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It’s a sign of the times: retailers closing stores and drastically marking down merchandise to survive the economic downturn. But the type of markdowns, and how retailers go about them, are different than those seen in past recessions.

National retailers traditionally offered the same prices and identical markdowns to all their stores, whether located inNew York Cityor a small town inKansas. But these very different markets have unique demands, and they can support very different pricing levels. Even withinNew York City, a Banana Republic store in the WorldFinancialCenteroffered a skirt for $39.99, marked down from $69. At the SoHo store, just a few blocks away, the same skirt was priced at $33.99. The markdowns depend on local demand and inventory levels.

Such an approach, rather than slashing prices across the board, can reveal which products need even further markdowns and which should retain their price, according to the demand for the product. Many retailers are investing in markdown optimization software that might increase their pricing sophistication and thereby earn them more profits, even with less sales. Some of the software promises gross margin increases of 4 percent, along with a 15 percent improved sales-to-stock ratio.

Even without fancy software though, some of the pricing decisions seem almost too obvious: The MyMacy’s program offers local promotions and discounts on geographically specific merchandise, such as swimsuits. Markdowns on swimsuits may make sense in September inMaine, but the retailer might still earn almost full prices on such items inFloridain the same month. Using such tactics should become part of retailers’ strategies to institute markdowns while demand persists for the product, rather than waiting until no one even wants to think about swimsuits.

Discussion Questions:

  1. Why do retailers sometimes use different markdowns in different stores?
  2. How do retailers decide which stores should charge which price?

Andria Cheng, “US Retailers Find New Ways to Fine-Tune Discounts,” The Wall Street Journal, July 3, 2009.