How to Execute Effective Markdown Strategies for End of Year Sale

Markdowns are a crucial part of retail, allowing retailers to kill several birds with one stone. If done right, markdowns not only improve cash flow, they also free up inventory and get your customers excited about older products.

As we wrap up the final quarter of 2021, it’s time for the end of year sale period. But with so many retailers launching promotions at the same time, it can be easy to drown in a sea of discounts. To help you prepare for this critical season, we’ve compiled considerations, tips and techniques to optimise your markdown strategy.

One of the best ways to navigate year-end sales is by analysing the strategies adopted by leading fast fashion retailers. With real-time market insights, you can:

1. Identify the start and duration of the sale period
2. Understand the types of markdowns and promotions adopted 
3. Identify the discount depth for each category
4. Validate the performance of the markdown strategy 

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By performing these key steps, it will help you understand what drives sales and map out your own discounting plan.

Step 1: Identify the Start and Duration of the Sale Period

Getting the timing right is crucial when launching a promotion. At the same time, retailers have to choose a suitable duration as holding a sale for too long can take away from its exclusivity. To identify the best time to launch the sale, we’ll be using Omnilytics’ calendar module to look at Zara’s markdown strategy last year in the US. 

Unlike many fast fashion brands today, Zara does not rely on constant markdowns to drive sales. Instead, the brand only launches big promotions twice a year, once in the summer and another at the end of the year. From the launch timing, it’s clear that Zara’s intention with launching the sales is to clear up inventory before the new season. Limiting the promotion period to just twice a year creates urgency for customers to shop as they know the sales are limited.

For a more precise analysis of markdown launches, look at the first discount by date. From the above chart, we can see that Zara discounted the bulk of its products on 27th December, with 4,299 SKUs discounted, followed by 31st December (5,059 SKUs). Zara staggered its markdowns by increasing the number of discounted products gradually, peaking on 31st December.

The ongoing discounts by date chart help you determine a retailer’s end of year sale duration.  Here, we can see that Zara’s end of year sale period started from 27th December 2020 and lasted just over four weeks until 22nd January 2021. The brand also limits its sale period to four weeks in the summer, which entices the customers to buy faster.

Now that you know when to start discounting, it’s time to identify what to discount. As the objective of year-end sales is to clear inventory for a new season, retailers should prioritise aged stock. Learn more about how to identify slow-moving products based on ageing in this article. 

Step 2: Understand the Mechanics of Markdown Execution

Retailers rely on different year-end sales tactics to accelerate stagnant inventory. Understanding the types of markdowns and promotions adopted, and validating their performance can help you plan your own.

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At the start of the sale period, most of Zara’s products were discounted at 30-39% off and followed by 20-29% off.
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On the following week, Zara put 18% more products on markdown. Most of the discounted products still fell under the 30-39% off range (31% of the SKUs). However, Zara launched deeper discounts whereby 26% of the SKUs were discounted at 40-49% off and 12% was in the 50-59% range.

At the mid-point of the sale - from 10th January onwards - Zara had fewer SKUs on discount. But the products that were on sale were given deeper discounts.

By the end of the sale on 22nd January, there was a wider overall discount range, from 20-89% - with most of the SKUs falling under the 50-69% off range.

From this analysis, we can conclude that Zara started out with shallow discounts and gradually increased the discount depth and range as the sale progressed. Staggering your markdowns like this is a good way to proactively keep track of the sell-through rate and balance stock.

Step 3: Identify the Discount Depth for Each Category

It’s important to choose the right discount depths for different categories to protect your margins. While clearing up inventory is one of the main goals of year-end sales, you can practice smart discounting to ensure the best returns. Using the calendar module again, clicking on any date or discount range will show you the list of products that fall under it.

For the first batch of discounts on 27th December, most of the discounted products at Zara were comprised of the women’s range. Diving deeper into the discount depth, seasonal products like fur jackets, coats and leather attire were immediately discounted at between 60-79% off. Meanwhile, essential items like jeans and basic t-shirts were given shallow discounts at 10-19% off.

On its peak sale period four days later, Zara discounted its mens and kids range for the first time. By holding off on discounting its mens and kids range, Zara was able to get maximum exposure for each category - womenswear first, followed by mens and kids. 
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Another strategy to take away for your own end of year sale is how much to discount different product categories. Seasonal items that can’t be carried forward to the next season should immediately get a big price slash as you want to clear your stocks as fast as you can. Essential items, on the other hand, can be given lower discounts to entice customers to buy while still keeping a comfortable margin.

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Step 4: Validate the Performance of the Markdown Strategy 

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After strategising and carrying out the markdown process on the identified items, the best practice thereafter is to measure the performance of your markdown. This helps you track the efficiency of the strategy applied and can help determine if it can be adapted into future markdown implementations. 

As we’ve identified Zara’s end of year sale period in Step 1, we can use the competitor benchmarking module on the Omnilytics dashboard to see if the brand’s markdown strategies were effective.

Zara’s end of year sale performed well - registering a 77% sell-out rate. Sales dropped after the first week of promotion but gradually increased before peaking at the final week. Overall, the markdown period was effective in driving sell-out as it was a 485% increase from the previous month.

While sell-out rates are a good indicator of your trade performance, you can also compare your initial stock level to the current post-sale level. This is especially crucial if your main objective was to clear off old inventory ahead of a new season.

At the peak of its end of year sale, Zara had 11,321 discounted SKUs and it reduced to 7,376 in the final week. In total, the brand was able to clear 42% of its inventory during the end of year sale.

The Takeaway

To maintain a competitive edge, brands and retailers must approach key promotions and sales events like the end of year sale period tactically. Identify your objectives for the sale - whether it’s to clear inventory or boost sell-through - and strategise your markdowns based on that. 

Studying the competitors' markdown strategy is always a good practice to be conscious of their moves. Brands and retailers can assess their competitor’s game plans and discover opportunities or gaps. At the same time, monitoring your competitors helps you keep your own strategies aligned with the current market.

While markdowns are inevitable, it does not have to end up in loss. With careful planning and granular analysis of key brands’ strategies, you can plan an effective promotion that meets your business goals.

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