Understanding Markdowns vs. Discounts in Retail Strategy
In retail, markdowns and discounts both involve lowering prices, but they aren’t the same thing. A markdown is typically a permanent or unconditional price reduction on an item, often because it isn’t selling at the original price.
For example, a sweater originally priced at $150 might be marked down 33% to $100 if it has been sitting on the rack for months. Markdowns are usually used to clear out inventory or recoup part of the investment in products that didn’t sell as expected.
In contrast, a discount is usually a temporary or conditional price reduction, often offered at the point of sale. Discounts are frequently tied to a promotion or a specific customer group – for instance, a 20% off coupon during a weekend sale, a student discount, or a loyalty club discount.
These discounts don’t change the item’s sticker price for all customers; instead, they give certain shoppers a lower price (such as showing a student ID or using a promo code at checkout).
Understanding Markdowns and Discounts in Retail Strategy
It’s easy to confuse the terms because both markdowns and discounts result in a customer paying less. In fact, some retail guides use the words interchangeably. However, from a merchandise planning perspective, there’s a useful distinction:
- A markdown is generally an across-the-board unconditional price reduction on an item
- A discount is conditional or promotional
As a retailer, they have different triggers and implications. Markdowns usually signal “this product didn’t sell as expected”, while discounts often signal “we want to encourage you to buy now or reward you”. Understanding this difference is key to using each tactic effectively.
How to Use Markdowns as an Inventory Management Strategy
From a strategic standpoint, markdowns and discounts serve different purposes in your merchandising plan:
Why Markdowns Matter: Inventory Management and Sell-Through Rates
Markdowns are primarily a tool for inventory management. If your goal is to clear out excess or slow-moving stock and free up cash tied in inventory, a markdown is the go-to strategy. By permanently lowering the price, you aim to increase the sell-through of those items. This helps avoid having racks of unsold clothes that take up space and capital.
Planning Markdown Cadence and Depth to Protect Margins
For example, end-of-season sales in fashion are classic markdown events – summer dresses get marked down in September to make room for fall inventory. The strategic intent is to liquidate time-sensitive inventory (like seasonal apparel or last year’s styles) and at least break even or minimize loss on those products.
Industry data shows this is a huge issue: markdowns cost U.S. retailers about $300 billion in lost revenue in one year (2018), roughly 12% of total sales. In other words, a significant portion of revenue is sacrificed due to inventory that didn’t sell at full price. This is why smart merchandise planners treat markdowns as a planned part of the lifecycle of a product – an “exit strategy” for items that don’t hit their targets.
When executed well, a markdown strategy can protect profits and even become a competitive advantage. In fact, optimizing markdown timing and depth has been found to improve margin rates by 4–8 percentage points for retailers.
The Risks of Over-Markdown: Margin Erosion and Brand Impact
On the flip side, excessive or haphazard markdowns can erode your margins and brand image. If customers come to expect that your products will always end up on the clearance rack, they may refuse to buy at full price at all.
Using Discounts as a Marketing and Customer Acquisition Tool
Discounts, on the other hand, are typically used as a demand-generation or marketing tool. If your goal is to drive traffic, boost short-term sales, or attract a specific customer segment, a discount is the appropriate tactic. For example, offering 20% off for first-time online customers or running a “Black Friday” sale are discount strategies designed to incentivize purchases.
Planning Promotional Discounts to Drive Demand
Discounts are often planned well in advance as part of promotional calendars – think of holiday sales, flash sales, or special events like “Friends and Family” weekends. They can create a sense of urgency and excitement, encouraging customers to buy now rather than later (e.g. a 3-day online flash sale on a new collection).
Targeted Discounts: Reaching Specific Segments Without Devaluing Your Brand
Strategically, discounts can help you acquire new customers or reward loyalty without permanently slashing the value of your products. A key benefit is that a discount can target certain groups or time periods without altering your base pricing.
For instance, a student discount (say 10% off with student ID) lets you attract price-sensitive young shoppers , but you still charge regular price to those who don’t qualify. Likewise, a limited-time coupon doesn’t necessarily damage the perceived value of a product long-term – once the promo ends, the item goes back to full price for everyone.
Finding the Right Balance: Discount Frequency and Profitability
That said, over-reliance on discounts can also be problematic. If you run constant promotions, customers might start waiting for the next sale and never buy at full price (a phenomenon many mall clothing brands have faced). Finding the right balance is crucial: use discounts enough to drive sales, but not so much that your “regular price” becomes meaningless.
Strategically, you should decide early what role each tactic plays in your pricing strategy. As one retail expert put it, markdowns are about getting rid of the old, while discounts are about enticing with something new.
- If your priority is maximizing margin and maintaining a premium brand image, you’ll aim to minimize markdowns (by buying carefully and reacting quickly to slow-sellers) and use targeted discounts sparingly.
- If your priority is volume and quick turnover, you might plan frequent promotional discounts to keep customers coming back, while still scheduling end-of-line markdowns to clear stock.
Remember, each approach affects customer behavior:
- Markdowns clear stock but don’t necessarily create loyal customers
- Discounts can win new shoppers but at the cost of margin.
The best retailers use a mix – planning seasonal markdowns as a safety net, and orchestrating discounts as part of marketing campaigns – aligned to their overall strategy.
Operational Differences: How Markdowns and Discounts Are Executed
On a day-to-day operational level, markdowns and discounts are handled differently within retail teams:
Executing Markdowns: Pricing Adjustments and Store Coordination
Markdowns require coordination between merchandising and store operations (or e-commerce site management). Operationally, a markdown means changing the actual price of an item in your system and on the sales floor. In a brick-and-mortar store, staff might print new price tags or put “SALE” stickers on items when they are marked down.
For example, a store might have a policy to mark down fashion items by 25% after 8 weeks on the floor, then 50% after 12 weeks if they still haven’t sold. This involves updating the inventory database so that the barcode now reflects the lower price, and making sure signage is clear to shoppers.
It’s a systematic process: many retailers do weekly (or monthly) reviews to identify which SKUs need markdowns based on sell-through targets. As a merchandise planner, you’ll typically have markdown budgets and schedules.
You might plan for, say, 30% of the assortment to be marked down at end-of-season or set aside a certain margin allowance for markdown losses. Careful analysis is needed – you want to markdown high enough to entice buyers, but not more than necessary. Too large a markdown too soon is just lost profit; too small or too late, and you’ll be stuck with unsold stock.
In e-commerce, operationalizing markdowns is a bit easier (just update the price on the website), but it’s still a deliberate change that often coincides with moving items to a “Clearance” or “Sale” section online. Marked-down items might also need different handling, like being removed from front displays or consolidated on sale racks.
There’s also an inventory aspect: marked-down merchandise might be transferred to outlet stores or sold through off-price channels if they don’t sell in mainline stores.
All of this requires planning and communication across teams. The key operational challenge is to execute markdowns efficiently (reprice and re-tag thousands of SKUs, for example, in a large chain) and to integrate those changes across all channels so that the price is consistent for customers.
How to Operationalize Discounts Through POS and Promotional Tools
Discounts are typically executed through your point-of-sale (POS) system or e-commerce platform via promotional rules. Operationally, a discount doesn’t always require retagging products because it’s often applied at checkout.
For instance, if you run a “20% off this weekend” sale in-store, you might simply post signs (“All items 20% off at register”) rather than stickering every item. The POS system will deduct 20% when scanning.
In e-commerce, you might give customers a code (SUMMER20) to enter for 20% off, or automatically apply the discount in the cart. The heavy lifting on the operations side is setting up the promotion correctly in the system (ensuring the discount applies only to intended items or dates), and training staff to handle it (e.g. how to input a student ID discount).
Another operational consideration is marketing communication – discounts need to be advertised to be effective. That means coordinating email blasts, social media, website banners, or in-store posters to let customers know about the deal.
There’s also often a customer service aspect: handling coupons, verifying eligibility (for targeted discounts like military or senior discounts), and managing any abuse (like one-time codes used multiple times).
From a planning perspective, discounts are part of the promotional calendar, so you’ll coordinate with marketing and finance. You might plan extra inventory for an upcoming sale event if you expect a spike in demand. Unlike markdowns which are reactive, discounts can be scheduled proactively, but you must ensure you don’t run out of stock on promoted items or, conversely, overstock if a promotion underperforms.
Operational timing is crucial: a one-day sale means everything must work smoothly on that day. Executing discounts is about systems and service – making sure the discount is properly applied and communicated – whereas executing markdowns is about price management of products over their life cycle.
Cross-Team Collaboration: Merchandising vs Marketing Roles
In many retail organizations, the merchandising team takes the lead on markdown decisions (since they manage product lifecycles and inventory), while the marketing or sales team leads discount promotions (since those are often tied to campaigns or customer programs). Of course, the two must work hand in hand.
For example, if marketing plans a 10% off site-wide sale next month, the merchants need to account for that in margin forecasts. Conversely, if the merchants decide to markdown all winter coats in January, the marketing team might help promote that clearance to drive traffic. Both tactics also require post-mortem analysis operationally: you’ll review how the markdown affected sell-through and margins, and how a discount promo lifted sales or if it just cannibalized future demand.
The operational mantra is “plan, execute, monitor, adjust.” Whether it’s a markdown or a discount, it should be planned with a goal, executed cleanly at store level and online, monitored via sales data, and then adjusted for the next cycle of decisions.
Real Retail Examples: How Fashion Brands Use Markdowns & Discounts
To see how markdowns and discounts play out in practice, let’s look at a few fashion and apparel retail examples:
Zara’s Approach: High Full-Price Sell-Through and Minimal Markdowning
Fast-fashion giant Zara is known for minimizing markdowns by tightly controlling inventory and rapidly responding to trends. Zara reportedly achieves about 85% sell-through at full price, far above the industry average of 60-70%. This means they have to markdown far fewer items. In fact, Zara spends 15% less on markdowns (and associated inventory losses) than competitors by producing in smaller batches and restocking only what sells.
Strategically, Zara uses just two main sale periods each year (at the end of season) to clear out remaining stock – these are markdown events where prices are slashed on last season’s items.
During the regular season, Zara stores rarely have “sale” signs except on those clearance racks. Instead, they rely on new merchandise and quick turnover to keep people buying at full price. Discounts in the form of coupons or promo codes are virtually nonexistent in Zara’s model (you won’t see a “20% off spring collection” coupon from Zara). The result is a brand image where customers know they must buy now or risk the item selling out, and if they wait, someone else will grab it at full price.
This example shows a strategy heavily favoring full-price sell-through and limited markdowns, using markdowns only as a last resort to clear inventory.
Macy’s and Saks: The Impact of Frequent Discounts and Clearance Strategies
Department store retailers often use a combination of constant discounts and markdowns – sometimes to their detriment. In the 2010s, shoppers became so accustomed to big sales that “Americans never pay list price” at department stores.
Chains like Macy’s run frequent discount promotions (one-day sales, coupons, etc.) to draw in crowds. At the same time, they maintain clearance sections where marked-down merchandise accumulates.
Saks Fifth Avenue operates an off-price arm, Saks OFF 5TH, specifically to sell marked-down products from its full-price stores. Saks OFF 5TH has carved out a strong value-focused customer base, often seeing more traffic and faster inventory turnover than Saks Fifth Avenue itself. To compete, Macy’s launched its own off-price spin-off, Macy’s Backstage, to help liquidate clearance inventory.
These examples illustrate a strategy where discounts are used continually as a marketing tool (but arguably train customers to expect deals), and markdowns are so routine that entire sub-brands/outlet stores are created for clearance products.
The operational challenge here is managing margins – rampant discounting and heavy markdowns have pressured profits and brand equity. Macy’s has at times tried to pull back on constant discounts to rebuild its image, but then risks losing price-sensitive shoppers.
The key lesson: a balance is needed. Department stores are experimenting with fewer blanket discounts and more personalized ones (like targeted coupons to loyalty members) to reduce the addiction to discounts while still clearing inventory through planned markdown cycles.
ASOS: Reducing Discount Dependence While Managing Old Inventory
Online fashion retailers also juggle markdowns vs discounts. ASOS, a major e-commerce fashion player, found itself relying too much on promotional discounts in recent years. In a turnaround effort, ASOS’s CEO noted they were “over-reliant” on promotions and not doing enough brand-building. They deliberately scaled back site-wide discounts so that about 60% of sales were made without any promotion or discount in a recent period. This was a big shift for a company that frequently emailed flash sales and student discount codes.
However, even as they cut back proactive discounts, ASOS still had to deal with excess inventory through markdowns. In 2023–2024 they faced a profitability squeeze partly because they had to aggressively markdown old stock, which hit their margins by an estimated 260 basis points (2.6%). Essentially, ASOS tried to wean customers off endless promo codes (to strengthen their brand and full-price sales), while simultaneously executing markdowns to clear a backlog of inventory.
This real-world case shows the tension between discounts and markdowns: you can reduce promotions to preserve pricing power, but you must also improve buying and inventory management to avoid massive markdowns.
ASOS is now focusing on more targeted discounts (like for loyal customers) and improving its forecasting so that it doesn’t need to markdown as much stock in the first place. For an e-commerce player, operationalizing this means changing the website’s tactics (fewer splashy sale banners, more emphasis on new arrivals) and having clear-out sales for old merchandise in a controlled way.
Gap Inc.: Lessons from Over-Promotion and Inventory Mismanagement
Brands like Gap and its sister companies (Old Navy, Banana Republic) have historically been heavy promoters, often offering 40% off everything sales regularly. This drove short-term sales but at the cost of conditioning shoppers to never buy at full price.
In 2022, Gap Inc. faced a major inventory glut – at one point holding over $3 billion in unsold product due to forecasting errors and supply chain issues. To address this, they “leaned heavily on markdowns and discounting” to work through the excess. That included massive clearance markdowns (piles of last season’s clothes marked down in outlet stores or on clearance racks) and increased discount promotions to move product faster. The result was a hit to margins and brand positioning.
Gap’s struggle is a cautionary tale: relying too much on discounts can hurt brand value (customers think of Gap as a discount brand now), and if your product isn’t hitting the mark, you end up taking deep markdowns anyway.
Recently, some of Gap Inc.’s brands have tried to reduce promotional cadence and get back to product appeal (for instance, Banana Republic moved more upscale to justify fewer discounts). Operationally, this meant tighter buys (ordering less inventory upfront) and using data to localize assortments so they don’t end up overstocked. The Gap example underlines how poor planning leads to costly markdowns and how a perpetual discount strategy can become a tough habit to break.
Each of these examples shows a different mix of tactics. The common thread is that markdowns and discounts are tools that need to align with a retailer’s overall strategy. Fast fashion uses speed to avoid markdowns; department stores use discounts to drive traffic but risk margin erosion; e-commerce players experiment to find the sweet spot between enticing deals and maintaining margin; specialty brands learn that if you over-discount, you might devalue the brand. As a merchandise planner or buyer, studying these cases helps you understand the consequences of your pricing actions in the real world.
Retail Planning Takeaways: Balancing Markdowns and Discounts
Markdowns and discounts are both essential tools in retail, especially in fashion and apparel where trends and seasons drive the business. Knowing when and how to use each will directly impact your profitability and customer relationships.
What’s the bottom line? Be proactive and plan for both. You want to minimize unplanned, last-resort markdowns by improving your buying accuracy and reacting quickly to sales data. At the same time, plan strategic discounts that align with your brand, use them to attract customers and boost sales during key moments, but avoid a constant discount drumbeat that trains your audience to wait for a sale.
Strategic Price Planning: When to Choose a Markdown or a Discount
In practice, this means setting clear goals for any price change.
- If your aim is to clear inventory that isn’t selling, you now know a markdown (a permanent price cut for all) is the appropriate move.
- If your aim is to boost conversion or reward a segment of customers, a targeted discount (temporary and conditional) is the better choice.
Monitoring Metrics: Sell-Through, Promo Lift, and Margin Health
Always monitor the results. Track your full-price sell-through rate (on average, only about 60% of products sell at full price in apparel retail – how is your business performing against that benchmark?). A higher full-price sell-through means fewer margin-eating markdowns.
Also track the lift from discounts; did your weekend 20% off promo spike sales enough to justify the margin drop? Over time, refine your strategy: perhaps you discover your customers respond more to limited-time flash sales (a form of discount) than to large clearance bins, or vice versa.
Coordinated Execution: Aligning Merchandising, Marketing, and Customer Expectations
Involve both merchandising and marketing teams in these decisions. A well-planned promotion (discount) can be timed so you also clear some older stock, effectively achieving both goals at once.
For example, a “buy one, get one 50% off” deal can help move excess units while rewarding customers. Tactics like these blur the line between discount and markdown, and that’s okay if it serves your objectives.
Finally, maintain a customer-centric view. Shoppers love a good deal, but they also love getting value. Use markdowns to ensure they’re not seeing stale or irrelevant products on your racks (which improves their experience), and use discounts to make them feel savvy and appreciated (without giving away the store).
By clearly understanding the difference between a markdown and a discount, and executing each thoughtfully, you’ll optimize your inventory turns, protect your margins, and keep your customers coming back for more, at the right price.
