Clearance Pricing Optimization for a Fast-Fashion Retailer

Fast-fashion retailers such as Zara offer continuously changing assortments and use minimal in-season promotions. Their clearance pricing problem is thus challenging because it involves comparatively more different articles of unsold inventory with less historical price data points. Until 2007, Zara used a manual and informal decision-making process for determining price markdowns. In collaboration with their pricing team, we since designed and implemented an alternative process relying on a formal forecasting model feeding a price optimization model. As part of a controlled field experiment conducted in all Belgian and Irish stores during the 2008 fall-winter season, this new process increased clearance revenues by approximately 6%. Zara is currently using this process worldwide for its markdown decisions during clearance sales. Subject classifications: retailing; markdown pricing; clearance sales; fast-fashion; revenue management; forecasting; field test; model implementation. Area of review: OR Practice. History: Received June 2011; revision received May 2012; accepted June 2012.