There IS a difference between markdowns and discounts…..AND they are exactly the same.
The difference is in how you track them, but they can mean the same thing.
ANYTHING that reduces the price of an item is a markdown. A markdown is sometimes given different nicknames (reward credit, discount, loyalty dollars, etc.). Remember, YOU are giving the customer money to use to reduce the price of the item.
ANYTIME the price of an item is reduced (for ANY REASON), it has to be recorded by assigning it to that particular item so that the TRUE profitability of each item (therefore each class, therefore the entire store) is known. When a deduction of price is just taken at the end of the sale and off of the total price, it would go into a black hole and you have no record of that markdown being taken… by item or by class. This is what people usually mean when they use the word “discount.” The mistake made is that many don’t realize that it must instead be tracked by line item.
It is important to grasp the difference between this key difference about the way that POS systems look at a markdown and a discount. Your POS system should generate a report based on line items and your class structure, not only the total amount “discounted” at the end of the month that has reduced your store items. Most often this means that you have to take the markdown off each item.
Example: At your shoe store you have a customer appreciation program by providing $20 in future store credit for every $100 the customer spends. When the customer purchases a pair of new running shoes and uses that $20 store credit towards that particular purchase, your POS system should reflect the $20 markdown off the running shoes, so the markdown is tracked by class (in this example, running shoes), not just $20 off the total bill. You may need to work with your POS company to track these transactions accordingly.
You DID just markdown those shoes by $20. It impacts the profitability of that class of inventory.
Another example: you sell a sweater for $90 that was originally $100 because the customer used her $10 birthday bucks card; the markdown is $10 on that particular clothing item and must be tracked by class structure. If a customer buys more than one item, you can spread the markdown between the items. I can tell you from personal experience that the markdowns balance out over the classes over the year.
One of the most common mistakes I see is about gift certificates and donations. Let’s be clear. A gift certificate is a tender type, NOT a markdown. It is when SOMEONE else gives you money to hold until their loved one comes in to use it. However, donations in the form of gift certificates are considered a markdown. The dollar amount used from a “donated” gift certificate should be tracked to an item and class structure to give you the correct maintained markup. The bottom line with “donated” gift certificates is that you are still reducing the price to the customer. You keep track of it so that you can write that donated amount off at the end of the year.
If you are not already doing this, you need to change your thinking (and the way your POS system generates reports). Even erase years of the way you previously looked at your numbers. This method is a more accurate way to look at line item markdowns and will help guide proper EOM reporting and future decision-making. This is how I help you to love your numbers. I am here for you. You most likely have questions about markdowns (if you have them, you can perhaps help others by asking!). Post your questions on Facebook at www.facebook.com/retailmavens and let’s start a conversation. Happy retailing!