What are some pros and cons to the practice of markdowns and markups?

Expert Answers
pohnpei397 eNotes educator| Certified Educator

There is no real downside to the policy of markups, but there are both advantages and disadvantages to markdowns.

Markups are absolutely necessary if a business is to be worthwhile.  A markup is the difference between the cost of a good to the retailer and the price that the retailer charges the customer.  If there is no markup, the retailer makes no profit.  If there is no profit, the retailer will not stay in business.  Therefore, it is necessary to have markups in order to keep a retailer open.

By contrast, there are good and bad aspects to markdowns.  The major benefit of markdowns is that they can improve the chance of selling products and, thereby, making profit.  For example, if a car dealer has spare inventory as a model year is coming to an end, it may mark down those cars to allow them to be sold.  A retailer might also mark products down just to attract more customers, as is done when something is put on sale.  The disadvantage of markdowns is that they can reduce the retailer’s profits if the markdowns are excessive or are done when it is not necessary.  Markdowns can also make accounting more difficult as you have to account for the different prices of the goods at different times.