Retail profitability has faced challenges since its peak in 2021. To counter this trend, retailers are exploring innovative strategies to drive sell-through and enhance profitability. A compelling tactic gaining traction is the shift from traditional markdown strategies to targeted marketing investments.

Why the shift?

Markdowns, while effective in clearing inventory, often erode profit margins. By redirecting a portion of markdown funds into marketing efforts, retailers can potentially achieve higher full-price sell-through rates, leading to increased overall profitability. For example, shifting from 69% of SKUs sold on promotion to just 60% could result in an approximate 1% to 2% uplift in revenues and lift to EBIT, according to Bain’s estimates.

The MAM advantage

On average, over 30% of unplanned markdowns are due to reduced demand, Coresight Research found. A crucial aspect of this approach is utilizing margin accretive marketing (MAM) within the broader retail strategy. MAM empowers retailers to identify specific products or categories ripe for targeted marketing campaigns. This is particularly beneficial for items that:

• Haven’t fully sold through after major events or promotions
• Experience a sales dip following peak demand periods
• Become seasonally irrelevant (e.g., swimwear in the fall)

To determine the suitability of this strategy, retailers should consider:

• Do you consistently have categories that require price reductions due to unsold inventory?
• What are the optimal deal drops (time of year, percentage off, etc.) that were successful in clearing all on-hand stock?
• How do you typically clear seasonally irrelevant items?
• Which categories underperformed in terms of sell-through after peak events?
• How are you leveraging your first-party data and third-party trends to determine how consumer preferences or demand may affect sell-through?

Preemptive planning for profitable holidays with MAM

During the crucial Q4 holiday season, marketing and merchandising executives have a unique opportunity to proactively address potential inventory challenges and maximize profitability. MAM offers a strategic framework to anticipate and mitigate post-holiday markdowns.

Many shopping ads platforms, like Google, allow marketers to understand trends and insights from their promoted products. Alternatively, consider how you may work with inventory and logistics teams to understand pricing, sell-through, promotion thresholds, etc. By integrating MAM into your existing marketing plans, you can:

• Identify high-risk products: Pinpoint items that historically experience slower sell-through after peak events, allowing for preemptive marketing campaigns to drive demand.
• Optimize inventory management: Align marketing efforts with merchandising strategies to ensure optimal stock levels, reducing the need for deep discounts post-holiday.
• Enhance full-price sales: Shift focus from reactive markdowns to proactive marketing initiatives that drive full-price sales during the holiday rush.
• Maintain brand value: Avoid excessive discounting that can erode brand perception and customer loyalty.

Whether or not MAM is currently a core strategy, consider exploring its potential to safeguard profit margins this holiday season. MAM can be particularly effective for multi-category product lines and during specific event periods like tentpole sales or seasonal peaks.

By taking a proactive approach, you can ensure a more profitable and less stressful pre- and post-holiday period.

Setting up for success

Before embarking on this shift, retailers should align on estimated sales uplift benchmarks. Additionally, close collaboration with merchandising and finance teams is crucial to ensure seamless execution and accurate tracking of results.

The shift from markdown funds to marketing presents a promising avenue for retailers to revitalize profitability. By embracing MAM, and carefully targeting marketing efforts, retailers can drive sell-through, enhance customer engagement, and ultimately strengthen their bottom line.

A MAM strategy, especially useful during the Q3 and Q4 holiday periods, aims to increase full-price sales, optimize inventory, and protect brand value by avoiding excessive post-holiday discounting. For more insights on retail check out www.thinkwithgoogle.com.