Markdown optimization

Markdown optimization is the practice of using data, rather than fixed calendar rules like "30% off after four weeks," to decide the timing and size of price cuts on inventory that is not selling fast enough. The goal is to clear stock before it becomes obsolete or out of season while sacrificing as little margin as possible.

Models typically forecast demand at different discount levels using historical price elasticity, remaining weeks of the selling season, current sell-through rate, and stock on hand, then recommend a markdown schedule, sometimes with multiple discount steps, that maximizes expected revenue or margin recovered rather than simply guessing a round-number discount. This differs from everyday dynamic pricing, which continuously adjusts prices in response to real-time demand and competitor pricing; markdown optimization is usually a scheduled, end-of-life clearance decision for a defined batch of stock.

Retailers rely on markdown optimization because unsold seasonal or perishable inventory loses value quickly, and both over-discounting and under-discounting are costly: cutting price too early gives away margin unnecessarily, while cutting too late leaves stock unsold. It works closely with inventory turnover targets and is a common source of tension between merchandising, which wants healthy margins, and operations, which wants shelf and warehouse space freed up.