The curse of expiry dates and markdown strategy
#Markdown strategy, #discount, promotional scheme, expiry date policy, price optimization, #markdown optimization, leftover inventory, salvage value
Dear fellow wanderer,
“What is wandering without the summer of prose, winter of leather boots, and the day of stories?”
so here is the story of the beginning of this newsletter. Then if you want to wander some more:
https://thinkingcategory.substack.com/p/customer-lifetime-value-80-focus
How to get the pricing right - pricing strategy for consumer products
Also, this is the 25th post of thinking category. I never knew I would see this day :)
Now, off to the wandering in supermarket and the story of markdown.
This all started when I decided to take a stroll to a local supermarket. The list was ready, the purse has been cleaned, filled up and all glittered. Mask was on and so was my rainy season ballerina. Today is after all the day I will conquer the lanes of discounted items and good night snacks.
I was looking for a few specific kind of chocolate croissants but I found only 1 packet of those. I wanted more obviously. So I asked to the store helper. She couldn’t find one. I saw few boxes lying around. Being noisy and extra motivated, I started checking them out. Found at least 20 packages of croissant, but alas, the tragedy - those were closed to expiry date. I went home with 1 packet of croissant. The end.
Hence, the point of discussion - Markdown.
What is Markdown?
A markdown is the process of reduction in original price of the product to increase sales. If sell-through rate is low, and in case of fast fashion, retailers use Markdown method to get items move faster out of their store.
In case of SKUs with expiry date, Retailers uses FEFO method (First expired, first out) and stock rotation method to reduce waste because of expiry product.
How?
Normally, retailers set markdown policies and convey those policies and frequency, timing, discount% to stores so that they can execute the process. As a category planner, I used to take markdown decision every month twice.
Assume the product expiry date is 3 months.
Markdown policy could be - At the end of 1st month - Markdown by 10%. 2nd month by 40%, 3rd month by 75-80%.
Few points to notice-
Baby product should not go to markdown for obvious reason.
Sometimes store owners exploit markdown policy for personal benefits. A markdown audit at regular interval will help to keep a tab on this. The frequency and quantity for markdown needs to be monitored to avoid unnecessary markdown processes.
Different type of product category requires different markdown policies.
While developing category plan, retailer takes markdown budget into account to do P&L forecast.
Markdown is a necessary evil, nevertheless. You have to make essentially 3 decisions :
Which product to go to markdown
Timing of markdown - when
And by how much % (reduction in prices)
Do subscribe :
Method : Markdown optimization
Markdown optimization is finding the optimal timing and markdown % for products at the end of their product lifecycle.
Problem - For a product category, we have price response function from the historical data. (For every time period, we have different price response function, that is demand (d) of the product as a function of price (p). {from historical dataset)
Original stock, and original selling price
Just to see what happens without markdown, lets enter 55 rs., original selling price, into the price optimization model.
We can clearly see that for time period 1 +2, we will sell 130 items. but after that demand function is negative, means we will not be able to sell. ultimately it’s a loss for the retailer.
Let’s see how can we improve our revenue using solver.
Currently, I set 10 rs. as my selling price so I am selling at 80% discount that doesn’t make sense. With 10 rs. price, my revenue is 4000 rs. Let’s try to maximize this.
We will be feeding these constraints into the solver:
We can't sell more than we have on inventory at the beginning of a particular time period. (Initial stock = total quantity)
Only price reductions are allowed.
The price in a period should be either equal to or lower than the price in previous period. (Time period 1 price <= original price, time period 2 <= time period 1 price, …..so on and so forth. )
The price for end of period should be greater or equal to salvage value.
Let’s run the solver.
Solution:
So if set price at 55,37.5, 25,10 at each interval, we would be able to maximize our profit. Difference in profit from price 10 markdown = 9163-4000 = 5163
So simply by doing this, we have improved our revenue by 5163 Rs.
So now this is your markdown policy after markdown optimization:
I hope you don’t have to markdown but if you do, choose wisely, you must as yoda would say.
Have a great weekend and let me know how do you do in your organization, leave a comment.
Spread the joy :)
Image source - Google image
Video credit - Friends
@neetubarmecha