How to create a successful markup strategy that builds profits and incorporates the essentials of retail margins and markdowns.
There are M&M’s, and then there are M&M&M’s. In retail, it’s this trio of M’s that matter the most – and when understood and implemented correctly, their taste can be just as sweet.
The Nitty Gritty
In order to understand the M&M&M’s – markdowns, markups and margins – let’s first look at the basic understanding of each.
A Markdown is a devaluation of a product. It’s an attempt to sell something at a lower price than originally planned due to it not selling. This may be because a store bought too many, an industry trend didn’t live up to its reputation, or a product has a sizing issue or other defect that has limited its sales.
A Markup is the difference between the cost of a good or service and its final selling price. This cost should reflect the total amount of both fixed and variable expenses to produce and distribute a product. Creating a successful markup strategy is essential when purchasing and planning inventory assortment, as it also helps merchants identify their store margins.
Margins -also commonly referred to as gross margins – measure the relationship between the costs you pay and the price you charge your customers. These prices will vary based on markdowns, and markups but ultimately, they are the key to your retail success.
Now that you have a better understanding of the nitty-gritty of markdowns, markups and margins, let’s take a look at how they collectively impact your store success…or failures.
Realities in Markdowns
At a quick glance, markdowns are hardly something you would consider “sweet” or even appealing at all. But markdowns, as it turns out, can actually work to your advantage and help fuel your business for profit. The catch is identifying effective markdown strategies for your store that have you looking ahead in an effort to avoid markdowns you never planned for.
Markdown Reality #1: Order the right amount of inventory by using this basic forecasting formula
A very basic – yet still strong – way to do this is to look at what your sales are trending for the next 6 months and divide that number by 2. So if you forecast $100,000 in sales over 6 months, your goal should be to order no more than $50,000 in inventory to sell. This will help you avoid markdowns and help keep your inventory and sell-thru under control.
Markdown Reality #2: Be Bold, Make Adjustments
“If you find an item that you are absolutely crazy about or know that a particular time of the year, such as the holidays, demands more volume, then don’t be afraid to commit to a scary large order. What’s key, however, is to make special and specific plans to sell those items.” – RETAILMavens founder, Cathy Wagner
Wagner, who helps retailers manage their store inventory and sales, further suggests that when a busy season is in your future or a particular product is expected to sell like crazy, don’t be scared to make some adjustments to your normal buying plans.
Markdown Reality #3: Make Plans to Avoid Markdowns
Wagner’s advice to make special plans to sell your added inventory is in order to avoid markdowns.
Some ways to help do this are the following:
- plan an in-store event that is promoted above and beyond your normal store marketing
- incorporate a strategic email marketing campaign to encourage customers to come into your store or buy from you online
- create a contest among employees to help sell-thru this added inventory
Combined, these efforts can reduce your chance of markdowns and increase your chance of successful sales.
The root cause of excessive markdowns can almost always be traced back to the lack of adequate pre-season planning and in-season adjustments to those plans. When you plan ahead, markdowns are less likely to happen. Review sales as each day passes to ensure you are staying on track with your sales goals. If you’re not meeting your sales expectations, a markdown plan should be considered.
Inventory that isn’t selling does no good for your business – and can cause a much worse problem if it continues not to sell. Here are some great tips to sell inventory that’s not making you money.
While there are a variety of ways markdowns should be approached, the key takeaway is to plan markdowns in advance to control your inventory, maintain strong sales and help keep stock at a balanced level. You may even discover that markdowns aren’t something to dread but instead enjoy, as they help impact your total store success.
Understanding Markups and Calculating Your Markup Percentage
With markdowns come markups, and most merchants would agree that a strong markup is good for business.
By definition, the markup percentage calculation is cost X markup percentage, and then add that to the original unit cost to arrive at the sales price. For example, if a product costs $100, the selling price with a 25% markup would be $125. If the markup was 100%, it would be $200. Margin and markup overlap a bit, with each impacting the other, but it’s important you understand just what their differences are. To help, consider the below examples:
Gross Profit Margin = Sales Price – Unit Cost = $125 – $100 = $25
Markup Percentage = Gross Profit Margin/Unit Cost = $25/$100 = 25%
Sales Price = Cost X Markup Percentage + Cost = $100 X 25% + $100 = $125
Markup calculation is more likely to result in pricing changes over time than a margin-based price. This is due to the cost upon which the markup figure is based may vary over time. The key for merchants is to ensure their markup is as strong as possible, allowing for increased sales and less markdowns.
The Main Objective: Margins
One of the surest routes to high sales is to source inventory that allows for strong margins. An example of this may be purchasing 100 units of a bracelet that will be merchandised near the cash wrap (point of sale area) of your store and intended to be an “add-on” sale or “impulse” buy. The bracelets may have cost you only $1 each; however they are marked up and sold for $10 each. The margin on each unit would be 900% in this case – an impressive gain for any investment on inventory.
As a merchant, high margins are among the best ways to be profitable yet too many retailers don’t identify margins as part of their retail strategy.
A thoughtful, ongoing combination of markdowns, markups, and margins give you a dynamic, sustaining, profitable business. Your goal? To create a balance between these “M&M&M’s” so that your store reality is sweet success.
By Nicole Leinbach Reyhle
Nicole Leinbach Reyhle is co-founder of the Independent Retailer Conference (which takes place inside ASD Market Week), a columnist for Forbes, and publisher of online magazine Retail Minded.