Markdown Impact on Apparel Margin: How Gross Margin Changes

Every example and amount on this page is illustrative. It shows the method and is not a benchmark, a quote or advice.

What the margin impact actually measures

Markdown impact is the gross margin lost because an item sells below its original planned selling price. The comparison is between the margin the item would have generated at the planned price and the margin generated at its actual selling price. It is a price effect, not simply the difference between this month’s gross margin and last month’s.

Keep the unit effect separate. A lower price may produce more orders, so total gross profit can increase even while gross margin per unit falls. That additional profit comes from volume, not from the markdown itself. Conversely, if units sold decline, the resulting loss should not be assigned to the markdown without evidence that the lower price caused it.

Cost also needs to remain visible as its own variable. If a product’s landed cost changes, the margin change includes a cost effect as well as a price effect. The cleanest assessment holds units and product cost constant while isolating the gap between the planned and actual selling prices. Discount Impact on Margin: How Discounts Change Gross Margin covers this distinction in more detail.

Returns and cancellations change which sales count. A returned or cancelled order should not be treated as completed revenue when measuring realized margin. Refund value, returned units, and any recoverable or unrecoverable costs should be reported separately from the initial price reduction. This prevents a high-return product from appearing to have a markdown problem when the larger issue is post-purchase leakage.

Selling fees are separate again. Payment processing, marketplace charges, and advertising do not belong in gross margin; they affect contribution or net profit. Include them when judging the economic result of a promotion, but do not label their movement as markdown impact. This keeps gross margin and net margin answering different questions, as explained in Gross Margin vs Net Margin in Ecommerce.

The calculation in plain English

Use the same landed product cost in both scenarios. Landed cost should include the product cost and any directly attributable inbound costs you include in your gross profit model. Let original revenue be the original selling price multiplied by units, and markdown revenue be the reduced selling price multiplied by units.

The original gross margin is the gross profit at the planned price divided by original revenue. The markdown gross margin uses realized markdown revenue and the same landed product cost. These are margin percentages, not the percentage discount applied to the price. A 20% markdown does not automatically mean a 20-point margin loss.

Margin-point change is the markdown margin minus the original margin. A negative result is the number of percentage points of margin lost. Keep this separate from the dollar impact: a small percentage-point change on a large volume can produce more lost gross profit than a larger change on a small volume.

For a like-for-like comparison, total gross profit impact is the markdown gross profit minus the original planned gross profit for the same units. Because landed cost is unchanged, this simplifies to the price reduction multiplied by units sold. If the number of units differs between scenarios, calculate each scenario's total gross profit separately; the difference then includes both markdown and volume effects. That distinction matters when evaluating whether a lower price improved sell-through rather than measuring price impact alone. For the related distinction between discount rate and margin effect, see Discount Impact on Margin: How Discounts Change Gross Margin.

• Original gross margin = (original revenue − landed product cost) ÷ original revenue
• Markdown gross margin = (markdown revenue − landed product cost) ÷ markdown revenue
• Margin-point change = markdown gross margin − original gross margin
• Total gross profit impact, same units = markdown gross profit − original planned gross profit = markdown revenue − original revenue

A worked apparel example

Take a garment with a planned retail price of $120 and a landed unit cost of $38. The planned gross profit is $120 − $38 = $82 per unit, giving an 82 ÷ 120 = 68.3% gross margin.

Assume the merchant buys 100 units. Sixty sell at the original price, 30 sell at a reduced price of $84, and 10 remain in inventory. At $84, gross profit is $84 − $38 = $46 per unit, or 46 ÷ 84 = 54.8% gross margin.

The markdown reduces gross profit by $82 − $46 = $36 per affected unit. For the 30 units sold at $84, the dollar impact is 30 × $36 = $1,080. The price reduction is 30%, but the margin percentage falls by 68.3% − 54.8% = 13.5 percentage points. Those are different measures: the first describes the price cut, the second describes margin rate, and the $1,080 describes lost gross profit.

The 10 unsold units are not yet realized revenue or markdown impact. They remain $380 of inventory at cost (10 × $38). If they later sell at $84, they add $840 of revenue and $460 of gross profit, while creating another $360 of markdown impact versus selling those units at $120. This keeps the calculation tied to actual unit outcomes rather than treating remaining stock as sales.

The inputs that make the answer wrong

The first error is using MSRP or the catalogue price instead of the price customers actually paid. If a $120 garment sells for $90 after a markdown, a $38 cost produces $52 gross profit and a 57.8% gross margin. Using $120 would report $82 and 68.3%, overstating both dollars and percentage. Use the realized selling price after discounts, coupons, and partial refunds.

Cost is also easy to understate. If the factory invoice is $30 but duties are $4 and inbound freight is $3 per unit, the relevant cost is $37, not $30. Leaving out those costs makes the markdown appear more profitable than it is. Keep the cost definition consistent across the full-price and markdown scenarios; landed cost is not interchangeable with product invoice cost.

Returns and fees require a clear margin boundary. A returned unit is not delivered revenue, and a $90 sale with a $9 payment or marketplace fee does not leave $90 available after selling costs. Decide whether the comparison is gross margin or a broader contribution measure, then include the same categories on both sides. Gross margin and net margin answer different questions, while contribution margin can include costs below gross profit.

• Check the unit: per garment, per pack, per order, and per case can produce different answers. Do not compare a per-unit cost with an order-level selling price.
• Keep currencies and tax treatment consistent. A price in dollars cannot be compared with a cost in euros or with a tax-inclusive price without conversion and adjustment.
• Control the mix before comparing periods. A full-price comparison for one SKU and channel is not valid against a markdown period dominated by outlet sales, wholesale orders, different sizes, or different products.
• Reconcile the calculation to delivered units, refund value, and the product or collection being measured. Otherwise, a change in returns or channel mix can look like a markdown effect.

When selling through beats holding price

A markdown is preferable when its gross profit exceeds the profit you are likely to retain by holding the units, after accounting for time and risk. Compare complete scenarios, not just today’s unit margin. For illustration only, 100 garments cost $38 each. Clearing all 100 now at $90 produces $5,200 in gross profit: 100 × ($90 − $38). If holding the stock means 60 sell at $90 and the remaining 40 sell later at $60, the gross profit is $4,000: 60 × $52 + 40 × $22. Holding has already reduced gross profit by $1,200 before storage, handling or financing costs.

Sell-through is the key variable. A higher price only wins if the additional margin per unit is greater than the gross profit lost on units that do not sell, plus the cost of carrying them. Include warehouse charges, insurance, capital tied up in inventory and any extra handling. If the item is seasonal, the relevant comparison may be a sale before demand fades versus a deeper reduction after the season, when the later price is less certain and the stock may compete with new arrivals.

Also model the liquidation outcome explicitly. If 40 units held for another month are eventually sold at $25, each produces a $13 gross loss against the $38 cost, before disposal or handling costs. That risk can make a smaller reduction rational even when the current full-price option appears more profitable. For a broader decision, pair this gross-profit comparison with ecommerce contribution margin, since advertising, returns and fulfilment can change which option generates more cash after variable costs. ORVX can show remaining stock value and dead stock alongside product profitability, but it reports the scenarios; it does not change prices or liquidate inventory.

How to use the result in planning

Use the markdown impact at each rung of the price ladder, not only at the final sale price. For illustration only, if a $100 item costs $40, a 20% markdown reduces gross profit from $60 to $40 per unit. If the rung is expected to sell 80 additional units, it gives up $1,600 of gross profit versus full price, so the decision must rest on the expected sell-through and the cost of holding the stock. The same logic applies to the next rung: calculate its incremental units, gross profit and remaining inventory rather than assuming a deeper discount is automatically better.

For SKU decisions, compare the markdown loss with product-level profitability, remaining stock value, dead stock and return rate. A SKU can have an acceptable gross margin but still destroy contribution after advertising or tie up cash in inventory. Review collection-level results as well, since a weak SKU may be subsidised by stronger products. Ecommerce contribution margin provides the framework for bringing those costs into the decision.

Build forecasts as scenarios: hold price, take the first markdown, or move to the next rung. Show revenue, gross profit, net profit and inventory remaining for each scenario, and label the assumptions clearly. A forecast should describe what the arithmetic implies under those assumptions, not promise that a price change will produce a particular demand response.

After the promotion, review delivered units, realized revenue, gross profit, contribution after advertising, refund value and repeat behaviour against the plan. Finance and merchandising should inspect MER and attributed ROAS separately, along with sell-through and stock value. This post-promotion review identifies whether the markdown solved excess inventory or merely exchanged revenue for lower-quality profit. See Discount Impact on Margin for the related discount analysis.

A markdown is not automatically harmful if it converts aging inventory into more gross profit, cash, or useful selling capacity. Calculate the margin change at SKU level, use fully loaded costs, and compare the result with the realistic cost of waiting before approving the price cut.

General information only: tax, duty and import rules change and depend on your situation, so check with an accountant or the official source before acting.