What markdown optimization means
Markdown optimization is choosing how deep to cut a product’s price, and when, so it sells through by its exit date, the week it is due to leave the range, with as much gross margin left as possible. The result is a markdown ladder for each style and store cluster: a planned sequence of price cuts, each with a depth and a start date.
A markdown is a permanent or temporary price cut, usually to clear stock that is selling slower than planned. The merchandise financial plan sets a markdown budget for each department and month, and markdown optimization decides how it is spent, style by style.
It balances four things:
- Depth: too shallow and the stock does not move; too deep and margin goes on units that would have sold anyway.
- Timing: an early first cut can be shallow, because there is time left to sell; a late one usually has to be deep.
- Sell-through target: the share of the stock to sell by the exit date.
- Margin: what is left after the discounts, including the value of unsold stock.
Price elasticity links depth to units: it says how many more units a given cut will sell. Clearance is the ladder’s last step, when what remains is marked down deeply to sell before the season ends or to make room for new receipts.
The markdown formulas
The first check is whether the stock will sell by its exit date at today’s price, using weeks of supply (also called weeks of cover):
Weeks of supply = units on hand ÷ forecast weekly units at the current price
When weeks of supply is longer than the weeks left, the product will not sell through at its current price, and the excess is what a markdown has to move. Two more formulas size the cut:
Discount depth = (original price − marked-down price) ÷ original pricePrice elasticity = % change in units sold ÷ % change in price
Elasticity is negative, since units rise as the price falls; the larger its size, the more units each point of discount brings. It is estimated from past price changes on similar products and differs by category, cluster and point in the season.
Ladders are then compared on the margin they leave, not on sell-through alone:
Gross margin = revenue at the prices achieved − unit cost × units sold
Units still unsold at the exit date count too: they go to an outlet or an off-price buyer, often below cost, or are carried into another season. Teams also differ in when they record a markdown: a permanent cut is often booked on all the stock when the price changes, a temporary one at the till as each unit sells. The retail planning glossary defines each term.
A worked markdown optimization example
Take one boot style in one store cluster with 1,000 pairs on hand, a $100 original price, a $40 unit cost and eight weeks to its exit date. At full price the forecast is 50 pairs a week: 20 weeks of supply, against eight weeks left. The target is 85% sell-through, and the planner compares two ladders.
| Ladder | Weeks | Discount | Price | Pairs forecast |
|---|---|---|---|---|
| A | 1 to 4 | 40% | $60 | 480 |
| A | 5 to 8 | 60% | $40 | 440 |
| B | 1 to 2 | 25% | $75 | 200 |
| B | 3 to 4 | 40% | $60 | 240 |
| B | 5 to 8 | 60% | $40 | 450 |
The forecasts come from the style’s elasticity and allow for pairs a deep first cut sells early that would have sold later anyway. Ladder A sells 920 pairs, a 92% sell-through, for revenue of 480 × $60 + 440 × $40 = $46,400 and a gross margin of $46,400 − 920 × $40 = $9,600. Ladder B sells 890 pairs, an 89% sell-through, for revenue of 200 × $75 + 240 × $60 + 450 × $40 = $47,400 and a gross margin of $47,400 − 890 × $40 = $11,800.
Both ladders clear the target. Ladder A sells 30 more pairs but earns $2,200 less, because its deeper first cut gives money away on pairs that would have sold at $75. Writing off the 80 and 110 pairs left over would not change the answer.
Now suppose ladder B’s first two weeks sell 120 pairs, not 200. If the rest of the forecast holds, 1,000 − 120 − 240 − 450 = 190 pairs are left at the exit date, an 81% sell-through, short of the target. The planner can bring the 40% cut forward, deepen the last cut or plan a bigger clearance, and checks each option on margin.
The example shows why depth is a margin decision, not only a sell-through one, and why a ladder has to move with each week’s sales: left alone after its slow start, ladder B would miss its target.
How planners manage markdowns today
Markdowns are usually proposed by merchandise planning or a pricing team, agreed with the buyer, and kept within a margin limit that merchandise finance sets. Each week the planner reads sell-through and weeks of supply by style and decides which styles take a first or next cut. In stores each change means new tickets or shelf labels, so markdowns usually follow a fixed weekly cycle.
Many ladders follow rules written seasons ago: a first cut after a set number of weeks, at a set depth, for every style in a category. The first cut is often deeper than the stock needs, because a planner reviewing hundreds of styles cannot weigh each one. Depths come from experience rather than a measured elasticity, and the same ladder often goes to every cluster, though a style can sell in one and sit in another.
Practices that keep markdowns working:
- Set an exit date and a sell-through target for every style before the season.
- Start with a shallow cut and hold it long enough to read the response.
- Plan by cluster or channel where prices can differ, not one ladder for every store.
- Check whether a transfer to a cluster where the style sells would beat a markdown.
- Review each markdown against its forecast afterwards, so next season’s depths start from evidence.
Where markdowns sit in the planning cycle
Planned markdowns are one of the terms in the open to buy formula, because a price cut lowers the retail value of the stock just as a sale does. When markdowns run ahead of plan, gross margin falls short. When they run behind, unsold stock stays on the books at full value, and next month’s budget for receipts shrinks.
They also feed the next season: what sold only at a deep discount tells the line review what to buy less of, and stock that outstays its exit date takes space and budget the new range needs.
How the OODARIS Pricing Strategist agent runs it
In OODARIS, markdown optimization is part of Pricing, markdown & promotions, one of the ten capabilities the Agentic OS covers. It is part of how OODARIS applies agentic AI to retail planning. The Pricing Strategist is the specialist agent for it.
- WatchesSell-through, weeks of cover, price elasticity and competitor prices, by cluster.
- ProposesPrice ladders, and markdown depth and timing for each cluster, with the expected margin.
- Approved byMerchandise planning. Merchandise finance clears the margin limit.
- Writes backApproved price conditions, to your ERP or pricing system.
It models price elasticity by product hierarchy and region, sequences markdowns to clear stock with shallower cuts, and answers competitor price moves with the evidence attached. It works with competitor price feeds, promotion planning tools, and web and shelf price systems.
With OODARIS, price ladders follow elasticity, inside your MAP, MSRP and margin floors, and markdown depth and timing are proposed to hit sell-through. In the illustrative product view on the Sell page, a store cluster’s current ladder is compared with a proposed one with a shallower first cut, on end-of-season gross margin, average discount and sell-through, both simulated against the cluster’s own sell-through history. What is written back is the approved price conditions and the cluster’s new ladder; the approval goes on the record, and the writeback has a rollback path.
The Promotions Director works in the same crew. It watches promotion calendars, uplift and cannibalization by segment and channel, and proposes offer depth, timing and audience for each campaign, with the forecast uplift. Marketing approves its offers, with merchandising, and the approved offers are written to your promotion and pricing tools.
By default, the person who owns the decision approves each change before anything is written back. Teams can also keep OODARIS read-only, or let it act on its own inside limits the decision’s owner sets; how it works describes the four levels. The pricing, markdown and promotions capability is one of the five available to new clients today.
Frequently asked questions
How do you calculate a markdown percentage?
Divide the cut by the original price: (original price − marked-down price) ÷ original price, so $100 to $75 is 25% off. In a merchandise plan, markdown percentage usually means the period’s markdown dollars as a share of its net sales.
What is a markdown ladder?
A planned sequence of price cuts for a product: a shallow first cut, then deeper ones at set intervals, ending in clearance. Ladder B in the worked example goes from 25% off to 40% and then 60%.
When should a retailer take the first markdown?
When weeks of supply at the current price is longer than the weeks left to the exit date. An early first cut can be shallow; a late one usually has to be deep.
How does price elasticity affect markdown depth?
Elasticity says how many extra units a cut will sell. For an inelastic product, a deeper cut adds few units and mostly gives margin away, so a transfer or a later clearance may cost less.
What is the difference between a markdown and a promotion?
A markdown cuts the price to clear stock. A promotion is a temporary offer meant to lift traffic or sales before the price returns, so its cost is judged against the lift it brings.
Does the Pricing Strategist change prices on its own?
Not by default. It proposes price ladders, and markdown depth and timing for each cluster, with the expected margin. Merchandise planning approves, and merchandise finance clears the margin limit, before the approved price conditions are written back to your ERP or pricing system.