Markdowns help retailers move merchandise, especially seasonal or fashion items that are unlikely to sell at their full prices anymore. But they also put substantial pressure on retailers, by reducing the revenue they earn on those sales. The problem is even more troublesome if the retailers offer too many and unnecessary markdowns.

The reason for such unwise choices seems closely related to a few related inventory management challenges. First, some retailers simply have poor inventory systems, unsure of how much of a particular product remains in their system, so they offer markdowns in a mistaken belief that they have too much inventory, even when they don’t. Others continue to rely on intuition instead of in-depth analyses to determine when to offer markdowns.

Second, returned products complicate any inventory management system, and return rates have been increasing. Especially when they shop online, consumers appear willing to make multiple purchases, receive the items at home, try them out, and then return anything that does not work. The retailer then is likely to mark down the item, whether because it can no longer be sold as “new” or because the time elapsed for the return means the item is not in high demand or fashionable any more. Notably, return rates are substantially higher for online sales, averaging 15–30 percent depending on the product category, compared with in-store sales, for which they average around 8 percent.

Along with these higher return rates, the growth of omnichannel retailing means that retailers encounter more and more consumers who shop online. That is, more people are ordering, and then more of those purchasers are returning items too. And these shoppers clearly expect the retailers to accept their returns without question. In response, some retailers have sought to offer personalized recommendations, to increase the chances that what customers order will be what they also want to keep. But if a shopper purchases the same pair of pants in several sizes, to determine which one will fit best, there is little a retailer can do but take back the rejected sizes and try to sell them again, likely by marking down their prices.

Discussion Questions:

1. Why are retail markdowns so high?

2. Why are returns so much higher for online purchases than for in-store purchases?