Sales Markdown: Definition, Rates, and Calculation
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Do you know how much profit you make from every euro in discounts you offer?
Schedule a meetingCheck out our MarkdownThe markdown is the total of all price reductions applied to the original selling price: promotions, sales, end-of-season markdowns, employee discounts, and loyalty program benefits. When expressed as a percentage of sales, it yields the markdown rate. Since the cost of goods sold remains constant, every euro of markdown represents one euro less in profit margin: this is the only type of markdown that is driven by price.
The Essentials in 6 Questions
The total price reductions granted, in euros and as a percentage.
Sales Management, Management Accounting, Purchasing, Pricing.
Monitored monthly, budgeted by season and by operation.
By marketing strategy (promotions, sales, loyalty programs), category, and store.
Measure the cost of margin discounts.
(Original price − price paid) × quantities, cumulative.
What Is a Markdown?
Any sale made below the original selling price results in a markdown, regardless of the reason for the discount.
| Lever | Examples | Objective |
|---|---|---|
| Special offers | Struck-through price, fixed-price bundle, buy 1 get 1 free, second item half price | Traffic, Volume, Customer Acquisition |
| Sales | Two four-week periods per year, as required by law | Get through the season |
| End-of-season or end-of-life markdowns | Gradual price reduction on a collection; a model has been replaced | Avoiding Unsold Inventory |
| Employee Discounts | Employee discount applied at checkout | Employee Benefit |
| Loyalty | Gift certificates, discounts for cardholders | Retention Rate |
Bundle mechanics also matter: in a “buy one, get one free” (BOGOF) promotion or a fixed-price multi-item offer (multibuy), the discount is calculated based on the entire bundle. Only part of this price reduction is due to markdown—the planned price reduction to clear inventory—while the rest depends on the promotional strategy and loyalty program.
How do you calculate the markdown rate?
We calculate the difference between the initial price and the price paid for each sale, then express it as a percentage of revenue, specifying the basis used.
| Indicator | Formula |
|---|---|
| Sales discount (in euros) | Sum of (initial selling price − price actually paid) × quantities sold |
| Markdown rate, based on the original price | Sales discount ÷ revenue at original price × 100 |
| Markdown Rate, Based on Cash Receipts | Sales markdown ÷ actual sales revenue × 100 |
| Margin after markdown | Theoretical margin at the initial price − markup |
The two metrics coexist depending on the retailer: a 17% markdown on sales at the original price represents approximately 20.5% of actual sales revenue. Comparing two stores or two years only makes sense if the same pricing policy is used. This should not be confused with the promotional rate, which measures the share of sales generated through promotions, not the amount of the discount.
Example of How to Calculate the Markup
A store that generated €1,000,000 in sales at the original price took in €830,000: its markdown amounts to €170,000.
Discounts: €70,000 in sales, €60,000 in promotions, €20,000 in end-of-season sales, €15,000 in loyalty discounts, and €5,000 in employee discounts.
markdown rate, based on sales at the original price.
margin realized instead of the projected €450,000: since the purchase cost remains unchanged, the entire markdown is deducted from the margin.
Sales and promotions account for three-quarters of the markdown here: these two factors are key to generating the bulk of the profits.
Markdown, known markdown, unknown markdown
All three reduce the margin, but only one is intentional and driven by price.
| Type | What It Is | Examples | Lever |
|---|---|---|---|
| Markdown | Voluntary price reductions | Promotions, sales, discounts, loyalty programs | Price, schedule, discount amount |
| Known Markdown | Recorded losses with a known cause | Damage reported, expired products removed, donations | Process, Quality, Forecasting |
| Unknown markdown | Unexplained discrepancy found during inventory | Theft, administrative errors, unreported damage | Audit, Security, Inventories |
Vocabulary varies by industry: in the retail sector, “known shrinkage” sometimes includes recorded price reductions, whereas in the apparel industry, the term “shrinkage” refers solely to markdowns. The useful distinction lies in the cause. Unknown shrinkage is addressed through inventory management and security measures; commercial shrinkage is addressed through pricing decisions.
How can you manage markdowns without eroding your profit margin?
The goal is not to eliminate it, but to generate as many sales and move as much inventory as possible for every euro of discount.
- Budget for the markdown based on sales volume when planning the season, rather than recognizing it at the end of the fiscal year.
- Measuring the incremental impact of each promotion: a discount that doesn't generate additional sales is simply a transfer of profit margin to the customer. See our article on the incremental impact of promotions for more details.
- Sell off inventory early and in stages, based on Sell-through rate, rather than holding out for a big sale at the end of the season.
- Comply with the legal framework: a 30-day reference price for any price reduction announcement (see strikethrough price) and Egalim promotional caps on consumer goods—34% by value for food products and 40% for non-food products—through April 15, 2028.
That is the purpose of our promotions management and markdown features: to simulate, before launching a promotion, the impact of a discount on sales, inventory, and margin, and then compare the results with the forecast.
Frequently Asked Questions
Short answers to the most frequently asked questions about markdowns.
What is a markdown?
The markdown is the total amount of price reductions granted relative to the original selling price. It includes promotions, sales, end-of-season or end-of-life markdowns, employee discounts, and loyalty program benefits. It is expressed in euros and as a percentage of sales; this is the markdown rate. Since the cost of goods purchased remains unchanged, every euro of sales markdown reduces the margin by the same amount. This is the only form of markdown that the retailer determines and controls through pricing.
How do you calculate the markdown rate?
First, the markdown is calculated in euros: for each sale, the difference between the original selling price and the price actually paid is multiplied by the quantities, then totaled over the period. This amount is then divided by total sales and multiplied by 100. The basis varies by retailer: either sales revenue at the original price or actual cash receipts. For a single store, €170,000 in markdowns represents 17% of €1,000,000 in sales at the original price, and approximately 20.5% of €830,000 in cash receipts. The specific method must always be specified.
What is the difference between commercial shrinkage and unknown shrinkage?
A promotional markdown is voluntary: these are price reductions that the retailer decides to offer as part of promotions, sales, or end-of-season clearance. An unknown markdown is unavoidable: it is the difference between the theoretical inventory and the actual inventory count, resulting from theft, administrative errors, or unreported breakage. Both reduce profit margins, but they are not handled in the same way. The former is managed through pricing, timing, and the depth of discounts; the latter through inventory control, security, and the reliability of processes.
What is a known markdown?
Known shrinkage refers to recorded losses of merchandise for which the cause has been identified: reported breakage, expired products removed from sale, damaged items, and donations. It contrasts with unknown shrinkage, which is only discovered during inventory. Depending on the industry, known shrinkage may also include recorded price reductions—that is, promotional markdowns; in the apparel industry, the term “shrinkage” even refers primarily to markdowns. To manage profit margins effectively, it is best to distinguish between losses resulting from pricing decisions and those resulting from physical loss of merchandise.
What is the difference between a promotional markdown and a markdown?
Markdown is a component of the total price reduction: it refers to a planned price reduction—often in stages—to clear out inventory at the end of a season, collection, or product life cycle. The broader concept of “markdown” also includes promotions—which aim to drive foot traffic or volume rather than clear out inventory—as well as sales, employee discounts, and loyalty benefits. Tracking markdown by strategy allows you to distinguish between measures designed to boost sales and those intended to clear inventory, and to evaluate each strategy based on its specific objective.
Are employee discounts and loyalty discounts included in the markdown?
Yes, at most retailers. Any sale made below the original selling price results in a markdown, whether the discount is given to an employee, a loyalty cardholder, or all customers during a promotion. These two items are often underestimated because they do not involve a visible sales transaction and are buried in the sales receipts. Isolating them in markdown tracking allows you to measure their actual cost in terms of margin and verify that it remains consistent with the projected budget.
What is a good markdown rate?
There is no single “ideal” markdown level that applies to all retailers. The markdown rate depends on the industry, the extent of seasonality, the retailer’s promotional strategy, and the calculation method used. A fashion retailer that relies on short-run collections structurally offers more markdowns than a retailer of permanent merchandise. The best benchmark is its own historical data, category by category, and the markdown budget set at the beginning of the season. A markdown rate that drifts without an increase in volume or sales indicates that the discounts are not generating enough revenue.
How can we reduce markdowns?
Reducing markdowns doesn’t mean eliminating discounts, but rather choosing them more carefully. Four strategies are effective: purchasing more accurate quantities based on reliable sales forecasts, which limits end-of-season markdowns; measuring the actual incremental sales generated by each promotion and discontinuing those that don’t drive additional sales; applying markdowns earlier, in small increments, rather than holding a deep clearance sale at the end; and finally, budgeting markdowns by category and tracking them monthly. Simulating a discount before launching it helps avoid offering more than necessary.
Key Takeaways
- Sales discount = sum of (original price − price paid) × quantities, across all channels.
- Markdown rate = markdown ÷ sales, specifying the basis (original price or cash sales).
- This is the only type of pricereduction that is driven by price: budget, incremental, tiers, legal framework.
Would you like to reduce your markdown without losing sales?
Booper simulates the impact of each promotion and discount on sales, inventory, and gross margin before launching it.
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