A markdown is a reduction of price. Markdowns are used for all kinds of items for sale, ranging from produce at the grocery store to securities offered by a dealer. They may be instituted for a number of different reasons. Before marking down a price, the current price is weighed against factors such as the wholesale price of the item and prices offered by the competition. Pricing is a delicate art and mistakes can be costly.
One reason to offer a markdown is because the market for a given good has decreased. This may be the result of overstock, a sluggish economy, or other factors. These types of markdowns are used to encourage people to buy so that the inventory will clear. This is common at stores with seasonal merchandise that cannot be returned if it is not sold and strategic shoppers can often find excellent deals by buying products off season. Securities dealers will use markdowns to make prices for products they are holding more appealing, leading investors to trade with them and reducing their stock of items that are declining in value or not moving quickly.
Markdowns are also used to get rid of excess inventory. In retail, this is a common practice. Retailers have to strike a fine balance when ordering products to sell. They do not want to overorder and have excess inventory, but they do not want to underorder and not have enough to meet the demand. Imbalances in ordering practices can force retailers to make markdowns to get products out of the store and make room for new products.
A markdown can also be a form of sales promotion. Stores may use what are known as loss leaders, products with significantly reduced prices on which the store takes a loss, to lure people in. Some customers will just buy the loss leader and come out ahead. Others will purchase other products, drawn in by the hook of the loss leader, and the end result is profit for the store. Getting people in the door can be half the battle and low prices are an excellent way to appeal to customers looking for a deal.
Prices are often marked up before products are initially offered for sale. This makes it possible to adjust with a markdown without taking a loss. Sale of products also needs to cover overhead expenses like rents and utilities, however. Products that sit around for a long time and are eventually sold at a markdown price may represent a loss for the business if they failed to pay for themselves.
