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What is a Markdown?

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  • Written By: Mary McMahon
  • Edited By: C. Wilborn
  • Last Modified Date: 27 August 2016
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A markdown is a reduction of price. Markdowns are used for all kinds of items for sale, ranging from produce at the grocery store to securities offered by a dealer. They may be instituted for a number of different reasons. Before marking down a price, the current price is weighed against factors such as the wholesale price of the item and prices offered by the competition. Pricing is a delicate art and mistakes can be costly.

One reason to offer a markdown is because the market for a given good has decreased. This may be the result of overstock, a sluggish economy, or other factors. These types of markdowns are used to encourage people to buy so that the inventory will clear. This is common at stores with seasonal merchandise that cannot be returned if it is not sold and strategic shoppers can often find excellent deals by buying products off season. Securities dealers will use markdowns to make prices for products they are holding more appealing, leading investors to trade with them and reducing their stock of items that are declining in value or not moving quickly.

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Markdowns are also used to get rid of excess inventory. In retail, this is a common practice. Retailers have to strike a fine balance when ordering products to sell. They do not want to overorder and have excess inventory, but they do not want to underorder and not have enough to meet the 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 markdown can also be a form of sales promotion. Stores may use what are known as loss leaders, products with significantly reduced prices on which the store takes a loss, to lure people in. Some customers will just buy the loss leader and come out ahead. Others will purchase other products, drawn in by the hook of the loss leader, and the end result is profit for the store. Getting people in the door can be half the battle and low prices are an excellent way to appeal to customers looking for a deal.

Prices are often marked up before products are initially offered for sale. This makes it possible to adjust with a markdown without taking a loss. Sale of products also needs to cover overhead expenses like rents and utilities, however. Products that sit around for a long time and are eventually sold at a markdown price may represent a loss for the business if they failed to pay for themselves.

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lluviaporos
Post 3

@pleonasm - I try not to pay much attention to markdowns actually. Steak is probably going to be more expensive than mince even if it's been marked down, so you aren't actually saving money by buying one over the other. You're only saving money if you were going to buy steak anyway.

My father used to fall into this kind of trap all the time. He had closets full of stuff he bought on sale because it was such a great bargain, but he never used it. And since he didn't need it in the first place, it didn't matter how much he "saved", because it was still a waste of money.

Although he eventually seemed to recognize that and started just giving the stuff away to people, so I guess he found a use for it in the end.

pleonasm
Post 2

@Mor - I'm sure you could probably save money with a little planning, but you'd have to either just pick the right supermarket every shopping trip or buy in bulk so that you don't need to go shopping that often.

I'm not organized enough to do that, but I tend to just get whatever product happens to be on sale when I'm there. If it's a choice between mince and steak and the mince is on sale, that's what I'll get. The supermarkets are actually pretty predictable in the way they rotate markdowns through their products, although you can sometimes catch them with local overstocks and special prices.

Mor
Post 1

I read an article once about a woman who was trying to save as much money as possible for her family and would plan out all her shopping so that she could take advantage of loss leaders and markdowns in general.

I know she probably had all of this calculated, but I can't help wondering whether this would actually be worth it in the end. Would you really save more by driving to different supermarkets to buy each item at the cheapest price? The cost of transport and the cost of your time would surely be much more than any savings you can find on tinned tuna.

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