Markdown Math: Who Pays When Inventory Clears?
- The HRG Team
- 9 hours ago
- 3 min read
Markdowns feel simple in the store: price goes down, product sells through.
But financially? Markdowns can turn into a messy conversation about who funds the margin gap—and whether the claim you received matches what you actually agreed to.
The Journal of Accountancy describes a markdown allowance (or margin protection payment) as a vendor payment to a retailer in exchange for a temporary or permanent reduction in retail selling price. In other words: “We’re clearing inventory. Help us cover the margin.”
That’s reasonable—when it’s authorized and properly calculated.
The problem is when markdown claims show up as:
“price protection”
“markdown monies”
“margin support”
or a blanket deduction that’s light on detail and heavy on dollars
Why the second half of February matters
Late February is the handoff into spring:
winter clearance winds down
planograms shift
discontinued items get flushed
slower movers get marked down to make room
If your agreements aren’t crystal clear, markdowns become a quiet way to “true up” inventory risk—sometimes beyond what you intended.
A fictional scenario (clearly fictional)
Fictional example (not a real company):A snack brand is resetting packaging. Retailer clears old graphics with a deeper markdown than the supplier expected. A claim hits labeled “price protection,” applied not only to store inventory but also to units in transit.
The supplier’s team assumes it’s valid—until they compare the claim date to the agreed effective window and discover the markdown began before the authorization was in place.
Same markdown. Different liability.
The three questions that solve 80% of markdown disputes
1) Was it authorized?
You need:
the agreement (terms + dates)
the items covered (SKU list)
the mechanism (temporary markdown vs permanent retail change)
any caps (maximum units, maximum dollars, regional limits)
If the retailer can’t point to the authorization, you’re not “being difficult” by asking. You’re doing finance.
2) What inventory is included?
Markdown claims often reference:
on-hand store inventory
distribution center (DC) inventory
on open purchase orders
in-transit units
The scope matters. A markdown applied to “everything in the pipeline” can be drastically larger than you expected.
Accounting guidance also recognizes price protection/markdown allowances as cost-reducing mechanisms, which is why definitions and scope get scrutinized.
3) Does the math match the reality?
Validate:
starting retail and new retail
units claimed vs units actually in scope
dates: when markdown began vs when it was authorized
duplicates: the same markdown funded through two different buckets (yes, it happens)
A practical “Markdown Proof Pack”
If you want to win (or prevent) markdown disputes, standardize:
agreement + effective dates
item list (SKU/UPC + retailer item numbers)
claim detail (stores/DCs, units, retail prices)
store-level or portal price history when available
shipment timing (to confirm whether units were truly in scope)
internal approval log (who agreed, when, and under what constraints)
Prevention: make markdown language tighter going forward
When negotiating markdown support, push for clarity on:
scope of inventory (store only vs store + DC vs pipeline)
cap structure (units, dollars, or both)
time window (start/end dates)
documentation requirements (what the retailer must provide with a claim)
This keeps “reasonable margin support” from turning into “unlimited liability.”
Where HRG fits (lightly)
Markdowns are one of those areas where the label sounds legitimate, so teams don’t look closely. HRG’s perspective is simple: if the dollars are real, the proof needs to be real too—authorization, scope, and math.
