Markup cancellation is a subsequently-imposed reduction of the price of goods that had been marked up in the past. A markup cancellation may be imposed for a number of reasons, such as:
- The seller has too many units in inventory, and wants to reduce the price in order to clear out excess stock before it becomes obsolete.
- Competitors have reduced their prices, so the seller must reduce its price to remain competitive with them.
- The seller is experiencing a softening of demand at the higher price point, and so elects to lower the price to see if demand will increase (also known as having a high level of price elasticity).
- The original markup was only for a scheduled time period, and the price is automatically returned to its original level once the markup period expires.
For example, a product is normally priced at $50, but the seller increases the price by an additional $10, due to excess demand for the product. This represents a markup of $10. If more units were to be made available for sale by competitors, the seller might be forced to reduce or eliminate its markup. This latter action is called a markup cancellation.
At most, a markup cancellation only returns the price of a product to its original price; it does not lower the price to a point below the original price. It is also entirely possible that a markup cancellation will be for only part of the original markup, so that the new net price is still higher than the original price. Thus, an initial markup of $10 could be partially cancelled, leaving a residual markup of $2.