Initial Markup and Markdown in Fashion Retail Business

What is Initial Markup?
Initial Markup is called as IMU which is the difference between the cost and selling price of garment when it is first introduced for sale. It is also called Initial Mark On, Markon or Markup. It’s expressed as a percentage, and the higher the percentage, the more profitable the item is. Initial Markup is widely used in clothing or fashion retail business. The formula for this calculation is:

……………………….Selling price – Unit Cost
Initial Markup = ————————————- x 100
………………………………….Unit Cost

Initial markup is the amount of money, expressed as a percentage of initial cost.

The IMU formula is used to determine the sales price retailers put on an item in a store. For example, a retailer that buys a shirt for $10 from the manufacturer and sells them to customers for $20 has an initial markup is 100 percent.

initial markup in clothing retail business

Initial Markup in Clothing / Fashion Retail Business:
Initial markup is very important in clothing retail business, and is widely used. Initial markup is placed on the garments upon receiving them into the store. It can either be calculated in dollars or in percentage. It is important to bear in mind that this initial markup should be sufficient to cover reductions, expenses, etc. It is marked to obtain the original retail price of the apparel. As it is hard to achieve 100% forecast accuracy in the garment industry, there will be a situation when more garments are ordered than are sold, so some percentage of garments will be put on sales or the prices will be marked down. The discounted price means the retail prices now are less than the original retail price. So to have a decent profit in business, a company will need to put the initial markup high enough to average out the mark-downs, which is given by the formula:

Initial markup = (expenses + profit + reductions) / (net sales + reductions)

What is Markdown in Retail?
We can define markdown is the temporary reduction in the selling price of an item to increase its demand for low-demand products or to drive a competitor out of the market. Markdowns are caused by excess inventory at the end of a selling season.

Markdown in Clothing Retail Business:
Markdown is the discount given by retailers to promote sales of some fashion goods that are not selling fast and stay for a longer period. Markdowns allow retailers to adjust prices in response to competition, overstocking, seasonality, shop-worn merchandise and decreased shop traffic. Although markdown represents a loss of profitability, the inventory is at least converted to cash, which is available as Open to Buy (OTB). Evaluating the causes of markdown is essential for planning and future buying.

The vibrant nature of the clothing business pushes companies to adjust the prices either by increasing or decreasing from the original retail price. Normally, an increase in price does not happen in the clothing retail business, which means reductions in the retail price that was previously set higher. All the garments cannot be sold at the original retail price set by the company, and the downward adjustment of the retail price is known as markdown.

For example, a sweater sold at retail price of $150 and was now sold at $85, perhaps due to being in the warehouse for too long. This lowering of the retail price from $150 to $85 is called mark-down. In this case, the mark-down is of $65. So the company will be gaining lesser profit by selling the garments at this price. The markdown percentage is a function of net sales. Markdowns are also a promotion tool to increase sales.

Purposes of markdown:
There are numerous purposes of markdown, which are as follows:

  1. To encourage the sales of the garments.
  2. Buying error, such as purchasing the wrong styles, designs, etc., which cannot be sold and need to be marked down.
  3. Miscalculation at the time of ordering.
  4. If the demand is low and supply is more.
  5. If the products are not displayed properly and out of the reach of customers.
  6. To compete in the market for the same category.
  7. To provide money to the business to buy more products for next season.
  8. To create seasonal sales, which may include winter ending and summer coming in, or any occasion such as Christmas, birthdays, etc.
  9. To sell slow-moving items because slow-moving items increase the inventory cost.
  10. A high number of returns due to quality issues or other reasons.

The major cause of markdown is buying more quantity than required. In this fast fashion world, it is very difficult to estimate the exact number of garments to be sold, so estimation has to be done, which is known as forecasting. Although forecasting is a scientific discipline, 100% accurate forecasting is not possible as customer’s demand can change at any time.

Other causes may include:

  • Launching the product at the wrong time may adversely affect sales.
  • Longer lead time means the product is not hitting the market on time, and in turn may not be able to be sold.
  • Poor shelving of the garment may destroy it.
  • Careless handling of the garments.

It is very important to decide the timing and amount of the markdown, which is an experienced person’s job. When the stock is not being sold, that means customers are not interested anymore in that style, so markdown may help in getting the customer’s interest back.

You may also like:

  1. What is Garment Costing | Classification of Garment Costing
  2. Factors Influencing Garment Pricing Decisions
  3. Garment Costing Sheet Analysis and Format

Share this Article!

Leave a Comment

Your email address will not be published.