From margin killers to strategic signals: What is AI's role in retail markdown strategy?

The holiday season often marks a make-or-break period for retailers—when promotions intensify, aisles fill with shoppers and online traffic surges. 

Let’s take a look at some revealing holiday retail statistics:

• Global holiday retail sales topped $1.3 trillion in 2023
• Discounts drive nearly half of all transactions in the final two weeks before Christmas
• In the U.S., 46% of online orders during the holidays were made at discounted prices
• In Europe, December sales volumes in categories such as apparel and consumer electronics were 20 to 30 percent higher than in any other month Sources: Mastercard, Adobe Analytics and Eurostat

Behind this surge of seasonal activity sits one of retail’s most misunderstood levers: the markdown. For decades, markdowns have been treated as margin killers, the last resort when holiday inventory did not move as planned. 

In apparel, the U.S. National Retail Federation estimates that markdowns account for up to 12% of lost margin every year. In grocery, deep holiday promotions often wipe out profitability in entire categories. But the reality is more nuanced. Markdowns are not just discounts; they are strategic signals. They inform shoppers whether a brand rewards loyalty, show competitors how aggressively market share will be defended, and reveal to suppliers how closely assortments align with true demand.

AI and the Christmas markdown dance

When combined with retail software solutions, Artificial Intelligence (AI) reshapes the way retailers choreograph markdown strategies during the holiday season. In the past, most markdowns were reactive, often starting only after December 26th, when unsold stock piled up in clearance bins. Today, AI helps retailers to anticipate demand misalignments in early December and apply targeted markdowns before peak week even arrives.

AI also changes the message that markdowns send to shoppers. A discount offered to a first-time online shopper can serve as a powerful acquisition tool. The same discount, when given to a loyal shopper, can be framed as a holiday reward. Meanwhile, the channel and location matter more than ever. An in-store markdown in a high-traffic urban flagship may convey exclusivity and urgency, while broader markdowns online are designed to drive mass conversion at scale. AI enables retailers to keep in rhythm with where each signal matters most to your business.

In step with shoppers: Loyalty, brand and trust

Holiday shoppers are tuned in to both price and purpose. Each markdown sends a message that can strike the right note with customers or expose a brand’s miscalculated move. Done well, markdowns reinforce brand warmth, reward loyalty and communicate responsibility by preventing waste. Done poorly, they train shoppers to wait for discounts or erode brand equity at the very moment when the holiday spotlight is brightest.

Sustainability is also an increasingly important factor, as most consumers expect retailers to reduce waste and responsibly manage unsold products. Holiday markdowns, when managed intelligently, prevent unsold stock from ending up in landfills and enable brands to align price actions with their ESG commitments. In a market where reputation can shift overnight, the way a retailer manages markdowns is a direct reflection of its values.

Every move in the pricing dance should feel fair and equitable. 61% of shoppers would lose trust in a retailer if they discovered they were charged more than someone else for the same product (Salesforce). As AI enables more precise markdown strategies, fairness and accountability must stay front and center.

Mastering the holiday dance

The holiday season amplifies every decision. In categories such as toys, consumer electronics, and apparel, as much as 40% of annual sales occur in the last six weeks of the year (Bain & Company). That means a single miscalculated markdown strategy can wipe out months of careful planning.

Consider two extremes: a retailer that launches blanket markdowns too early risks leaving money on the table and damaging brand equity, versus another that waits too long may find itself forced into fire sales that decimate margins. The optimal path lies in precision: markdowns that balance demand, protect the brand and communicate value. AI provides the capability to execute at this level, but only if retailers understand that every markdown is more than a price change. It is a message, a signal, that shapes shopper behavior and market perception.

Markdowns are not the Grinch stealing margins at Christmas. When AI is aligned with vendor agreements and used in conjunction with retail software solutions, markdowns can become precise, timely, and strategic signals that build trust, move inventory responsibly and protect profitability in the most critical season of the year.