What is a retail markdown? Difference from Discount

Markdown

In ecommerce, markdowns are easy to confuse with discounts because both can make a customer pay less. Operationally, they live at different layers.

A markdown usually changes the product's price itself. A promotion or discount usually applies a conditional rule to an otherwise unchanged price.

Markdown versus promotion

Suppose a jacket is normally priced at $120. A merchant can reduce the product price to $90 and display the original $120 as a legitimate reference price. That is a markdown or sale-price change. Or the merchant can keep the jacket priced at $120 and issue a "25% off outerwear" code. That is a promotion. The customer may pay $90 either way, but the systems behave differently:

• storefront and collection pages may show different prices
• product feeds may export different values
• discount engines may or may not be involved
• MAP policies can treat public markdowns differently from private benefits
• analytics may classify the price reduction differently
• the reference-price claim has its own truthfulness requirements

Shopify, for example, explicitly distinguishes setting a sale price with a compare-at price from creating a checkout discount. That is a platform implementation, but it illustrates the conceptual separation.

A compare-at price is a reference, not the markdown itself

A common storefront pattern is: $120 struck through → $90 current price The $90 is the selling price. The $120 is a reference price presented to help the shopper understand the reduction.

Those numbers should not be treated as arbitrary merchandising fields. In the U.S., the FTC's Guides Against Deceptive Pricing warn against presenting an inflated or fictitious former price merely to create the appearance of a bargain. A markdown strategy therefore has 2 decisions:

1. what should the new selling price be?
2. what reference-price claim, if any, is truthful and appropriate?

Why merchants markdown inventory

Markdowns are often triggered by an inventory problem rather than by a campaign calendar. Common signals include:

• inventory has aged beyond its intended selling window
• a season is ending
• a new version is replacing an old model
• stock depth is too high relative to recent demand
• a product has weak sell-through
• warehouse or assortment capacity is needed for new items

Sell-through can be useful here because it relates units sold to the stock available during a period. Shopify's inventory reporting, for example, exposes product sell-through rate and other inventory metrics such as days of inventory remaining.

The operator's question is not simply "Can I sell more units at a lower price?" It is "Is the additional sell-through worth the gross profit I give up, and what is the cost of holding the inventory if I do nothing?"

Markdown ladders

Some merchants use staged reductions rather than one deep cut:

• full price while demand is healthy
• first markdown when sell-through falls behind plan
• deeper markdown as the exit date approaches
• final clearance when recovering cash or space matters more than margin rate

The logic should be tied to inventory and time, not merely to habit. 2 products with the same age can deserve different actions if one is still selling and the other is not. Useful inputs include:

• units on hand
• units sold per day or week
• remaining selling window
• product cost
• current gross profit per unit
• expected demand elasticity
• inbound replacement stock
• storage or obsolescence risk

Markdown depth is not the only lever

Before cutting price again, a merchant can also change placement, search ranking, bundles, recommendations, imagery, or audience targeting. If a product is poorly discovered rather than poorly valued, deeper markdowns can give away margin without solving the real problem.

That is where merchandising and markdown strategy meet: price is one lever inside the broader decision of how aggressively the store should expose and promote the item.

What good markdown management looks like

A useful markdown process records:

• original and current price
• effective date
• inventory position when the markdown starts
• sell-through before and after
• gross profit per unit
• cumulative gross profit recovered
• remaining inventory
• next review date

The goal is not to maximize the discount percentage or even the sell-through rate in isolation. It is to exit inventory at the best achievable economic outcome while keeping price communication truthful.

Worked example

Assume a product has:

- current price: $80- product cost: $38- gross profit at current price: $42

• The merchant marks it down 25% to $60

• At $60:

- revenue per unit: $60- product cost: $38- gross profit per unit: $22- gross margin: 36.7%

• Gross profit per unit fell from $42 to $22, a decline of about 47.6%

Ignoring other effects, the merchant needs to sell about 1.91 units at $60 to generate the same gross profit as one unit at $80. That can still be rational. If the product is seasonal and likely to be worth much less in 6 weeks, preserving today's full-price margin may be an illusion. The relevant comparison is between realistic future outcomes, not between the markdown and an unattainable full-price sell-through rate.