Six Key Economic Factors in End-of-Season Inventory Decisions

The Economics of Unsold Inventory

Have you ever wondered why that shirt you’ve been eyeing suddenly dropped from $49.99 to $29.99? Or why some products go on clearance while others never seem to go on sale?

These pricing decisions significantly impact a retail company’s financial performance. When stores have excess inventory at a season’s end, they face a critical challenge: selling remaining products without sacrificing profitability.

A complex mix of economic indicators, from consumer demand to interest rates, influences critical inventory decisions. This scenario represents a common challenge for retail FP&A teams that analyze how these factors interact across business cycles and provide leadership with insights for data-driven decisions.

This article explains six key economic factors that influence how companies manage excess inventory. These concepts shape the discounts you see as a shopper and the work of FP&A professionals behind the scenes.

Factor 1: Consumer Demand and Spending Trends

Consumer behavior responds quickly to shifts in the economy. When people feel confident and have disposable income, they spend. When uncertainty rises, they reduce spending, which directly affects the markdown strategy.

FP&A teams track economic cycles and consumer spending trends to predict discount sensitivity:

• In strong economies, consumers may respond to moderate markdowns, such as 20% to 30%.
• In downturns, they often hold out for steeper discounts like 50 to 60%.

To stay ahead of these shifts, many companies invest in consumer analytics. These reports reveal changing behaviors, competitive benchmarks, and perception of your brand.

By analyzing this data, FP&A professionals can guide inventory markdown strategies that align with customer expectations and the broader economy.

Factor 2: Price Elasticity of Demand (PED)

One of the key questions you need to answer in an FP&A role is: How much will a price cut boost sales?

Price elasticity of demand (PED) provides the answer. PED measures how sensitive consumer demand is to changes in price. Economists and finance professionals describe this sensitivity using two categories: elastic and inelastic demand.

• Elastic products: Small price cuts lead to big increases in sales. Examples include “fast fashion” or movie tickets.
• Inelastic products: Demand stays relatively steady regardless of price. Examples include gas or prescription meds.

In other words, elastic products benefit from discounts that drive higher volume, whereas inelastic products are better left at stable prices to preserve margins.

PED gives FP&A teams a data-driven way to evaluate whether a markdown will actually increase revenue or squeeze profit margins.

Factor 3: Sell-Through Rate Analysis

While elasticity predicts a potential response to markdowns, sell-through rate measures actual results. This key inventory metric calculates how much product has sold compared to the total available stock. It is calculated using the following formula: 

For luxury retailers like US-based Nordstrom, these benchmarks signal product health:

• High sell-through: >75% (strong performance)
• Moderate sell-through: 50-75% (acceptable performance)
• Slow-moving: <50% (concerning performance)

Identifying slow-moving inventory early helps avoid rushed, deep discounts. Tracking sell-through by category, region, and individual product (called “SKUs” in retail) provides the precision needed for effective inventory management.

Factor 4: Competitive Pricing and Market Positioning

FP&A teams must constantly benchmark their markdown approach against competitors. When major competitors slash prices, the pressure to follow intensifies. The competitive response varies by market positioning, which is how a company presents itself to customers in terms of price, quality, and brand image. 

Take fast-fashion brands like H&M. Their strategy is to markdown products aggressively to clear space for next season. Luxury brands like Burberry, on the other hand, often preserve price integrity by limiting discounts and emphasizing exclusivity.

Example: When Saks Fifth Avenue announces a designer handbag promotion, competitors like Nordstrom have to decide if they will compete on price or maintain their standard pricing and differentiate on value.

Factor 5: Inventory Carrying Costs and Interest Rates

Every unsold item carries the ongoing financial burden of holding it. Retailers incur inventory carrying costs for every day an item sits unsold on shelves or in warehouses. These ongoing expenses can eventually erode any profit margin, even if the item eventually sells at full price.

Inventory carrying costs encompass multiple expense categories, including:

• Storage costs (distribution centers, retail space).
• Insurance expenses.
• Risk of obsolescence or damage.
• Capital costs, which rise as interest rates increase.

Here’s how interest rates affect carrying costs on $1 million of inventory:

Higher interest rates more than double capital costs without touching the physical inventory. That means slower inventory turnover starts to eat away at profit fast.

In low-rate environments, retailers can afford to wait for better margins. In high-rate environments, speed matters. FP&A teams help quantify this tradeoff and guide decisions accordingly.

Factor 6: Supply Chain and Future Inventory Considerations

Supply chain information directly affects markdown timing and depth. While customers focus on the discounts themselves, retailers must consider inventory flow for both current and future seasons.

When making markdown decisions, FP&A teams typically encounter two opposite supply chain situations that require very different responses:

Real-World Examples

• During global shipping delays in 2021–2022, many luxury retailers chose smaller markdowns, banking on classic styles carrying over to the next season.
• In early 2022, retailers like Target and Walmart faced the opposite: late-arriving winter goods collided with spring shipments. They opted for aggressive markdowns to clear space fast.

Making Effective Decisions

How do you determine the best approach? You might calculate the trade-offs between marking down inventory now and selling it at full price later—especially when future inventory availability is uncertain. 

This calculation varies by product type, seasonality, and current market conditions. Holding what appears to be “excess” inventory is most profitable when:

• Products have long-term style relevance.
• Storage costs are manageable.
• Supply chain indicators suggest future inventory gaps.

Next Steps: Putting Economic Factors to Work in Inventory Decisions

The real challenge for FP&A professionals lies in understanding how economic factors interact during different business cycles. During expansions, consumer trends might suggest conservative markdowns while competitive pressures indicate otherwise. In downturns, the relationship between elasticity and supply chain becomes even more critical as price sensitivity increases.

FP&A professionals who translate economic data into actionable strategies help organizations navigate tariffs, optimize inventory, and implement strategic shifts. Understanding macroeconomic forces provides insights that protect margins during volatility and identify hidden opportunities. Building these analytical capabilities requires both practical experience and structured learning to recognize economic patterns across various business scenarios.

Ready to strengthen your ability to analyze economic factors in an FP&A role? 

CFI’s Economic Analysis for FP&A course teaches practical techniques for applying economic principles to real-world business challenges across multiple industries. You’ll gain the tools to confidently analyze economic factors, apply data-driven decision making in FP&A, and present financial insights that drive business success.

Explore Economic Analysis for FP&A Now!

Additional Resources

Price Elasticity of Demand

Sell-Through Rate

A Guide to Inventory Accounting

See all FP&A resources

See all Economics resources