Markdowns based on Opportunity Costs : Breakthrough C&A's Secret Formula Re-discovered Chapter 8.

Markdown suggestions based on

Opportunity Costs

What is the Opportunity Cost of not marking down a certain style now?

What space can be used for other more profitable styles if a style is marked down, sells faster and thus space is freed up during the coming weeks?

In the space where the stock would have been, you can sell other articles.

Even if a style is going to sell 100% of its stock at full price, you might want to mark it down and even sell it with 0% BCP to free up space for more profitable articles. In the past, for example, C&A marked down Low price classifications selling at a certain TOS but not High price articles that were selling at the exact same TOS.

An algorithm can be set up to calculate the total Opportunity Cost of selling an article without marking down, and be compared to the Opportunity Cost after a markdown.

Total Opportunity Cost = Opportunity Cost / piece / week x

Area used

Opportunity Cost per piece per week = Average Contribution

- style’s Contribution

Area used = 1/2 x present stock level x weeks cover

Consider the Example*  style from the report. Unchanged

Opportunity Cost = €2 x ½ x 500 x 20 weeks = €10.000.

 

After marking it down to its Buying Price (BCP% = 0) the article itself would not earn any margin, but might sell in 4¼ weeks instead of 20 weeks. Based on predictions of price elasticity the Opportunity Cost after markdown = €2,34 x ½ x 500 x 4,27 weeks = €7.500. Marking down the Example* style to cost will increase Net Profit by approximately €10.000 - €7.500 = € 2.500.

Based on a database of markdowns done in the past and the subsequent changes in TOS,  a computer algorithm should be able to predict how any article of a certain classification will sell if marked down 20, 30, 50 or 70%.

 

The algorithm could be used to optimize markdowns to minimize Opportunity Costs while ensuring there is no stock left at the end of the season. This should result in articles only needing to be marked down once, thereby eliminating the handling costs associated with repeatedly marking down an article by an insufficient amount.

Setting up a system to suggest markdowns would be significantly more complex than the first two suggestions proposed here.