How Low Should Seasonal Discounts Be?

Retailers often mark down seasonal merchandise to clear inventory, but how big should the discount be? An Impact Analytics article describes a clothing retailer that initially discounts winter coats by 20%, observes the resulting sales, and then increases the discount to 35% when inventory remains too high. This is a simple pricing decision in which lowering price sacrifices margin on units that would have sold anyway but generates additional sales. Keep cutting price as long as the marginal benefit from the additional sales exceeds the marginal cost from the lower price.

The pricing calculation can must compare benefits to costs. Selling another coat frees shelf and warehouse space, releases capital tied up in inventory, and avoids being stuck with merchandise that will be worth even less when the season ends. On the other hand, deeper markdowns may damage the brand or teach customers to wait for discounts. Include all the consequences of changing price, including possibly hidden changes in costs. The profit-maximizing markdown isn't the one that clears the shelves; it is the one where the benefit of cutting the price a little further no longer exceeds the cost.