Markdown depth: how far to cut before you're just writing the inventory off

The deepest defensible markdown is the one that leaves you more gross profit than holding the stock, and that is almost never deeper than 40% — on most retail cost structures, a 50% cut requires four to six times the unit volume to break even, which is a volume no slow seller has ever produced. So the working rule is: step down in 20/30/40 rungs across age bands, stop at whichever comes first, the cost floor or the point where required volume becomes fiction.

That's the short answer. What follows is the arithmetic behind it, the floor rule that ends the ladder for thin-margin items, and a depth-by-age table you can copy onto your own SKUs this week.

Depth costs margin dollars, not percentage points

The instinct is to read a 30% markdown as "30% off profit." It isn't. Margin per unit falls by the full discount amount, so on a lower-margin item the same percentage cut eats a far larger share of what you keep. The number that governs is the break-even multiplier:

Break-even multiplier = full-price margin ÷ discounted margin

It tells you how many units the discounted price must sell to produce the gross profit full price would have produced. Three properties make it the only chart you need:

• It runs on dollars. A 60% margin and a 35% margin react completely differently to the same 30% cut, because the multiplier divides by the absolute margin left over.
• It grows non-linearly. The step from 0% to 20% is usually cheap; the step from 40% to 50% can double the requirement, because there's very little left to divide.
• It's the honest test of "will this discount work?" If the multiplier demands 4× volume from an item selling 0.3 units a week, no amount of clever merchandising delivers it.

If margin and markup get tangled anywhere in your math, the whole ladder below runs on margin (price minus cost) — margin versus markup untangles the two, and mixing them turns every rung into a surprise.

The multiplier table

Hiking socks: cost $6.50, retail $19.00, gross margin $12.50.

A 20% markdown needs 1.4× the volume — plausible for something merely slow. A 50% markdown needs 4.2× — implausible for something already failing at full price. A 60% markdown needs 11.4×, a rounding error dressed as a strategy.

Now the same ladder on a yoga mat: cost $18.00, retail $45.00, margin $27.00. A healthier 60% margin looks like protection, and isn't:

−40%: price $27.00, margin $9.00 → 3.0× −50%: price $22.50, margin $4.50 → 6.0×

Six times the volume on a bulky item with real storage cost. High margin percentage doesn't protect depth, because a big absolute discount ($22.50 here) consumes most of the margin in one move. Deep rungs are survivable only on high dollar-margin items — and even then, only when the volume actually materializes.

The floor: where a rung becomes a write-off

The floor is unit cost. A stricter floor — cost plus variable selling costs plus a minimum contribution — is the one to use when you're deciding policy rather than rung maths; that version is worked in clearance pricing by unit economics. Where the two disagree, the stricter one wins. Below it you are not discounting, you are realizing a loss — the same loss a write-off would record, but routed through the storefront and with the added cost of the sale badge. Two worked cases show how quickly the floor arrives:

STA-NB-A5 notebook. Cost $9.00, retail $14.00, margin $5.00 (36%). A 30% markdown prices it at $9.80, leaving $0.80 and demanding a 6.3× multiplier. A 40% markdown prices it at $8.40 — sixty cents underwater. For this SKU, rung three doesn't exist. A ladder that includes it is laundering a write-off into a "sale."

CANDLE-8OZ. Cost $4.20, retail $16.00, margin $11.80 (74%). At 40% off, $9.60, margin $5.40, multiplier 2.2× — genuinely climbable. At 50% off, $8.00, margin $3.80, multiplier 3.1× — still above cost, still possible if the item is high-velocity. This is what a product with room to move looks like.

So the floor test isn't "is this under cost?" alone; it's two questions: is the price above cost, and is the margin left big enough that the required volume is in a range this SKU has ever achieved? A product that never exceeds 6 units a week doesn't get a rung that needs 25.

Depth by age: the table

Age sets the ceiling on depth, margin sets the floor, and the rung is whatever the single value is — never both at once.

And the override: use whichever is more conservative, this table or the cost floor. A 40% rung on the notebook above is both the table's answer and underwater, so the answer is "no rung." A 40% rung on a 74%-margin candle is the table's answer and comfortably above cost, so it stands.

One honest note on the 300+ row: deep discounts don't stop working there, they stop being worth the calendar time. A 60% cut that takes five months to clear usually loses to a bulk lot that clears in two weeks, because space and attention are worth something too. The ranked exit tactics are in how to get rid of dead stock.

Worked ladder on one SKU

A wool throw: 90 units, cost $22.00, retail $68.00, margin $46.00 (68%). Oldest stock is 170 days. All figures illustrative.

Against $1,980 of cost, that's about 90% recovered, $1,353.60 of it from the three priced rungs. Note what the exit lot did: 35 units, the stubborn tail, cleared in two weeks for $420 — where a fourth rung at $27.20 would have recovered more per unit but taken a quarter to shift a fraction of them. The tail of any distribution needs a bulk exit, not a deeper rung.

Also note what the ladder didn't do: it never went below $40.80, comfortably above the $22.00 floor. There was room to go deeper and it wasn't needed — the point of starting shallow. Every unit sold at rung 1 would have gone for $6.80 less if you'd opened deep.

When to skip rungs

The ladder maximizes margin; sometimes margin isn't the scarce resource.

• When the multiplier is fiction. If a rung demands volume the SKU has never approached, skip to the exit. Waiting three weeks to confirm what the velocity history already told you is a way of paying rent for certainty.
• When the item dates. Seasonal goods, holiday packaging, and anything with a best-by lose value on a calendar date, not by degree. A ladder that runs out of weeks is a donation with extra steps — see donating inventory and, for date-coded goods, short-dated stock.
• When storage is the constraint. A bulky item holding shelf space a bestseller needs can be worth exiting above the ladder's best case, because the space earns more than the discount saves.

Setting a rung up in Shopify, without compounding it

Mechanically, a rung is either a compare-at price plus a sale price on the product (the storefront shows the struck-through anchor), or a discount with a start and end date. The failure to watch for is stacking: a 20% code landing on top of an existing 30% sale produces a 44% effective depth you never chose and can't see in either setting. Before publishing a rung, check what else is live on that product — automatic discounts, collection-wide sales, and bundle pricing all interact.

If you're running several rungs at once across a clearance list, the bookkeeping is where it breaks down — which is the narrow job our app does: ClearStock applies rule-based discounts with a cap you set, logged and reversible, so each rung has a recorded start and stop rather than a forgotten sale price.

For the broader sequence — which SKUs enter the ladder, in what order, and how the ladder relates to bundles and liquidation — the surrounding decisions are covered in the Shopify markdown strategy and clearance pricing.

Common questions

What percentage should I mark down? Start at 20% and let the break-even multiplier set the next rung. The multiplier is full-price margin divided by discounted margin: on a $19 item with $12.50 of margin that's 1.4× at 20% off, 2.6× at 40%, and 4.2× at 50%. Most slow sellers can deliver 1.4×; very few can deliver 4×.

How do I know when a markdown goes below cost? Compute price minus cost at each rung, not the percentage off. A $14 notebook costing $9.00 is underwater at 40% off ($8.40); a $16 candle costing $4.20 still has $3.80 of margin at 50% off. Below cost you're realizing a loss through the storefront rather than recording a write-off.

Is a 50% off sale profitable? Only on high-dollar-margin items that can plausibly sell four to six times their normal volume. For a $45 item with $27 of margin, 50% off leaves $4.50 and requires 6× volume — usually impossible for a slow seller. For a $16 item with $11.80 of margin, 50% off leaves $3.80 and requires 3.1× — plausible if velocity responds.

Should I mark down once deeply or step down gradually? Step down, unless time is the binding constraint. Each rung catches buyers who would have paid the higher price, so starting shallow preserves margin on units you'd otherwise have given away. Cut once and deep when the item dates, storage costs are heavy, or the space is needed for something that sells.

How long should each rung last? Two to three weeks. Long enough for the audience to see it — a home-goods store's repeat customers don't visit daily — and short enough that a failed rung doesn't quietly become the new price. Fixed start and end dates also create the urgency a rolling discount never generates.

Next step: take your ten oldest SKUs, look up cost and retail for each, and compute the 20% and 40% multipliers side by side. The SKUs whose 40% multiplier exceeds their best-ever weekly sales multiple don't have a ladder — they have an exit, and knowing that in ten minutes saves a quarter of guessing.