What Is A Markdown in Retail? Reasons and Tips (2026)

A markdown in retail is a reduction from an item’s original selling price used to boost sell-through. Sales, discounts, and clearance deals are all examples of retail markdowns.

Shoppers love markdowns because they make them feel like they’re getting a good deal. Retailers benefit from markdowns because they help liquidate inventory. 

Ahead, you’ll get the full scoop on how to successfully use markdowns while avoiding common pitfalls like predictability and damage to brand value and reputation.

What are retail markdowns?

Retail markdowns are price reductions. Coupons and discount codes that lower prices, seasonal clearances, and store closing sales could all be considered markdowns. These price reductions can be temporary or permanent, depending on a retailer’s discount strategy.

Markdowns vs. discounts

Markdowns are unconditional redactions to a product’s listing price shown in the price tags. Think of a limited-time storewide 20%-off sale.

A discount, on the other hand, is conditional, like an employee discount, senior discount, or cash discount. It’s applied when a customer is checking out. 

Tip: With Shopify POS, you can create dollar or percentage discounts that get automatically applied to individual items or entire carts at checkout. Once you set up an automatic discount, it works for both online and in-store purchases.

Types of markdowns

The three most common types of markdowns are temporary, competitive, and permanent.

Temporary retail markdowns

“Some retailers offer temporary sales, for example, 30% off during a particular weekend, which creates a sense of urgency because prices go back up when a sale is over,” says Kate Ashley, associate teaching professor in the Supply Chain and Information Management Group at Northeastern University’s D’Amore-McKim School of Business.

Limited-time sales, buy one, get one (BOGO) promotions, and coupons are examples of temporary discounts.

Competitive markdowns

In order to stay competitive, some retailers offer markdowns through price matching. Customers must show that a competitor sells the same item for a lower price to access the discount.

“Price matching is a strategy that allows firms to offer markdowns only to price-sensitive customers who take the time to research prices offered by competitors,” says Kate. “The retailer is able to avoid advertising a marked-down price that might reduce customers’ perceptions of the good’s value.”

Permanent retail markdowns

End-of-season clearances or discounts for damaged goods are examples of permanent markdowns.

“[Some] retailers may wait longer to mark down items, but then offer steeper and steeper discounts as it gets later into the season. Here, the primary reason for customers to buy early is the risk that the item they want will be sold out by the time it’s offered at a deep discount,” Kate says. 

Initial markdown versus additional markdown 

Markdowns exist in two stages:

• Initial markdown. The first move off the original ticket price. It’s made after an item has been stocked and triggered by seasonality or the end of a life cycle. 
• Secondary markdown. If the product is still not hitting its sell-through targets, another reduction is used. It lets you capture margin before you resort to deeper discounting. 

For example, in late January, you mark down a parka by 15% for an end of season sale. Inventory is still relevant to the weather, so you might spark some interest and sell the 500 units left. By mid-March there are still 300 units in the warehouse, so you mark them down another 30% to not carry excess inventory into the next fiscal quarter. 

Reasons for markdowns

The primary reasons businesses give discounts is to get rid of time-sensitive inventory, boost sales, and keep up with the competition.

Poor sales

When items don’t sell like retailers predicted they would, they have undesirable inventory that’s taking space away from products that could sell quickly. This could be due to changing trends or simply because of slow retail months. Marking down prices helps move inventory.

Akshay R. Rao, General Mills chair in marketing at the University of Minnesota’s Carlson School of Management, says that “most often, markdowns are monetary discounts to stimulate sales of slow-moving inventory that is most often targeted at price sensitive consumers who have been willing to wait for a price reduction, at the risk of the product being sold out.”

Perishable inventory

Retailers in many industries face the problem of perishable inventory, or goods that lose value when they are held for too long.

Kate says, “This can happen because of physical spoilage, in the case of fresh produce or other items with a limited shelf life; technological obsolescence, in industries such as consumer electronics; or items going out of style, for clothing or other fashion goods. 

“Inventory is costly, and when a retailer has items on hand that are about to drop in value, markdowns are a way to drive demand and recover at least some portion of the investment in inventory.”

Competition

If your competitor sells identical or similar items at lower prices than you, then you run the risk of losing customers to the competition. Sometimes, retailers offer discounts akin to their competitors to avoid losing business.

Overstock and holding costs

An overstock means you have too much product that’s unsold in storage. The longer inventory sits around, whether in a warehouse, backroom, or at a 3PL, the more expensive it becomes. 

Inventory carrying costs, or holding costs, include everything from storage fees to insurance, depreciation, and the opportunity costs of capital tied up in dead stock. They accrue over time and drag down cash flow and profitability. Retailers use markdowns to recoup some of the cost associated with carrying unsold merchandise and making room for new inventory. 

How to calculate markdown price

Knowing how much of a markdown you’re offering consumers can help you advertise these discounts and create buzz. 

The formula for a retail markdown is:

([Original Price - Sales Price] / Original Price) x 100 = Markdown %

So, if you’re selling a TV that was originally priced at $500 for $300, then your markdown percentage is:

[($500 - $300) / $500] x 100 = 40%

When setting discount prices, it’s important to consider your profit margin to ensure you’re not losing money. Even after a markdown, the sale price should be more than what you paid for it.

If a discounted item still isn’t selling, you could offer a bigger markdown. You may only break even in this case, but that’s better than losing the money you invested in the inventory by not making a sale.

Markdown percentage and margin impact on the P&L

Markdown percentage measures the size of the price cut. Margin impact is the change in gross profit on the profit and loss statement, where gross margin = net sales - cost of goods sold (COGS). When you mark down an item, net sales drop, but your cost doesn’t, so gross profit and margin fall. 

Say the COGS of your TV above is $200. 

• Gross profit before the markdown: $500 - $200 = $300
• Gross profit after the markdown: $300 - $200 = $100

So, the markdown reduces gross profit by $200 per unit since revenue dropped but the costs didn’t change. 

Tips for implementing a markdown strategy

Follow these strategies to make markdowns work for your business.

Consider pricing psychology

Pricing isn’t just about profit margins; it’s also about perceived value and creating a sense of urgency. Explore the retail psychology behind pricing before setting markdowns. 

Perceived value

“There are many ways in which retailers can use psychology, but one key tactic is to employ the original reference price to convey the impression of a deal. This is why you see signage that employs [’Was x-dollars, is now y-dollars’] to convey to the consumer how much they are saving,” says Akshay. 

Ecommerce fashion brand Nasty Gal, for example, offers a perpetual discount on products to boost perceived value while making the “discounted” prices seem like a great deal.

Charm pricing

Another tactic is to leverage so-called “charm pricing.” According to studies by University of Chicago and MIT, prices that end in a 9 (such as $59.99) have more demand than prices that end in other digits. 

Prices that end in a 0 are prestige prices, while prices that end in a 9 are value prices. Experts recommend setting regular prices ending in even numbers and offering discounts ending in odd numbers.

Urgency

“Some retailers offer temporary sales [to] create a sense of urgency because prices go back up when a sale is over,” says Kate. 

Using language like “today only” or “limited time” pushes consumers to pull the trigger on a purchase they may otherwise wait for. Black Friday sales are a prime example of the success of urgency in markdowns.

Innumeracy

According to Akshay’s research, shoppers tend to prefer discounts that aren’t associated with numbers, even when they’re equivalent in value to a numeric discount.

For example, consumers perceive a BOGO promotion as a better deal than saving 50% on two items. Akshay’s research suggests that offering freebies is also an effective markdown strategy. 

Price presentation 

How a price is shown changes how expensive it feels. Researchers describe this as the pain of paying, where cues that make spending feel more like losing money increase discomfort and can reduce willingness to buy.

Restaurants often remove dollar signs and cent digits from menu prices. This strategy makes customers disassociate those numbers from money. Keep price displays clean and consistent. When a markdown is the point, emphasize the value of the deal, like “Was $500, Now $300.” 

Compliance note: The FTC and other global regulators require that "was/now" pricing reflect a bona fide, established price at which the item was offered to the public for a reasonably substantial period. Avoid price spiking to create artificial discounts. If selling in the EU, anchor all claims to the lowest price offered over the past 30 days.

Localize your markdown strategy

If you have a brick-and-mortar presence and an ecommerce presence, or multiple shops and an ecommerce platform, you don’t have to offer the same prices at each point of sale. 

If pink pants sell well online but not in-store, then mark them down in-store, but not online. If pink pants sell well in your Montreal shop but not your Vancouver shop, then discount them in Vancouver but not in Montreal.

Optimize your markdown strategy by location to preserve profit margins.

Pay attention to competitors

How are competitors pricing similar products? Consider offering price matching so consumers shop with you instead of going to the competition. Doing so could help you gain a loyal customer, which is worth more overall than preserving a fraction of a profit margin on one item.

Use historical data

Look at sales data to see how your discounts are contributing to revenue. The customer is key to driving sales of discounted products, and what motivates a shopper to buy is different across industries and companies.

“Using analytics to measure the customer response to different coupons and promotional strategies is a great way for retailers to fine-tune their markdown strategies and understand what types of discounts have the most favorable long-term revenue impact,” says Kate.

💡 Pro Tip: To see how the discounts you set up are used and the total value of those sales, view the Sales by discount report in Shopify admin.

Set rules before you markdown

The rules behind markdown have to be consistent for everyone. Merchandising leads define the markdown framework, but your finance team has the say in allowable minimums and maximums. 

Guardrails are put in place, so every markdown is strategic and doesn’t hurt margins. Use these tips to set yours:

1. Define your limits. Set minimum and maximum discount rates ahead of time so your team doesn’t over-discount during a slow month. There’s no set rule, but a minimum markdown could be around 10% to 15%. A maximum can be up to 60% without telling customers you’re a brand in distress. 
2. Use firm deadlines. Use Shopify’s discounting tools to set exact start and end dates for your sales. Your first cut can be around six to eight weeks when new merchandise starts to arrive. The second markdown can come up to four weeks after that, depending on how slow inventory is moving before it becomes dead stock. 
3. Stay disciplined. Hard deadlines prevent open-ended promotions that train customers to never pay full price. If a markdown wasn’t received well by customers, chances are it was never the price. It’s a good idea to review your creative and product market fit. 

Remember that not every SKU is fit for a markdown. Some items are restricted by minimum advertised price (MAP) or manufacturer requirements. There are also items that should keep their price integrity, like bestsellers and signature pieces that show your brand’s premium value. 

Pitfalls of retail markdowns

When retailers offer markdowns, they run the risk of becoming predictable, damaging their brand reputation, and failing to consider product life cycles. 

Consider these markdown pitfalls before changing your prices.

Becoming predictable

“The biggest challenge associated with retail markdowns is related to customer behavior,” Kate says. “The frequency and size of markdowns can teach the consumer to anticipate when products will go on sale, buy in large quantities at the sale price, and wait for the next sale, thus harming retailer profitability because the product is never purchased at full price.”

Avoid this hazard by varying how often you give markdowns and not telling employees about sales until they need to know about them.

Damaging brand reputation

Price isn’t just about profit margins; it’s also about perceived quality. Marking down prices, therefore, can make your brand seem cheaper, which is a big concern for luxury brands.

“Once a retailer is known to offer significant markdowns, it can be hard to recover the customer’s perception of brand value that is needed to drive full-price sales,” Kate says. 

“Advertising a marked-down price … might reduce customers’ perceptions of the good’s value. Some retailers may avoid markdowns altogether, or offer them very rarely, to avoid the pitfalls of reducing prices.”

Failing to consider product lifecycle

Sometimes retailers mark items down prematurely because they fail to consider a product’s life cycle. High-consideration items, like cars or mattresses, may not sell as quickly as other products and may not need to be discounted.

Instead, they could benefit from a marketing boost to make them more desirable. Consider creating a demonstration of how the item is used, changing up how it’s displayed, or working with influencers to boost sales of slow-moving products.

Consider using markdowns at your store

When used strategically, retail markdowns can help you move inventory, build customer loyalty, and create buzz. If discounts are given without much thought, they can become predictable and damage your brand’s reputation. Carefully consider what, when, and how to offer retail markdowns for maximum results.