ABSTRACT
When selling perishable goods, it may be necessary to carry out price reductions to move inventory. Finding the timing and magnitude of price reductions to maximize revenues are the key points of markdown optimization. In this chapter, the authors focus on what markdown optimization is and how managers can formulate and solve such problems. Markdown optimization is all about finding the optimal timing and magnitude of price reductions for items with a limited time left of their remaining life. Both variable pricing and markdown optimization use the time dimension as a criterion to segment the market. However, an important distinction is that markdown optimization models assume that customers’ willingness to pay is either constant or decreases over time. The markdown optimization problem is about maximizing the total revenues from regular sales in-store over the remaining lifetime, plus the salvage value, by adjusting the price levels for the various periods.
