What is a Markdown?

What is a markdown? Markdown’s meaning most commonly refers to the retail sector, where a retailer will discount the selling price of a product to encourage sales. Alternatively, a markdown may refer to the difference between the highest bid price among market dealers and the reduced price that a dealer may charge their customer.

We explore the different markdown definitions and what they mean for retailers, traders, investors and consumers.

Markdown in retail

Retail is one of the most common contexts in which consumers will experience the term ‘markdown’. Here, a retailer will permanently reduce the selling price of an item of stock for the duration of its lifecycle or according to its seasonality.

Markdowns are usually applied due to an abundance of inventory that does not sell as well as anticipated by the end of the sales cycle. While this may result in the retailer suffering a reduction in profit margin, it allows them to liquidate their excess inventory and improve operating cash flow while also providing added value for the customer.

A markdown, however, differs from offering products at a promotional sale price. While both can provide a boost in sales revenue, a markdown strategy is implemented for the sole purpose of liquidating excess stock, while promotional sales are often part of a retailer’s ongoing marketing efforts.

Example of a retail markdown

An independent electronics retailer is anticipating the release of a new Smart TV. However, they also anticipate that this will dramatically reduce consumer interest in the model that the new TV will replace.

Because they slightly over-ordered on the previous model, the retailer marks down its selling price incrementally over the next nine months:

• 10% off the original price for the first 3 months

• 20% off for 3rd-6th month

• 30% off for 6th-9th month

An alternative pricing strategy would be to reduce the price more modestly but cross-sell with other end-of-life items like soundbars or Blu-ray players.

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Markdown in finance

In the stock market, dealers will also markdown the selling price of stocks to stimulate trading. Here, a markdown represents the difference between the maximum bidding price a buyer will pay for a security and the lower cost a dealer will charge when selling that same security to a trader.

Dealers and brokers will often undercut bid prices when they wish to unload a surplus of a particular stock or security. They will usually make up for the reduction in profit by increasing their commission.

Example of a markdown in the stock market

A dealer buys a large sum of gilts to sell on the secondary market. However, selling these gilts is proving difficult as demand from traders is not what the dealer expected. In order to stimulate gilt sales, the trader sells at a markdown of 10%, adjusting their commission slightly to mitigate the loss.

Markdown FAQs

What is a markdown rate?

A markdown rate is a percentage which compares the original price of a product to the reduced sale price.

Why do retailers markdown their inventory?

Retailers will often markdown excess inventory, having over-ordered to prevent potential loss of sales. They may also use a markdown strategy to clear seasonal stock that is reaching the end of its useful life.

What is the difference between a markdown and a markup?

A markup refers to the increase in the wholesale cost of an item before selling it in order to ensure a profit margin. A markdown is just the opposite, reducing the sale price of an item in order to liquidate stock.