up with a realistic forecast. Still, a good plan looks at every department and every month, and projects both dollar sales and unit sales. Knowing what you plan to sell, and establishing those benchmarks, is critical to making good, informed decisions about what and how much to buy, both before the season starts and during the season. 
2. Flow your inventory. Everything you buy carries the dual risks that the merchandise might not be the right merchandise and the quantities might not be the right quantities. You can minimize that risk by committing to and shipping inventory as close to the anticipated time of sale as possible. You minimize the risk by flowing your inventory continually throughout the season to support your sales plan. Let your inventory levels drive your merchandise presentations rather than the other way around. Maintaining lean inventories and flowing your inventory also allows you to respond quickly to sales trends and keeps your assortments fresh and current, which encourages your customers to visit more frequently and to buy when they first see something they want. 
3. Maintain liquidity. The other way that you can reduce the risks of carrying inventory is to keep some of your planned dollars in your back pocket. Planning your sales isn’t a license to go out and spend it all up front. How you execute your plan is as important as the plan itself. If you only commit as many of your dollars as you have to before the season starts, for only as much inventory as it takes to kick off the season, you’ll have more liquidity during the season to respond to what your customers are doing. Maintaining liquidity gives you the maximum flexibility to invest those dollars where you really need them, when you really need them. 
4. Avoid the last buy. All too often when you look at a clearance rack you realize that much of what is left over came from that last shipment of the season. At the time it seemed to make sense. You were concerned that you might not be able to make that last sale if you didn’t make that last buy. The problem is that those sales you were chasing almost always turn out not to be profitable, due to the left over inventory that’s now sitting in clearance, deeply discounted. What you need to keep in mind is that if you don’t chase that last sale by making that last buy, you’ll be left with more cash in your pocket going into clearance season, rather than more clearance inventory.
5. Give the dogs a head start. The simple fact is that a sale made at 30% off is more profitable than a sale made at 50% off. And, if something’s a dog, if it’s lagging behind the sale of other merchandise, it will still lag if you wait to mark it down with everything else. It’s far better to give it a head start, before everything else needs to be marked down, when you also have more customers in your store than later during clearance season. Mark dogs down as soon as they present themselves. It won’t take as deep a discount in-season to move them through as it will if you wait until clearance season. 
6. Test before you leap. Every great merchant is always on the lookout for exciting new lines, programs and items. It’s those things that drive sales increases. But being a great merchant is also about assessing risk and maintaining a strong batting average. Testing new things before you commit significant dollars to a more significant investment allows you to minimize your risk and keep your batting average high. Testing first also enables you to try a greater number of things than if you place bigger bets more narrowly up front. 

Markdowns are the result of decisions made earlier in the season to bring in inventory that ultimately couldn’t be sold at full retails. These decisions end up having a profound impact on the cash flow of the business. They can leave you feeling cash poor and having to deal with back payables and debt. Minimizing markdowns is an essential element of assuring long-term sustainability for any independent retailer. Follow these six tips and watch the impact on your cash flow!