Markdown optimization

Chapter 9 examines the concept of markdown optimization—a pricing strategy designed to determine the optimal timing and magnitude of price reductions for perishable or short-lived products. The chapter begins by distinguishing markdown optimization from variable pricing, emphasizing its focus on continuously decreasing prices to maximize revenues before product expiration or obsolescence. Through a two-period pricing model and extensions to multi-period scenarios, it demonstrates how price segmentation over time can lead to significantly increased profitability. The practical implementation of markdown optimization is detailed through Excel examples. The model takes into account real-world considerations such as demand cannibalization and salvage values. By modeling these scenarios, firms can better manage unsold inventory and make informed pricing decisions.