Introduction to Price Markup and Markdown in Ecommerce with Data Science

Let’s start with a business case. Flipkart started ‘The Big Billion Day’ (BBD) sale in 2014. In 2016, it had its third BBD. There is always some promotion or other on the site every day. However, BBD remains the biggest sale for the site. As you must have noticed, the BBD happens around the time of Navratri and Diwali. Now, this is the time of the year when people make big purchases. A discount for such purchases creates a feeling of big savings.

As people psychology predicts, the customers end up buying a lot more to take advantage of the sale, as they know that after the sale ends, products will go back to their original prices, which are much higher.

Such one-time price markdown boosts sales as much as 20 times compared to business as usual (BAU) days and also increase profit margins by a significant percentage. To ensure there is no revenue loss due to cancellations or returns, products purchased during these days can only be exchanged (with terms and conditions) but not returned.

This is just one of the cases of price markdown in the e-commerce business. Let’s look at a few more business cases of price markup as well as markdown.

As you saw in the case of Big Bazar, just a look at the day-wise sales revealed a simple yet extremely significant fact: Sales are the lowest on Wednesdays. While working in an e-commerce company, you may come across such insights which, if used smartly, have the potential to transform the way a business is run. Thus, it is important for data analysts to understand the concept of pricing and its impact on sales, profits, footfall, etc., which is what you'll learn in this module.   

Let’s now understand price markdown in detail. Price markdown has separate implications both for the seller and the customer, which have been summarised in the figure below.

Note: In Figure 1: Price Markdown, Point 3 under Customers - the 'or' will be replaced with 'for', i.e.,"...bargain to value for quality sensitive ones."

Let’s learn more about the different forms that price markup and markdown take in the real world.

You saw that the popular forms in which price markdowns are offered include a flat price cut, discounts, freebies, or combo offers. However, there are other ways as well through which markdown can be achieved.

Let’s consider a few other cases where prices are marked up higher than normal.

In case of food delivery, the delivery is generally free of charge if the order amount is above a certain limit. This is to ensure that the delivery cost can be recovered from the profit margin. In case the order amount is lower than the threshold, an additional delivery charge is added to the bill.