What Is a Markdown in Retail?

A markdown in retail is a reduction from an item's original selling price, taken to move inventory that isn't selling fast enough at full price. Once you take it, the lower price is the price. It applies to everyone, and it usually stays.

That's what separates a markdown from a discount. A markdown resets the value of the product. A discount is a conditional offer that lowers the price for a specific customer or a specific window, then goes away. Every discount lowers a price, but not every price cut is a discount. Most of the price cuts that show up on your margin line are markdowns.

The rest of this guide covers how markdowns work, how to calculate them, the main types, how they differ from discounts, and how to plan both so you protect margin instead of surrendering it.

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.

A discount, in contrast, 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. Think of 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.

Why the Distinction Matters for Planning

It's easy to confuse the terms because both markdowns and discounts result in a customer paying less. Some retail guides even use the words interchangeably. But from a merchandise planning perspective, the distinction is useful:

• A markdown is generally an across-the-board, unconditional price reduction on an item.
• A discount is conditional or promotional.

They have different triggers and different implications. Markdowns usually signal "this product didn't sell as expected." Discounts usually signal "we want to encourage you to buy now, or reward you." Understanding this difference is the foundation for using each tactic well.

How to Calculate a Markdown

The markdown percentage tells you how deep the price cut is. The formula is simple:

Markdown % = (Original Price − Sale Price) / Original Price × 100

Say a jacket is priced at $200 and you drop it to $140. The markdown is

($200 − $140) / $200 × 100, or 30%.

The number you actually care about is what that cut does to margin. Your cost doesn't move when you mark down. Only the price does, so the entire reduction comes straight out of gross profit.

Take the same jacket. If it cost you $90:

• Gross profit at full price: $200 − $90 = $110
• Gross profit after the markdown: $140 − $90 = $50

One 30% markdown cut the profit on that unit by more than half. That's why the size of a markdown matters far less than the number of units you're forced to take it on. A shallow markdown across half your buy does more damage than a deep markdown on a handful of units. The fix isn't a better markdown formula. It's buying closer to real demand so fewer units ever reach the markdown rack.

The Main Types of Markdowns

Not every markdown is the same, and they don't all signal the same thing.

Permanent markdowns are price cuts that stay. You take them on styles that have run their course, or on damaged and end-of-life stock. The price resets and doesn't come back up.

Promotional markdowns are temporary and tied to an event, like a holiday weekend or a flash sale. The price returns to full when the event ends. These blur into discount territory, but if the ticket price itself changes for everyone, it's a markdown.

Clearance markdowns are the deep, final cuts you take to clear seasonal or discontinued inventory before it becomes dead stock. The goal here isn't margin. It's cash and floor space.

Competitive markdowns are reactive. You cut price to stay in line with a competitor, often through price matching, so you only give up margin to the shoppers who go looking for a better price.

It also helps to think in stages. The initial markdown is your first move off the ticket price, usually triggered by seasonality or a sell-through target being missed. An additional markdown is the follow-up cut when the first one didn't clear the stock. Planning both in advance, instead of reacting week to week, is what keeps total markdown spend under control.

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 you avoid racks of unsold product taking up space and capital.

Planning Markdown Cadence and Depth to Protect Margins

End-of-season sales in fashion are classic markdown events. Summer dresses get marked down in September to make room for fall inventory. The 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 how big the issue is. Markdowns cost U.S. retailers about $300 billion in lost revenue in one year (2018), roughly 12% of total sales. A significant portion of revenue is sacrificed to inventory that didn't sell at full price. This is why smart merchandise planners treat markdowns as a planned part of a product's lifecycle, 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. Optimizing markdown timing and depth has been found to improve margin rates by 4 to 8 percentage points for retailers.

The Risks of Over-Markdown: Margin Erosion and Brand Impact

On the flip side, excessive or haphazard markdowns erode your margins and your brand image. If customers come to expect that your products 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 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 right tactic. 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 create a sense of urgency and excitement, encouraging customers to buy now rather than later, like a three-day online flash sale on a new collection.

Targeted Discounts: Reaching Specific Segments Without Devaluing Your Brand

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.

A student discount, say 10% off with a student ID, lets you attract price-sensitive young shoppers while you still charge regular price to everyone who doesn't qualify. 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

Over-reliance on discounts is its own problem. If you run constant promotions, customers start waiting for the next sale and never buy at full price. Many mall clothing brands have lived this. Finding the right balance is the whole game: use discounts enough to drive sales, but not so much that your regular price becomes meaningless.

Decide early what role each tactic plays in your pricing strategy. Markdowns are about getting rid of the old. Discounts are about enticing with something new.

• If your priority is maximizing margin and holding a premium brand image, minimize markdowns by buying carefully and reacting quickly to slow sellers, and use targeted discounts sparingly.
• If your priority is volume and quick turnover, plan frequent promotional discounts to keep customers coming back, while still scheduling end-of-line markdowns to clear stock.

Each approach affects customer behavior differently:

• 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. They plan seasonal markdowns as a safety net and orchestrate discounts as part of marketing campaigns, all aligned to one overall strategy.

Operational Differences: How Markdowns and Discounts Are Executed

On a day-to-day level, markdowns and discounts are handled differently inside retail teams.

Executing Markdowns: Pricing Adjustments and Store Coordination

Markdowns require coordination between merchandising and store operations, or e-commerce site management. A markdown means changing the actual price of an item in your system and on the sales floor. In a store, staff might print new price tags or add sale stickers when an item is marked down.

For example, a store might mark down fashion items by 25% after 8 weeks on the floor, then 50% after 12 weeks if they still haven't sold. That means updating the inventory database so the barcode reflects the lower price, and making sure signage is clear to shoppers.

It's a systematic process. Many retailers run 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 30% of the assortment to be marked down at end-of-season, or set aside a margin allowance for markdown losses. Careful analysis matters here. You want to mark down enough to entice buyers, but not more than necessary. Too large a markdown too soon is lost profit. Too small or too late, and you're stuck with unsold stock.

In e-commerce, marking down is easier operationally. You 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. Marked-down items might also need different handling, like being pulled from front displays or consolidated on sale racks.

There's an inventory angle too. Marked-down merchandise might be transferred to outlet stores or sold through off-price channels if it doesn't sell in mainline stores.

All of this takes planning and communication across teams. The operational challenge is to execute markdowns efficiently, repricing and re-tagging thousands of SKUs in a large chain, and to keep those changes consistent across every channel.

How to Operationalize Discounts Through POS and Promotional Tools

Discounts are typically executed through your point-of-sale system or e-commerce platform, using promotional rules. A discount doesn't always require re-tagging products, because it's often applied at checkout.

If you run a 20% off weekend sale in-store, you might simply post signs ("all items 20% off at register") rather than stickering every item. The POS system deducts 20% at scan.

In e-commerce, you might give customers a code (SUMMER20) to enter for 20% off, or apply the discount automatically in the cart. The operational work is setting up the promotion correctly, making sure the discount only applies to the intended items and dates, and training staff to handle it, like how to input a student discount.

Discounts also need to be advertised to work. That means coordinating email, social, website banners, or in-store posters so customers know about the deal. And there's a service side: handling coupons, verifying eligibility for targeted discounts like military or senior offers, and managing abuse like one-time codes used repeatedly.

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 if you expect a spike in demand. Unlike markdowns, which are reactive, discounts can be scheduled proactively. But you have to make sure you don't run out of stock on promoted items, or overstock if a promotion underperforms.

Timing is everything. A one-day sale means everything has to work smoothly on that one day. Executing discounts is about systems and service. Executing markdowns is about managing price over a product's life cycle.

Cross-Team Collaboration: Merchandising vs. Marketing Roles

In most retail organizations, the merchandising team leads markdown decisions, since they manage product lifecycles and inventory. The marketing or sales team leads discount promotions, since those are tied to campaigns or customer programs. The two have to work hand in hand.

If marketing plans a 10% off site-wide sale next month, the merchants need to account for it in margin forecasts. If the merchants decide to mark down all winter coats in January, marketing can help promote that clearance to drive traffic. Both tactics also call for a post-mortem: how the markdown affected sell-through and margin, and whether a discount promo lifted sales or 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 in stores and online, monitored against sales data, and adjusted for the next cycle.

Real Retail Examples: How Fashion Brands Use Markdowns and Discounts

To see how markdowns and discounts play out in practice, look at a few fashion and apparel examples.

Zara: High Full-Price Sell-Through and Minimal Markdowns

Zara is known for minimizing markdowns by tightly controlling inventory and responding fast to trends. Zara reportedly achieves about 85% sell-through at full price, well above the industry average of 60 to 70%. That means far fewer items to mark down. Zara spends 15% less on markdowns and associated inventory losses than competitors by producing in smaller batches and restocking only what sells.

Zara uses just two main sale periods a year, at the end of each season, to clear remaining stock. During the regular season, its stores rarely show sale signs except on clearance racks. Instead, the model relies on new merchandise and quick turnover to keep people buying at full price. Coupons and promo codes are virtually nonexistent. You won't see a "20% off spring collection" code from Zara. The result is a brand where customers know to buy now or risk the item selling out.

This is a strategy that heavily favors full-price sell-through, using markdowns only as a last resort to clear inventory.

Macy's and Saks: The Impact of Frequent Discounts and Clearance

Department stores often combine constant discounts and markdowns, sometimes to their detriment. Through the 2010s, shoppers became so used to big sales that many never paid list price at department stores.

Chains like Macy's run frequent discount promotions, one-day sales and coupons, to draw crowds. At the same time, they maintain clearance sections where marked-down merchandise piles up. Saks Fifth Avenue runs an off-price arm, Saks OFF 5TH, specifically to sell marked-down products from its full-price stores. Saks OFF 5TH built 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.

Here, discounts are used continually as a marketing tool, which arguably trains customers to expect deals, and markdowns are so routine that entire sub-brands exist for clearance. The operational challenge is margin. Rampant discounting and heavy markdowns pressure both profit and brand equity. Macy's has at times tried to pull back on constant discounts to rebuild its image, then risked losing price-sensitive shoppers.

The lesson: balance is required. Department stores are testing 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 retailers juggle the same tension. ASOS found itself leaning too hard on promotional discounts. In a turnaround, its CEO said the company was over-reliant on promotions and not doing enough brand-building. ASOS deliberately scaled back site-wide discounts so that about 60% of sales were made without any promotion or discount in a recent period. That was a big shift for a company that frequently emailed flash sales and student codes.

Even so, ASOS still had to deal with excess inventory through markdowns. In 2023 to 2024 it faced a profitability squeeze partly because it had to aggressively mark down old stock, hitting margins by an estimated 260 basis points, or 2.6%. The company tried to wean customers off endless promo codes to strengthen full-price sales, while executing markdowns to clear a backlog.

This shows the tension clearly. You can cut promotions to preserve pricing power, but you also have to improve buying and inventory management to avoid massive markdowns. ASOS is now focusing on more targeted discounts, like offers for loyal customers, and improving forecasting so it doesn't need to mark down as much stock in the first place.

Gap Inc.: Lessons from Over-Promotion and Inventory Mismanagement

Gap and its sister brands, Old Navy and Banana Republic, have historically been heavy promoters, often running 40% off everything. That drove short-term sales but conditioned shoppers never to 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 work through it, the company leaned heavily on markdowns and discounting. That meant deep clearance markdowns and more discount promotions to move product faster. The result was a hit to both margin and brand positioning.

Gap's struggle is a cautionary tale. Relying too much on discounts can hurt brand value, and if the product isn't hitting the mark, you end up taking deep markdowns anyway. Recently, some Gap Inc. brands have tried to reduce promotional cadence and get back to product appeal. Banana Republic moved more upscale to justify fewer discounts. Operationally, that meant tighter buys and using data to localize assortments so they don't end up overstocked.

Each example shows a different mix of tactics. Fast fashion uses speed to avoid markdowns. Department stores use discounts to drive traffic but risk margin erosion. E-commerce players hunt for the sweet spot between enticing deals and protecting margin. Specialty brands learn that over-discounting devalues the brand. Studying these cases helps you understand the consequences of your own pricing actions.

Retail Planning Takeaways: Balancing Markdowns and Discounts

Markdowns and discounts are both essential tools, especially in fashion and apparel where trends and seasons drive the business. Knowing when and how to use each directly affects your profitability and your customer relationships.

The bottom line: be proactive and plan for both. Minimize unplanned, last-resort markdowns by improving buying accuracy and reacting quickly to sales data. At the same time, plan strategic discounts that fit your brand, use them to attract customers and lift sales during key moments, and avoid a constant discount drumbeat that trains your audience to wait for a sale.

When to Choose a Markdown or a Discount

Set a clear goal for any price change.

• If your aim is to clear inventory that isn't selling, a markdown, a permanent price cut for all, is the right 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, so measure your business against that benchmark. A higher full-price sell-through means fewer margin-eating markdowns.

Track the lift from discounts too. Did your weekend 20% off promo spike sales enough to justify the margin drop? Over time, refine your strategy. Maybe your customers respond more to limited-time flash sales than to large clearance bins, or the reverse.

Aligning Merchandising, Marketing, and Customer Expectations

Involve both merchandising and marketing in these decisions. A well-planned promotion can be timed to clear some older stock at the same time. A buy one, get one 50% off deal can move excess units while rewarding customers. Tactics like these blur the line between discount and markdown, and that's fine if it serves your objective.

Finally, keep a customer-centric view. Shoppers love a good deal, but they also love getting value. Use markdowns so customers aren't seeing stale or irrelevant products on your racks, which improves their experience. Use discounts to make them feel savvy and appreciated, without giving away the store.

Understand the difference between a markdown and a discount, execute each one thoughtfully, and you'll optimize your inventory turns, protect your margins, and keep customers coming back at the right price.