The fashion industry has a discounting problem. More often than not, brands and retailers subscribe to a discount loop, regularly offering constant markdowns to remain competitive.
It’s tough to not participate when the rest of the market rely on discounts, so brands and retailers blindly follow to keep up.
This is especially evident when Covid-19 hit the globe, as fashion players, from Nordstrom to Boohoo, resorted to deep discounts in a bid to lift consumer demand.
But discounting is a double-edged sword. Without visibility into the effectiveness of a discount, it not only erodes your brand image, but it can also fail to drive aged or slow-moving stock. You’re then left with no choice but to continue discounting deeper, stuck in a continual cycle.
While markdowns are inevitable, it doesn’t mean they have to amount to a huge loss.
Effective Markdowns
The key aspect of effective markdowns is in its timing. The right markdown timing is important and it becomes urgent when:
- The inventory levels are showing red flags. For example, when a particular colour or print shows subpar results, prior action needs to be taken immediately to maintain a healthy inventory balance as well as to make room for new collections.
- Fragmented inventory costs more to hold onto, especially if the products will turn stale, such as leather – which incurs storage and processing costs.
- There is a key sale event and you know your competitors are participating in. Do you also join? If so, when is the best time to launch to avoid the saturated market?
To have a firm grasp in timing, it’s crucial to assess your competitors’ markdown strategy. Here, analysing the competitive landscape isn’t limited to identifying what sales they’re running, but to also measure its effectiveness.
Here’s how to monitor your competitors’ markdown strategy:
Step 1: Review Your Stock Levels
First, review your stock level by comparing the value of your current stock with your average monthly sales. This gives you a clear idea of the next steps – and whether you are in an overstock or understock position.
In other words, it’s crucial to understand your ageing levels. Here, Omnilytics helps to track your stock age.
Ideally, your stock levels should cover three months of sales.
In this example, you can see Zara has a total of 43.41% SKUs in the 90 days bracket, compared to the total SKUs. This allows you to identify which products are sitting in the ageing bracket above 90 days.
After you have identified the ageing stocks, you can go down to the SKU level by analysing sell-throughs. Combined with sales duration (by month) and the average sales unit per month, you can identify whether the SKU is a bestseller or a slow-mover.
Step 2: Identify Competitor Seasonal Sale Strategy
Next, identify when your competitors, or leading retailers in your market, are launching their promotions and their discount mechanics. This gives you a granular view in timing – and when can you best leverage the timing to your advantage.
Here, we can see that Zara launches two seasonal sales in a year, in both June and December. This would typically be the mid-season sale, as well as the year-end sale. You can even go in-depth by identifying the exact date.
Then, on a higher level, strive to understand the depth of your competitors’ markdown. Keeping track of the periodical depth of markdown is a proactive practice in order to maintain healthy product life cycles and ensure that stock levels are always kept at an optimum level.
By having this information, you can better plan your own promotion.
Step 3: Identify the Discount Percentage by SKU Performance
Another key step here is to plan discounts based on SKU performance. This is important, one also suggested by CCO of Zalora, Giulio Xiloyannis and Sarah Johnson, ex-Head of Merchandising at Asos, as generalising a discount causes you to lose out on a higher opportunity for more revenue.
For example, when an item is falling behind for its sell-through rates, retailers can take action by carrying out a markdown strategy to ensure the item reaches it’s expected sell-through rate by the end of the season.
This Lace Top from Zara, for example, launched on February 5, with its original retail price at US$39.90 – which hasn’t sold out. But Zara then placed the item on markdown (to US$15.99) on March 5.
In less than a month, the product sold out – and it was replenished numerous times since. If Zara was insistent to retain it at normal price, it would end up sitting in longer shelf life. This increases its stock level by the end of the season and the brand would need to push in a higher discount for clearance.
Deep dive into the SKU level to determine the discount percentage for similar products while comparing the sell-through percentage – this will ensure your discount is effective and targeted.
Targeted Markdowns
By understanding when and how your competitors’ markdown and promotions strategy, it allows you to build an effective markdown calendar and strategy according to market demands.
Don’t train your customers to wait for markdowns. A well-planned and well-executed discount strategy are possible, and clear objectives can help to gain your business goals.
