In a perfect world, retailers would always strike the perfect balance on full-price sales. Imagine selling the last Christmas ornament at full price just before the doors close on December 24, with no customer left unfulfilled. It’s of course only a dream; 100% sell-through and perfect inventory balance—with no out-of-stocks and zero overstocks—can never be completely achieved.
Markdowns are therefore an inevitable reality in retailing. The trick for retailers is to find the minimum markdowns that will achieve the highest revenues and profits. And the first step to doing that is to turn the traditional approach to markdowns upside down.
Don’t leave revenues and profits on the table
In a traditional approach to markdowns, retailers first determine how much product to allocate from their distribution centers to stores. They then use separate rules to compute markdowns, which they adjust after the fact based on sales. While making each decision in isolation takes little analytics and can be done with modest computing power, the trade-off for retailers is enormous—up to 20% in revenues and profits left on the table.
There is a better approach to markdown optimization. Rather than treat each step separately, retailers should optimize allocations and markdowns simultaneously. Computing power and advanced analytics eliminate the obstacles of the past. Solutions that are cloud-optimized, with no limits on computing or analytical power, are purpose-built to address the challenge. This is a highly differentiated approach, and it yields far greater revenues and profits.
By using true mathematical optimization and solving the problem holistically, Predictix clients identify additional profit opportunities that are simply not possible when these decisions are taken in isolation. Most important, our retail clients enjoy up to 20% greater revenues and profit than is possible from traditional markdown solutions. For retailers who are transitioning from manual processes, the benefits are even greater.
How does the Predictix approach to markdown optimization work? There are three basic steps.
Step 1 – Model the retail network
We start by building a model of your distribution centers, stores and channels, allowing our solution to solve for the optimal allocation of products across your entire network, not just isolated parts of it.
Step 2 – Model the business constraints
We next examine all the variables and business constraints. Will there be two markdowns or three, and at what pace? Will they be the same for every store or different for each price zone? Will the markdowns be in round numbers or set percentages? What is the desired sell-out date? By modeling the retailer’s exact business constraints, our optimization will return the allocation and markdowns that will provide the maximum revenue or profit while meeting those constraints.
Step 3 – Solve for maximum revenue? Or profit?
The simplest approach to markdown optimization is to make maximum revenue the objective; the product has already been bought, so it’s a sunk cost. When practical, however, our clients prefer to solve for maximum profit; after all, there are various costs to markdowns, such as tagging, transportation costs, and others. These factors can be taken into consideration to realize the greatest profit improvements.
Once the business is modeled and the objectives have been set, the Predictix cloud-native platform and sophisticated solvers can deliver the optimal joint allocation and markdown plan—and retailers can be on the way to seeing 10 to 20 percent (or more) increases in markdown revenues and profit.
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