Retail prices need to be many times adjusted to meet the conditions prevailing in the market. Adjustments to retail price can be done by way of markdowns or by way of promotions. Markdowns are a permanent reduction in price and may be taken as a result of slow selling or as part of a systematic strategy. They are usually taken after a determined number of weeks in order to maintain a desired rate of sales.
Timely markdowns help improve profitability, increase turnover and increase profit. Markdowns may be necessitated due to wrong forecasting, over buying, faulty selling practices or simply because it is shop soiled or when the odds and ends of a range are left at the end of a season. The markdown % is calculated as Total Markdown / Total sales.
Promotions on the other hand, are a temporary reductions in the price, used to generate additional sales during peak selling periods. Prices may be reduced by a percentage (e.g. 25% off) or to a sale price (e.g. Rs 99). High volume items with a substantial initial markup are usually selected for promotional vehicles.
Promotions may include coupons, which may reduce the retail price by an amount. With retail coupons, the retailer absorbs the reductions in price.
A comparison of markups and markdowns:
Markup is defined by Baker, as the gross profit (selling price less cost price) price, expressed as a percentage of the cost price. This method of price determination is closely rated to cost plus pricing when a fixed percentage is added on to a total unit cost.
A markup is where profits expressed as a percentage of costs as shown below:
(Price – Cost) / Cost x 100
Thus, Selling price of 30 with a cost of 20, gives a mark up of 50%.
Many smaller retailers set prices of individual merchandise items on a mark up percentage on cost.
A markdown is where profit is expressed as percentage of the sale price and is calculated shown below:
(Price – Cost)/ Price x 100
Thus, selling price of 60 with a cost of 24, gives a markdown of 60%
%Markdown on selling price = % markup on cost x 100
100% + markup on cost
%markup on cost = % markdown on selling price x100
100% — % markdown on selling price
Most price changes are decreases, referred to as markdowns.
Once the merchandise is purchased and priced, it must be allocated to stores. Most retailers classify as A, B, or C based on their sales potential. Each chain’s allocation of merchandise to stores is different, but it should be based on the total number of stores in the chain and the distribution of sales among stores. Each store, regardless of size, must carry a large proportion of the assortment offered; otherwise the customers will perceive the smaller stores as having an inferior assortment.
The stores that are larger and amount for a larger percentage of the sales can get merchandise more frequently. The seasonality of demand in each, the amount of time that it takes for the merchandise to reach the locations, specific colors and sizes – all these issues must be taken into account while allocating the merchandise.
The retail buying process has traditionally been reviewed from rational or scientific method of vendor selection. However, the subjective nature of consumers require that merchandising decision incorporate the skill and intuition of second guessing customers’ future wants, needs and desires. Retail consumers can be very subjective in their buying decisions.
Inventory is one of the major assets of a retail firm and plays a vital role in the operation and profitability of the firm. As the number of suppliers and stock keeping units (SKUs) increase, the significance of the inventory increase. While larger organizations typically give a formal role a merchandising (i.e. specialized departments and buying centers) the importance of buying decisions is frequently discounted. Catering to the changing needs and desires of the consuming public requires the skill and intuition of second guessing customers. Often, small businesses are resource poor; therefore even minor miscalculations in planning, control or merchandising decisions can be catastrophic.