A retail markdown is a permanent or temporary reduction from an item's original selling price, used to sell through inventory before it loses more value. The markdown formula is simple: markdown percentage = (original price − sale price) ÷ original price × 100. The strategy is deciding when to mark down, how deep to go and how much markdown to plan before you ever place the order.
I am Carina Hatton, boutique owner since 2013 and ecommerce coach since 2019. I treat markdowns as a buying tool, not an emergency. This guide covers the markdown math and the planning around it. If you want the calculation done for you, use the markdown calculator. All figures here are hypothetical examples, not benchmarks.
The retail markdown formula
Four short formulas cover almost every markdown decision a boutique makes.
Markdown dollars = original price − sale price
Markdown percentage = (original price − sale price) ÷ original price × 100
Sale price = original price × (1 − markdown percentage)
Margin after markdown = (sale price − unit cost) ÷ sale price × 100
Hypothetical example: a dress with a $20 landed cost is priced at $60. You mark it down to $42.
- Markdown dollars: $60 − $42 = $18
- Markdown percentage: $18 ÷ $60 × 100 = 30%
- Original margin: ($60 − $20) ÷ $60 = 66.7%
- Margin after markdown: ($42 − $20) ÷ $42 = 52.4%
Notice the margin does not drop by 30 points. It drops by less, because the cost stays the same while the price falls. That also means each additional markdown hurts more than the last.
Markdown vs markup
Markup is what you add to cost to set the original price. Markdown is what you take off the original price later. They are calculated on different bases, markup on cost and markdown on retail, so they do not cancel out. A 100% markup followed by a 50% markdown brings you back to cost. For more on setting the starting price, see my retail pricing guide.
Markdown rate for a period
Retailers also track markdowns across a month or season, not just per item:
Markdown rate = total markdown dollars ÷ net sales for the period × 100
Hypothetical example: you sold $20,000 in a month and gave away $2,400 in markdowns and discounts. Your markdown rate is 12%. There is no single right number for every store. What matters is tracking yours month to month and seeing whether it is creeping up, which usually points to a buying problem rather than a pricing problem.
Types of markdowns
| Type | What it is | When it fits |
|---|---|---|
| Permanent markdown | The price is lowered for good | Aging or broken-size stock you want gone |
| Promotional markdown | A temporary price cut for an event or weekend | Traffic building, with full price returning after |
| Clearance markdown | Deep final reductions to exit stock | End of season or dead stock |
| Customer-specific discount | VIP, loyalty or first-order offers | Rewarding customers without a store-wide sale |
When to take the first markdown
The best time to decide your markdown timing is when you buy. The best signal once product is on the floor is sell-through. Check sell-through rate at set points after arrival, for example two, four and six weeks, and compare each style with others that arrived at the same time.
- Selling ahead of plan: hold full price and consider a reorder.
- On plan: hold price and keep it well displayed.
- Behind plan: re-merchandise first, then take a first markdown if it still lags.
- Far behind, late in the season: go deeper and move it to clearance.
Early, modest markdowns usually recover more cash than late, deep ones, because the product is still in season and customers still want it. Waiting until the end of the season often forces a bigger cut on stock that is worth less.
How deep to go
I use a stepped cadence and set the steps in advance so I am not making the call emotionally. A hypothetical cadence:
| Step | Trigger | Markdown | Price on a $60 item |
|---|---|---|---|
| First | Behind plan at four weeks | 25% | $45 |
| Second | Still behind two weeks later | 40% | $36 |
| Final | End of season | 60% | $24 |
Those percentages are an illustration, not a rule. Your steps should come from your own margins and history. Before each step, check the margin after markdown and your fees, and set a floor below which you would rather bundle, sell in bulk or donate. The markdown calculator can solve for the deepest discount that still hits your minimum margin.
Plan markdowns into your buying budget
Some product will always need a markdown. If your plan assumes every unit sells at full price, your margin will disappoint every season. Build an expected markdown allowance into two places:
- Your pricing. Leave room at the opening price so a planned markdown still leaves a workable margin. My profit margin calculator helps you test that.
- Your open-to-buy. Planned markdowns are part of the open-to-buy formula. Leaving them out overstates how much stock value you will have and leads to overbuying.
Use your own markdown rate from past seasons as the starting estimate. If you are new and have no history, start conservatively and adjust after your first full season.
How to mark down without training customers to wait
- Mark down specific styles, not the whole store.
- Keep sale product in one clearly marked area.
- Keep new arrivals at full price and in the front.
- Avoid predictable store-wide sales on the same dates every month.
- Use bundles or gift-with-purchase where they protect margin better than a straight discount. My boutique sale ideas guide lists options.
How to know if your markdown strategy is working
| Metric | What it tells you |
|---|---|
| Markdown rate | Whether markdowns are growing as a share of sales |
| Sell-through after markdown | Whether the step was deep enough to move product |
| Gross margin | Whether markdowns are eroding overall profit |
| Inventory turnover | Whether cash is recycling faster. See the inventory turnover calculator |
| Aged stock | Whether old inventory is shrinking month to month |
These fit into a wider monthly review. My boutique KPIs guide shows which numbers to check together, and retail math formulas has the other core formulas in one place.