How to use markdowns to manage stock throughout the Product Life Cycle

Any e-commerce seller knows how tricky markdowns can be. You don’t want to markdown stock too early when it could be selling at a higher price, but you also don’t want to markdown too late and end up with old stock you can’t sell. There’s no one-size-fits-all solution for this challenge, but aligning markdowns with your life cycle strategy is a great way to maximise sales and minimise leftover inventory, all without sacrificing margin. Here’s Omnia’s recommendation for how to do it.

An overview of life cycle strategy

The Product Life Cycle (PLC) refers to the stages that a product typically goes through, from its initial introduction to the consumer market to its eventual decline. These stages help e-commerce businesses understand how to manage a product's marketing, pricing and inventory strategies over this cycle. 

The PLC is usually broken down into four stages:

1) Introduction

• Characteristics: This stage begins when a new product is introduced to the market.
• Marketing Focus: The primary focus is on creating awareness and generating initial interest in the product. Marketing efforts may include online advertising, social media campaigns and influencer marketing.
  

• Pricing: Prices are often set competitively to attract early adopters and build a customer base.
• Inventory: Inventory levels are usually low to test the market's response and prevent overstocking.

2) Growth

• Characteristics: In this stage, the product gains popularity, and sales begin to increase rapidly.
  
• Marketing Focus: The emphasis shifts to expanding market share and customer acquisition. Marketing efforts may involve scaling advertising campaigns and targeting a broader audience.
  
• Pricing: Prices may remain stable or even increase if demand is strong.
• Inventory:  Inventory levels may need to be increased to meet growing demand, but careful management is essential to avoid overstocking.

3) Maturity

• Characteristics: Sales growth stabilises, and the product reaches a saturation point in the market.
• Marketing Focus: Marketing efforts aim to maintain market share, differentiate the product from competitors and retain loyal customers; for example, product updates, loyalty programs and customer engagement.
• Pricing: Prices may become more competitive as the market matures and more alternatives become available.
• Inventory:  Inventory management becomes critical to prevent overstocking.

4) Decline

• Characteristics: Sales start to decline, often due to market saturation, changing customer preferences or the introduction of newer products.
• Marketing Focus: The focus shifts to clearing out inventory, possibly through stock markdowns, promotions or bundle deals. Discontinued products may be phased out.
• Pricing: Prices are typically reduced to encourage remaining inventory to sell.
• Inventory: Careful inventory management is essential to avoid excessive carrying costs for unsold products.

It's important to note that not all products follow this linear path through the entire product life cycle. Some products may skip certain stages, experience shorter or longer cycles or even go through cycles repeatedly due to updates and rebranding. Think of a product like Coca-Cola, which has been around since 1886. The product has gone through many iterations and experienced a close call with the decline stage and product death when the company rebranded and changed the formula to “New Coke” in 1985 – this only lasted 110 days before reverting to the original formula. 

As professor Hermann Simon points out: '' And the real art of pricing is not so much in determining whether a price is high or low but to differentiate pricing across customers across value across space and time. That will be a big challenge for software and for everybody involved in this area.'' 

Effective product life cycle management involves continuously monitoring market dynamics, being agile in responding to changing customer needs and competitive pressures and adjusting strategies accordingly – for instance, by aligning markdown strategy with where a product is in the PLC.

Folding stock markdowns into the PLC

Many retailers and brands think of markdowns as a loss centre that can’t be avoided. But while poor planning and product failures can certainly force markdowns, they can also be planned for in advance and used in combination with PLC strategy to manage assortment levels through their lifetime. The goal of this strategy has two parts: To ensure the site does not sell out of specific products too early and to avoid being left with a lot of overstock. This strategy is relevant for all e-commerce sellers who hold inventory, but it’s especially important for D2C customers.

What do PLC markdowns look like in practice?

Here’s a hypothetical scenario to illustrate this idea. The Fashion Store has a sweater for the spring collection, which they will stop selling in August. There are a few ways they can combine markdowns with the PLC strategy here:

• Tag the product based on its life cycle stage (introduction, growth, maturity, decline or simply new, regular, old) and markdown based on this tag
• Connect the age of the item in days to the life cycle stage and markdown based on this age
• Use the stock level as an additional variable next to PLC in a markdown strategy
• Add Sell Through Rate as a variable to steer price increases
• Add average margin calculations to steer price decreases; for example, when pricing competitively

Let’s say The Fashion Store defines its markdown strategies based on the life cycle stage. When the product is new and has a lot of stock left, they can keep the following position 3 in the market.  If it is new and low on stock, they can continue pricing at the recommended retail price (RRP), as it’s better to price less competitively to achieve more margin and avoid selling out.

As the product hits the next life cycles, The Fashion Store can slowly decrease the price based on current stock levels of the sweater. In the last stage (decline), a competitive price (match, undercut or follow cheapest market price) should be set – particularly if the product still has high stock at the end of its life cycle.

Using additional variables in the strategy like margin calculations, Sell Through Rate and stock gives them the ability to dynamically switch between higher and lower prices, between highly competitive and minor discounted prices.

Results: This strategy helps The Fashion Store avoid having high stock leftover by the end of the product’s lifetime. Because of this, they also can avoid a situation where they must significantly decrease the price all at once, by perhaps 50 – 70%, and instead have marginal, healthier decreases over time.

Strategic markdowns can actually increase profitability

Research from US retail think tank Coresight and inventory optimisation firm Celect found that retailers were missing out on significant revenues – 12% of total sales – due to markdowns. The “senior retail decision makers” who were surveyed blamed more than half (53%) of those unplanned markdowns on “inventory misjudgments.”

But when sellers have proper inventory management and plan ahead to use markdowns as part of the PLC, it positively impacts sales and profitability. Let’s go back to The Fashion Store example and consider hypothetical prices: If the sweater we discussed has a cost of goods sold (COGS) of €25 and a retail price of €50, and the company has ten of them, then they would need to sell at least five at full price to break even. 

However, if The Fashion Store was able to choose the right level of markdown and sell all ten at the lower price, then they would achieve three objectives: 

1. Reach break even point
2. Increase profits with each item sold
3. Avoid unsold stock
   
   

In this example, the right markdown price would be €40, as this would lead to a profit of €110.

How to implement markdowns using Omnia

This example is just one of the countless ways markdowns can be used to optimise stock at each stage of the PLC. But it doesn’t stop there – along with stock levels, a number of other data points can be used in Omnia to determine pricing throughout a product’s life cycle:

Below are some use case examples of how Omnia customers have combined the PLC with metrics like time since launch, stock levels, seasonality and promotional dates to set pricing rules.

To learn more about how you can incorporate markdowns as a part of your pricing strategy, click here.