A markdown is a reduction from an item’s original selling price, most commonly used in retail to move inventory faster. Sales, clearance deals, and coupon-driven discounts are all forms of markdowns. The term also has a separate meaning in finance, where it refers to the spread a broker-dealer takes when buying a security from a customer below market price. Here’s how markdowns work in both contexts and how to calculate them.
How Retail Markdowns Work
When a retailer lowers a product’s price tag, that reduction is a markdown. A jacket originally priced at $120 that gets marked down to $84 has taken a 30% markdown. Retailers use markdowns to clear out inventory that isn’t selling fast enough at full price, whether because the season is ending, a newer model has arrived, the product is damaged, or it’s approaching its expiration date.
Markdowns can be temporary or permanent. A temporary markdown might be a weekend flash sale where everything is 25% off, then prices return to normal on Monday. The limited window creates urgency for shoppers. A permanent markdown is what you see on clearance racks: the price drops and stays down, often getting cut further over time until the product sells out. Retailers that wait longer to mark items down tend to offer steeper discounts as the season progresses, betting that early buyers will pay closer to full price rather than risk the item selling out.
Markdowns vs. Discounts
In everyday conversation, “markdown” and “discount” are interchangeable. In retail operations, though, there’s a useful distinction. A markdown applies to the product itself: the price tag changes for everyone. A discount applies to a specific group of shoppers: military members, seniors, loyalty program participants, or customers with a coupon code. The reason for the price reduction is tied to who the buyer is, not to the product’s lifecycle.
This distinction matters for how a store tracks profitability. A markdown changes the expected revenue for that item across the board, while a targeted discount affects revenue only for qualifying transactions.
How to Calculate a Markdown
The math is straightforward. You need two of three values: the original price, the sale price, or the markdown percentage.
- Markdown amount: Original price minus sale price. A $200 item selling for $150 has a $50 markdown.
- Markdown percentage: Divide the markdown amount by the original price, then multiply by 100. That $50 reduction on a $200 item is a 25% markdown ($50 ÷ $200 × 100).
- Sale price from a known percentage: Multiply the original price by (1 minus the markdown rate as a decimal). For a 25% markdown on a $200 item: $200 × (1 − 0.25) = $150.
How Markdowns Affect Profit
Retailers build their original prices to cover the wholesale cost of the product plus overhead expenses like rent, labor, and shipping, with a margin left over for profit. When an item gets marked down, that profit margin shrinks. If the markdown is deep enough, the sale price can dip below the total cost of stocking and selling the item, meaning the store loses money on each unit sold.
Sometimes that’s intentional. A loss leader strategy involves selling a specific product at a loss because the retailer expects customers to buy other full-price items once they’re in the store or on the website. Grocery stores do this regularly with staples like milk or eggs.
Even when per-unit profit drops, markdowns can increase total profit by moving a higher volume of product. A 48-hour sale that cuts margins in half but triples the number of units sold leaves the retailer better off overall. Some retailers plan for certain products to be perpetually “on sale,” building their cost structure around the discounted price from the start so the sale price is the real price, and the “original” price is largely a reference point.
Markdowns in Financial Markets
In securities trading, a markdown has a different meaning. It’s the difference between the highest current bid price for a security among dealers and the lower price a dealer actually pays a customer who is selling. Think of it as the dealer’s built-in fee on your side of the transaction when you sell bonds or other securities through a broker-dealer acting as a principal (buying the security for their own inventory rather than matching you with another buyer).
For example, if the best market bid for a municipal bond is $1,000 and a dealer buys it from you for $980, that $20 gap is the markdown. It works like an invisible commission: you don’t see a separate fee line item, but you receive less than the prevailing market price.
FINRA, the self-regulatory body that oversees broker-dealers, has a “5% Policy” that serves as a guideline for fair pricing. Markdowns above 5% are generally considered unreasonable, though they can be justified depending on market conditions, the type of security, and the size of the transaction. The 5% figure is a guide, not a hard rule, and even markdowns below 5% can be flagged as unfair if they form a pattern or aren’t reasonably related to current market prices.
For fixed-income securities sold to retail customers, firms are required to disclose markdowns in certain situations, such as when they offset the trade with other principal trades in the same security on the same day. Outside of those scenarios, disclosure requirements are more limited, which is why it’s worth asking your broker about the spread before selling a bond or other thinly traded security.