Markdowns are price reductions used to clear inventory or attract customers. They are evaluated against factors such as wholesale price and competition. Markdowns can be used to eliminate excess inventory, make declining products more attractive, or as a sales promotion. Pricing must cover overhead costs to avoid losses.
A markdown is a price reduction. Markdowns are used for all types of items for sale, ranging from grocery store products to titles offered by a retailer. They can be established for a number of different reasons. Before reducing a price, the current price is evaluated against factors such as the wholesale price of the item and the prices offered by competitors. Pricing is a delicate art, and mistakes can be costly.
One reason to offer a markdown is because the market for a particular asset has declined. This can be the result of overstock, a slow economy or other factors. These types of markdowns are used to encourage people to buy so that inventory is cleared. This is common in stores with seasonal products that can’t be returned if they don’t sell, and strategic shoppers can often find great deals buying out-of-season produce. Securities traders will use markdowns to make the prices of the products they hold more attractive, leading investors to trade with them and reducing their stock of items that are declining in value or not moving quickly.
Markdowns are also used to eliminate excess inventory. In retail, this is common practice. Retailers need to strike a good balance in ordering the products to sell. They don’t want to overstock and have excess inventory, but they don’t want to understock and don’t have enough to meet demand. Imbalances in ordering practices can force retailers to make markdowns to get products out of the store and make room for new products.
A rebate can also be a form of sales promotion. Stores can use what are known as loss leaders, products with significantly reduced prices on which the store makes a loss, to attract people. Some customers will simply buy the loss leader and walk out ahead. Others will buy other products, lured by the loss leader’s hook, and the end result is a profit for the store. Getting people in the door can be half the battle, and low prices are an excellent way to attract customers looking for a deal.
Prices are often assessed before products are initially offered for sale. This allows you to settle with a drawback without incurring losses. However, the sale of products must also cover overhead costs such as rent and utilities. Products that last a long time and eventually sell underpriced can be a loss to the company if they don’t pay for themselves.
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