THE MANUAL APPROACH TO MARKDOWNS: “AN UNAVOIDABLE LOSS CENTER”
When I was in retail, we always thought of clearance markdowns as an unavoidable loss center. Every week we would manually reproject sales and inventory to determine how many units we could afford to mark down in order to hit our profit, inventory, and sales goals. It was manual and time-consuming as we crisscrossed hundreds of factors (age, sell-through percent, sales, channel, weather, etc.) to derive the final list of candidates and the price they should be reduced to. We always knew there would be a mix of great, good, and poor performers. No Markdown Optimization Solution was going to change this fact.
THESE NUMBERS ARE TOO BIG TO IGNORE – RETAIL PRICING IS MORE IMPORTANT THAN EVER
Today, US retailers are sitting on about $740B of unsold inventory that should have been cleared over the last 18 months (May 8, 2023 – McKinsey and Company), and an estimated $300B is spent to clear inventory, or about 12% of sales, on an annual basis.
THE EARLY DAYS OF AI-BASED CLEARANCE – YOUR FATHER’S MARKDOWN SOLUTION
In the early 2000s, Artificial Intelligence (AI) was introduced to apply deep learning models to the markdown process. Several years of history were modeled to understand seasonality and elasticity, generally at the category-class / location level.
Once the season started, the first forecast was established, and demand was understood through the outdate – independent of any markdowns. The units on hand, forecasted at the outdate, had to be cleared by optimally assigning the most profitable pricing path at the product/location/channel level to clear the inventory by the outdate. After the outdate, demand begins to drop, seasonality begins to dwindle, and lifts based on elasticity begin to drop significantly.
A MODERN MARKDOWN SOLUTION FOR TODAY’S RETAIL LANDSCAPE AND ECONOMY
A more sophisticated AI-powered markdown solution is needed to meet the demands of omnichannel retail today.
So, what does a modern markdown solution provide? Look no further than AI-powered Markdown Optimization by Digital Wave Technology which not only addresses foundational capabilities like fit to budget, what-if, recognizing business rules to support operation execution and a retailer’s unique business model.
There are five primary reasons to take markdowns when demand and supply are not aligned to a product’s desired outdate:
- Sell through fast fashion short-life products to make room for the next assortment flows. These items, like apparel, home, gifts, and more, usually live on the floor or site for 8 – 12 weeks.
- Sell through season and holiday items during peak demand weeks to avoid carryover beyond the season or holiday buying period.
- Clear aged inventory that begins to lower your annual turnover, tie up valuable inventory dollars, and impact your brand image as clearance units begin to clog up your stores and websites.
- Move products before their expiration date – such as groceries or other consumable items.
- Liquidate product categories or brands that a retailer no longer plans to carry.
So, how does a modern AI-powered markdown solution differ from other solutions offered today?
First, AI and deep machine learning algorithms are at the foundation. But add on AI attribute image reading, alerts, open science, and self-supported configuration to transform the markdown process into a profit-maximizing event.
AI-Driven Alerts: Often actions other than a Markdown will result in more profit. Digital Wave Technology has built a modern AI-driven alert engine to identify and alert merchants to other, potentially more profitable, actions that include:
- “Buy More” – for example, if a retailer has an item that is planned to live 14 weeks and is going to sell through 80% by week 5 (9 weeks before the planned outdate) the opportunity to flow more of the item or comparable items could drive high-profit sales.
- “Cancel” – during the first weeks, as demand is being forecasted against all known inventory, the optimization engine is identifying that only 55% of the units will be sold by the outdate. The outstanding order should be canceled to avoid deeper MDs, carryover inventory, and a negative impact on inventory turnover and fresh floors.
- “Change Business Rules” – in this case the business rules set for this product / location are constraining the model from selling through the units by the outdate. Generally, the rules need to be “relaxed” so the optimal timing depth and location of the markdowns will clear 95% + units by the outdate.
- “Defer DC Inventory for Online Fulfillment Only” – overall the brick-and-mortar locations or certain pricing zones are not selling the item. The cost associated with touching and moving slow-selling inventory is high and further degrades profit.
- Open Science – The Digital Wave Technology Markdown Optimization solution displays the elasticity and business rules weighing that drove the optimal Markdown recommendation. In addition, it shows the actual and forecasted sales, inventory, and margin being projected through the outdate.
- Design Mode – supports the more technically advanced user to execute configuration changes without having to wait for backlog features and capabilities to be completed by Digital Wave Technology.
Once the markdown strategy and business rules are defined and data is modeled with the Digital Wave Technology team, retailers and brands can receive optimal markdown recommendations for any product / location / channel level within weeks.
- Efficiency and time savings, allowing merchants and pricing teams to shift time to more strategic activities
- Increased GM$ capture rate and sales by 4% to 10%
- Increase inventory turnover
- Reduce aged inventory by 15% to 20%
- Reduce waste on perishables by 10% to 15%
Leveraging Digital Wave Technology’s modern AI-powered markdown optimization solution – not your father’s markdown optimization – addresses modern retail challenges and further maximizes profit and efficiency.
In today’s rapidly evolving retail landscape, manual or traditional markdown optimization practices simply do not cut it anymore. However, the advent of modern AI-powered markdown optimization solutions presents a groundbreaking departure from the manual, spreadsheet-driven processes of yesteryears and even first-generation markdown optimization solutions.
Digital Wave Technology’s modern solution is engineered to tackle contemporary retail complexities, aiming to convert what was traditionally a loss center into a vehicle for profit maximization and operational efficiency.
Let’s evolve together with an advanced AI-powered markdown optimization solution… the future of retail profitability and operational efficiency!