Making Inventory Markdowns Work For Your Small Business

Sale signs in shop window

Customers of all types look forward to seasonal clearances. Why wouldn’t they? The drastic markdowns save them a lot of money.  In fact, I walked into my local dollar store and noticed it still had a small Christmas item display situated at the front of the store, with all items priced at 25 cents.

While seasonal sales certainly can attract clientele through your doors to make a few extra bucks, how do the end-of-season overstocks of bright pink Christmas garland or odd sizes of bathing suits truly impact your day-to-day business?

If you were to be honest, those inventory markdowns should strike fear into you. Obviously you overestimated how certain items would sell, and now your business is paying the price. It’s frustrating and even downright annoying at times. If you are one of the 71 percent of businesses that expect revenue growth this year, inventory markdowns are definitely a concern.

So it’s vital that you take a more proactive approach to inventory markdowns because it’s essential to manage inventory more efficiently, from product life cycles to inventory levels. For instance, if a product doesn’t sell as well as expected, you can drop the price a bit and sell more, or even sell out, before the end of the season. Your small business may not be able to completely avoid markdowns; you can alleviate those seasons as much as possible and even use inventory markdowns for your advantage.

Incorporate Both Staples And Statements Into Your Inventory

If you don’t know what items are your staples or statements, it’s time to learn the basics.  Here are the definitions for each essential type of product:

Staples: Inventory items that know no season; they are needed any time of the year.  For example, a grocery store staple would be milk.  For a department store, it could be white T-shirts.

Statements: These are impulse buy items that aren’t sold year-round. They can be seasonal, but they are definitely products used to lure customers into the store. Or they are strategically placed by staple items to direct a customer’s train of thought. Eggnog would be a statement item at a grocery store. When placed in a refrigerated display right next to the milk, voila! Your customer travels to the back of the store for a gallon of milk and voila! “OOOH Eggnog,” your customer may think as he picks up a container. You’ve just made that extra sale.

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How do you know how to choose the “right” staples and statements for your unique retail business?

“Identify the top five selling items in your store since it’s been open, or at least over the past two years,” according to an article in ASDInsider. “Based on what you have identified, proceed to analyze the availability of this item in your store.”

To narrow your products down, some helpful questions to ask include:

  •    Should the item be well stocked all year round?
  •    Is the item seasonal?
  •    Will you offer multiple colors in the certain product or will it only be offered in one color?
  •    Is sizing an issue for this item? What sizes have historically sold best?

Once this data is analyzed, you can then identify strengths, weaknesses, and even opportunities available within your store. (This can be easily done if you have an automated inventory management system in place.) You’ll know which five (or more) items to stock to make sure you won’t run out of them.  The most effective way to identify and store this data is to implement an automated inventory management system. The combination of scanners, software, and printers can accurately provide helpful real-time analytics.


Related Article: TOP 5 INVENTORY METRICS THAT WILL INCREASE PROFITS

Don’t forget to place these staples in prime locations, mostly at the back of the store. That way, customers will have to walk past all the alluring statement products on the way making plenty of opportunity for impulse buys and more sales, and perhaps less.

store discount sign

Make a Statement with Your Statements

Sure, the staples are your bread and butter, so to speak. The statement items are the things that will intrigue guests and keep them coming back if they are in need of something new and exciting, like that bling-y purse for an office party or new swimsuit for a much-anticipated cruise getaway. For example if you are a clothing outlet, make sure you know what percentage accessories contributor to your annual sales. If you add more statements to your inventory, will you be able to increase your sales if you merchandise them among your staple items. If you haven’t done so, remember this trick to top your sales with statement accessories. Dress a mannequin dressed in a classic white T-shirt (staple item) with the latest must-have scarf, necklace and handbag; do you think you’d sell more of each? Retail research says yes!

Tie It All Together With a Plan

None of the above can happen effectively if you don’t have a plan. There are a number of facets to your business that need to work well together to make inventory markdowns work.

Inventory Control & Tracking Systems
  1. Sales: To manage inventory effectively and efficiently, businesses of all sizes need to implement an inventory management system that easily scans and stores SKUs with barcode scanners and provides accurate, real-time reports.

“Start with last year’s sales histories, and make adjustments for unusual events, such as weather, out of stocks, one-time promotions, etc.,” Ted Hurlbut wrote in an article for Inc. “Then factor in the appropriate increase or decrease based on your current sales trend and your reading of the sales potential for the category for the upcoming season.”

He added that it’s smart to break larger category sales plans down by sub-categories as well.

  1.     Inventory: Hurlbut shared that it doesn’t make sense to have more inventory than you need for displays at any time of the year.

“Committing to inventory too far in advance, and then bringing it in all in one shot is one of the surest ways to find yourself over-stocked down the road,” he explained.

In fact, a good rule of thumb is to have enough inventory on-hand at the end of the month to cover the following two or three months of sales.

  1. Inventory markdowns:  This goes hand in hand with planning inventories. It’s smart to set the date of the first seasonal markdown before the season even begins. That way, you’ll know how much inventory you want to have in stock at a certain time or season. And you’ll also be able to forecast markdown percentages and sales before any subsequent markdowns.

Once you have a handle on your staple products and statement items, and put a plan in place for markdowns, don’t shove your reports in a drawer and forget about them. Use that data to track progress.

“As each week goes by, and sales trends begin to develop, adjust future sales plans accordingly, and adjust inventory plans for those updated sales plans,” added Hurlbut.

If sales are exceeding expectations, make sure to keep inventory flowing and momentum going. However, if sales are down, these reports will help you make a “Plan B” as soon as possible, potentially preventing excess inventory and more costly inventory markdowns at the end of a season.

What markdown plans does your business have?

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Paul Trujillo

Paul Trujillo

Paul Trujillo is a Product Marketing Manager at Informatics specializing in Inventory Warehouse Management and Supply Chain product lines. His nearly 15 years of experience has put him at the forefront of industry technology and developing trends.