Managing the Markdown Schedule

managing markdown schedule

Managing the Markdown Schedule in Your Consignment Store

Having been in the consignment business for several years, you would think that I have heard of every markdown schedule out there.  Well, today I was introduced to one that I haven’t heard before!  In a casual conversation at a business meeting, a gentleman told me that his favorite consignment store in Ohio (I believe that’s where it was) marks down their inventory 1% per day! Wow, now I at least give this shop an A for creativity!

The markdown schedule is extremely important in the resale business!  It is one of the most popular topics at NARTS (National Assoc. of Resale Professionals) meetings. It will make or break you in two areas: profitability and inventory sell-through.  Although your gross margin does not change at markdown points (our commissions stay the same), the amount that goes into your bottom line does.

Managing the Markdown ScheduleWhich Markdown Model Should I use?

Two factors that you want to keep in mind when you are considering your markdown schedule are frequency and depth.  How often and by how much do you need to discount your inventory to get it to move and to maximize your take home?

In my humble opinion, 1% per day is extremely aggressive! By day 30 you are already at a 30% markdown, not to mention the complexity of figuring out what day the item is on in it’s consignment period. We began seven years ago with a 10-10-10 schedule.  In other words, we would markdown 10% on days 30, 60 and 75 on a 90-day consignment period.  We shifted away from that schedule because our maximum markdown was 30% and we felt like the customer needed more incentive to take 45+ day inventory home as quickly as possible. We accomplished that with a more aggressive markdown schedule during the last half of the period that is based on 25% increments.  We also stretched our initial period out from 30 to 45 days to try to get full price during what we call the “profit period.”  I learned that by taking my annual sales and dividing them by the number of days open per year and then dividing by the square footage of my showroom, that if I haven’t sold most items by day 45 I was losing money… which is simply bad business.   So, at day 45 we mark down 25% and then at day 60 another 25%.

Here is an example calculation for a small store carrying a sofa priced at $495:

Annual Expenses:                        $120,000.00
# of annual business days:          308
Cost of Doing Business/day:      $389.61
Square Footage Showroom:        2200 square feet
Cost per Square Foot Per Day:   $389.61 divided by 2200 square feet equals 18 Cents per Day

An average sofa plus space around it may be 8 feet long by 4 feet deep resulting in 32 square feet of floor space

Cost of carrying that sofa per day would equal 32 X .18 or 5.76 per day.
If the sofa sells on day 14 ($5.76 X 14) I have $80.64 in that sofa.  On a 50/50 commission rate I keep $247.50 resulting in a profit of $166.86
If the sofa sells on day 30 ($5.76 X 30) I have $172.80 invested in the sofa.  On a 50/50 commission rate, I keep $247.50 resulting in a profit of $74.70.
If the sofa sells on day 45 at a 10% markdown I have $259.20 invested in the sofa.  I keep $222.75 after the markdown… you do the math.

SOBERING, Huh?!  Let’s get those things off the floor!

managing the markdown scheduleBeyond that it just gets ugly.  So that’s why it is so important to get that dated inventory loaded into the back of a happy customer’s mini van.

You can also calculate this formula for clothing by taking the footprint of an entire rack and dividing that by how many articles of clothing that rack can hold.

I encourage you to work some numbers on paper and look at your markdown schedule from all angles and then make the decision that is best for your customer and consignor base.

We have created an excel spreadsheet listing each category of furniture we sell at various price points as a “cheat sheet” for about how much that item costs us to carry over our markdown periods.  This helps with both pricing strategy and screening out unprofitable inventory.

To Publicize or not to Publicize?

One of the more common questions among consignment shop owners is whether or not to publicize the markdown schedule of each item on the tag or through a color coded system.  The advantage of placing the schedule on the tag or using a color coded system is that it minimizes the number of “asks” regarding markdowns.  It will also take care of those “shy” customers who are afraid to ask.

In the furniture category, I prefer not to post markdown schedules on items for the following reason:

  • I always want to encourage my customers to have a conversation with my staff and engage in a selling opportunity.
  • I never want anyone to walk out the door without taking with them that potential purchase.  If they decide to wait 6 days until the markdown, there is a huge chance that they will forget about it or not be able to return on the scheduled markdown day.
  • There are often items, whether store owned or consigned by a regular that we may be able to mark down before the scheduled date and I want every opportunity to sell that item as quickly as possible.

Now, I realize that selling furniture is much different from selling clothing, so I suspect I’ll get some push back on these ideas.  In both the furniture business and the resale business, people expect discounts, so it has been difficult for us to be non-negotiable on pricing. This may vary in the clothing and children’s categories.  We try to build in a 10% buffer for early markdowns and I give my salespeople that leverage to close a sale.

We simply tell our customers to never be afraid to ask if an item has reached it’s discount date. This is yet another opportunity for our sales folks to engage a shopper.

And since unmet expectations make your life a living hell, we make sure our consignors know up front that we may discount up to 15% (another little buffer for us to under promise and over deliver) in order to make a sell.

With that said, we do code the take-in date on the tag so our sales people can quickly identify the length of time an item has been on the floor. Our POS software (Simple Consign by Traxia) allows us the option to put the markdown schedule on the tag, display the take-in date or create our own little secret date code for our sales people.  I am sure that other software packages allow the same capability. (btw I just Googled “compare consignment software” and I couldn’t find a decent third party comparison on the web… hmmm… may be a future article coming soon!)

But, What Will They Say if I Change My Markdown Schedule?

No fear, my friend.  If you communicate well with your consignors and leave no room to second guess your motives, you can sell your markdown schedule change as well as you can sell that Italian Brown Leather Henredon Sofa!  Here is how we changed from a max 30% markdown to a max 50% markdown about a year and a half ago…

 


Extended Initial Consignment Period!

We are working hard to serve you better by creating a new markdown strategy for your items.

Our new markdown schedule is as follows:

After 45 days we will mark down inventory by 25%. This extends our previous initial consignment period by 15 days so you have an opportunity to make more money!  On day 61 we will reduce inventory by an additional 25% so you’re not stuck taking it home.
 
Thanks again for making New Leaf so special!!  Keep your ears and eyes open for more exciting New Leaf News in the weeks ahead.  As a thank you, feel free to print the coupon below for an extra 10% on your next one consigned item.

Conclusion

You are the key to the success of your shop!  It is up to you to create policies and procedures that will serve your clientele and your shop well.  The key is to be creative, fair and smart.  Think more like a business leader and less like a hobbyist and you will stop striving to survive and begin to thrive!

Time to Contribute

Comment below to let us know how you determined your markdown schedule and how well it is working for you.  Also, I would love any feedback you have on the facts and figures in this article!

  • Carol

    I have just discovered your blog. I love your “About” page. I feel like we are kindred souls. I look forward to reading all of your blog posts and will be proud to share them. The resale industry needs more of this kind of help. ~Carol

    • Thanks Carol! I am familiar with Resale Junkies. Hope you are doing Great!

  • Since writing this article, our store has started putting uncoded date on the tags and posting what the dates are for each markdown. with the rise in traffic count it has helped us manage customers better by letting the customers discover the markdowns on their own. Another example that we must never stop changing if we want to keep growing. Happy shopkeeping!