is an exercise that occurs at least three times a year in businesses across
the country. Monst frequently it first happens in the month of January, a second time when spring arrives,
and a third time when fall arrives. For some businesses it seems to be an ongoing event. This event is called a clearance sale.
an example, we went through the exercise of buying merchandise that
we expected our customers would purchase during the holiday season.
When Christmas was over, we looked about the store and saw just how many customers actually came into the shop and purchased
the items we hoped they would buy.
we thought we would sell a dozen of a product that is adorned with
Christmas ornamentation. Unfortunately, only seven customers were
thinking the same way and purchased the product. Now we are left
with five of this item that we can either store away for next year
or mark down in an effort to get them out of the building thereby
getting the cost of the product back into the checking account so
we can purchase something new.
exercise will be repeated in the spring, as we will want to clear
out the unsold winter merchandise, and again in the fall when we
want to clear out the leftover summer merchandise. Ideally, we would
prefer to never have to experience this exercise. We would like
to think that as a buyer we made the correct estimate of sales each
year. Realistically, this is not going to happen.
a positive note, there is nothing wrong with our having these clearance
sales three times a year. Customers have come to expect them, and
properly used they can be a way to invite the public to shop in
your store as well as being a way to reward your existing customers
with some off-price offerings.
these multiple-times-a-year events are uncontrolled and result in massive
markdowns of your leftover merchandise, they can seriously erode
the maintained gross margin in your store. With rising payroll and
other operating expenses, this decrease in margin can spell disaster.
what can we do to not only control this situation, but also to utilize
these events to actually grow our businesses? The answer starts
with our developing a written plan of how much inventory we are
going to purchase in each of the product categories during each
of the seasons.
we are anticipating a great or modest sales increase, stagnant sales,
or even a sales decrease, we must start the process with a plan
of how much inventory it is going to take to create the amount of
sales we are expecting to have.
every store needs to add new products to the selection each year.
This is one of the key ways we persuade customers to come back time
and again. We should set aside from our overall inventory budget
a percentage of those dollars for purchasing these new products.
Even when we go to the show and see 100 new items that we think
will sell, only if we have enough dollars in this "new product"
budget can we afford to purchase all of them.
both the basic and new-product categories, we need to establish
a monthly budget for purchasing. The mathematics of this exercise
is quite simple. Let's consider dog food as a category. For the
month we are anticipating $1,200 in sales. This category has a gross
margin of 35%. Multiply the sales by the reverse of the gross margin.
The answer would be $1,200 multiplied by .65, giving us an answer
of $780. For this month, we need to purchase $780 in inventory to
support the $1,200 in sales.
this formula, we can do several things so our clearance sales will
have the amount of inventory we want to have for clearance as well
as a margin better than what we have been experiencing. Here is
what we can do.
any category of products as an example, let's realistically anticipate
that the merchandise we purchase will have a sell-through rate of
85%. This means that we expect we will sell 85% of the merchandise
at full price. The other 15% is going to be the merchandise that
is left over at the end of the season. If we think this is too much
"left-over" inventory, we need to reduce the amount of
inventory we are initially purchasing.
we decide we are okay with this situation, we then need to look
at the clearance sale plan. We know that we are going to have 15%
of the seasonal merchandise to start with. We could ask our vendors
for their close-out merchandise that we could purchase for the specific
purpose of including it in our "after-Christmas" sale.
this scenario, before the season begins, we have a good idea of
how much inventory we will have in the "after-Christmas"
clearance sale. If this amount appears to be too much, consider
reducing the amount of regular or special-buy merchandise we purchase.
if we have a much larger sell through and find ourselves with nothing
left for the "after-Christmas" sale? We will smile and
enjoy the extra sales and profit. This represents a very different
thought process for having a clearance sale; and if you are tiring
of seeing your seasonal profits sit on the clearance table, you
will do yourself a favor by trying this "planned" clearance
sale for the coming season.