What is dumping - methods of dumping and methods of countering the phenomenon

What is dumping

Dumping is the sale of goods at a deliberately reduced cost in order to gain a larger market share and displace competitors. In most developed countries, dumping is considered unfair competition, but this does not prevent companies from using it periodically.

The term itself has been used since the 30s of the twentieth century. Some experts associate it with the British word dumping ("unloading", "dumping"), others suggest its origin from the Norwegian dumpa ("fall heavily"). One way or another, the meaning is conveyed in both versions: a sharp drop in price.

Initially, the concept of “dumping” was applied to stale goods that were sold at a reduced cost, but later the term acquired a new meaning.

How does dumping differ from regular price reductions?

Price reductions are not uncommon in economic relations. However, promotions and other marketing ploys, as well as cheaper goods due to lower costs or the use of new technologies, have nothing to do with dumping.

In the case of dumping, it is not about attracting customer attention to a product or maintaining profitability at a reduced price. No, the goal here is only a brutal conquest of the market, including through deliberate work at a loss for a certain period of time.

At the same time, the buyer only benefits from dumping - at least in the short term. As long as there is competition in the market, you can safely buy cheap goods. In the future, there is a risk of monopolization and price increases, but the end consumer cannot influence this process.

When is dumping used?

The main reason for using this controversial economic instrument is the desire to occupy a niche in a new market - and preferably, a fatter niche. If the market is competitive, the technologies used are publicly available, and the pricing policy of the participants is stable, to achieve a quick result, a new player can make only one knight move: a sharp price reduction. This will allow you to lure away customers, and in the future, even if the cost increases to an economically justified price, some of the customers will remain.

Dumping is also used to force competitors out of the market. So a federal retail chain enters a small town, sharply reduces prices on the most popular goods, squeezes out local retail outlets, and then begins to dictate its pricing policy.

Euroset example:

A striking example from the past is Euroset, when Evgeny Chichvarkin was at its helm. What was he doing? He opened his own stores near his competitors' outlets, lowered prices an order of magnitude lower than the competitor's, often even at a loss, until the competitor closed down his business in that location. Let’s add here Chichvarkin’s unconventional approach to marketing and advertising campaigns, when he forced people to undress in the literal sense of the word.

Thanks to this approach, Euroset has become a leader in the mobile phone sales market.

The third reason for using dumping is “old school”: you need to sell a product with an expiration date, or you are going to update your assortment and need to clear your warehouse of illiquid items. The price drops sharply - the product is sold out.

How to fight

Let me note that dumping is still an exceptional measure; they resort to it only in difficult situations. But what to counter if you encounter it? Let's figure out how to competently resist dumping.

Fighting strategies:

1. Wait

   If there is a lack of information, it is better to do nothing. You should not get involved in a fight, watch your competitor, perhaps he has not calculated his strength. There is a high probability that the company will not survive and go bankrupt without achieving its target. But if the pressure occurs for a long time, your profits have decreased significantly, you need to exit the standby mode. Read below what to do in this case.

2. Negotiations with a competitor

   The best strategy, if you are not the one being squeezed out of the market. You can negotiate reasonable prices and stay in business. Naturally, such an agreement is not drawn up on paper, since it is a conspiracy.

3. Go to a higher price niche

   If you cannot survive due to dumping in your price range, then it is better to switch to more expensive products in the same segment. In trade, price competition usually occurs on inexpensive goods. By moving to a more expensive segment, you will avoid a long struggle with loss of turnover and profit.

4. Leaving the market

   If you are up against a major player with large reserves, then with a high probability she will have enough means to crush you. Soberly assess your strengths. It’s better not to cause big losses and not to get involved in a war with a competitor; it’s easier to change the field of business. Of course, this is not an easy decision, but sometimes it is the only way to avoid bankruptcy and preserve assets.

   Read also:  What is a resident and non-resident of the Russian Federation - who is he?

Types of dumping

From the point of view of the scope of dumping, there are two types:

Price dumping

More often used in foreign markets. A seller of products from one country, due to lower costs (for example, labor or raw materials), exports his goods to other countries at a lower price than local producers can offer. Such expansion has been carried out, for example, by China since the mid-90s. Although Russian companies - in particular, metallurgical companies - did not disdain their advantages when entering the US market in the mid and late 2000s, this example will be discussed in detail below.

Within one country, price dumping is used by manufacturers from regions where there is cheaper access to raw materials, supplies, and labor. For example, retail chains, due to large volumes of transportation and more stringent conditions for suppliers, have the opportunity to open their stores in remote areas, only slightly increasing prices compared to usual ones, which is impossible for local sellers due to high transport and other costs.

Cost dumping

The most aggressive type of dumping is when a company, in order to conquer the market, trades for some time at prices equal to or even lower than its cost. To take such a measure, you need accurate calculations, otherwise you can go broke without having time to oust your competitors. It is companies that underestimate production costs that are under special attention from antimonopoly services.

Fight against dumping

Targeted price reductions can lead to both positive and negative results. It is important to develop the right strategy without violating the general rules of doing business. A favorable outcome can also be influenced by the response activities of competitors. Dumping as such can have a negative impact on the economic processes taking place in the country. A similar trend was observed in the 90s, when the country had not yet recovered from the crisis and accepted thousands of foreign goods at deliberately reduced prices. Local production and trade were literally driven into a corner, crowded out by cheap foreign products.

This raises a logical question: how to combat dumping by competitors?

1. Creation. Inaction may seem absurd, but, as practice shows, many newcomers who use dumping simply “burn out.” The thing is that they stirred up the interest of the audience, lured them in and then scared them off with a sharp increase in prices. Don't rush to develop a new plan of action, just wait a while;
2. Try to establish partnerships with a competitor. This way you can stay afloat;
3. Increase the cost of production. At first glance, an absurd action, which in reality is completely capable of paying for itself. To do this, it is necessary to improve the product, make it more attractive, so that the price increase is justified in the eyes of the buyer;
4. Refocus the business. An extreme measure necessary for those firms that are unable to withstand competition. You can sell other products, find a new niche and market.

Please note that dumping activities are under the control of the state; large firms are often held accountable, where they must prove their case in court.

For example, the famous company Nissan moved its car production to Europe. Due to this, it was possible to reduce the overall production costs, which affected the price of the machines. As a result, the company's management was drawn into legal proceedings, however, the court did not prove his guilt.

Forms of dumping

Permanent dumping is the sale of goods at cost (or cheaper) throughout the entire sales period. This type of dumping is used for marketing purposes as part of promotions to stimulate sales of other goods. For example, a furniture store can sell a sofa with a regular price of 30,000 rubles for 15,000, but subject to the simultaneous purchase of three more pieces of furniture at the regular price. Compensation for the dumping price of the “bait” product is included in the cost of other goods.

Mutual dumping is the sale of goods at a reduced price by two countries to each other. This can be the same product (and then we are talking about fierce competition for markets) or different (and then in some cases we can talk about mutually beneficial cooperation).

Reverse dumping is the sale of goods in the domestic market at lower prices than for export in order to maintain internal economic stability. A striking example is gas, gasoline, electricity, and other energy resources, which within the Russian Federation are sold at prices below the world average. However, such dumping has a downside: exporters are motivated to sell goods at a better price abroad, which is why shortages periodically form in the domestic market and prices begin to rise.

Intentional dumping is purposeful actions to oust a specific competitor from the market in order to increase its share. Effective in a low-competitive market, it does not work at all where one competitor can take the place of another.

“Pirate” dumping is targeted actions to destroy the business of all competitors in the market. The most irresponsible type of dumping, when the stability of an entire industry can be sacrificed for the sake of dominance in the market.

Sporadic dumping is a short-term reduction in price in order to sell off warehouse surplus or illiquid goods.

Evgeniy, owner of a youth clothing store

We sell clothing from youth brands, such as jeans, sweatshirts, pullovers, down jackets, etc. In our business, you never know what will go well and what will remain on the shelves. To maintain our assortment, we purchase a variety of products. Some of the copies may become stale and then we have to get rid of them at a price below the purchase price. We, of course, can keep such products for a year or two, maybe someone will buy them. But why? I’d rather free up the shelf for something more profitable, where the markup is 100-200%. These things will completely pay for the losses that I will incur by selling illicit goods at half price.

Purposes of dumping

Firms undercut prices significantly, often with negative margins, when starting out in a new niche. By attracting the bulk of clients and turning them into permanent ones, significantly reducing the turnover of competitors. Subsequently, prices rise, and the company begins to make money on the remaining poached clients.

Price dumping is a shock measure, due to which the company either captures a market segment or gets rid of surplus products for the sake of necessary working capital. In the second option given, this is a forced measure to continue commercial activities. Example: clothing stores sell stale items from an old collection without profit. This gives the store free funds to purchase new collections.

Let's look at the main goals of dumping, which are achieved only by reducing prices:

1. Recruit clients. As mentioned above, new companies trying to enter the market take advantage of this, trying to occupy a niche, they lower the cost of their products. By influencing the buyer with very cheap goods, customers leave competitors, some of them will become permanent. In this form, word of mouth advertising occurs automatically. People share great deals with their loved ones.
2. Get a big client. Occurs when they want to enter into an agreement with a large company or retain it. Deliveries at a minimum cost stand out favorably, and profits are obtained due to large turnover through a large partner.
3. Become a monopolist. Aggressive and dangerous looking. The company operates at reduced prices until it goes bankrupt or other players leave. As a result, it remains the main major player and can dictate its terms: set any prices, buy up the assets of bankrupt companies, and so on.
4. Natural. Business efficiency is significantly higher than competitors; at low prices, profits remain at the same level. This happens due to low costs. For small companies this is a very dangerous species. Costs and overheads per unit of goods for small businesses are always higher than for large companies, such as chain retailers. This is difficult to resist, but perhaps not by price methods (improving the quality of service, speed of delivery, etc.)
5. Release from illiquid goods. This is resorted to when unclaimed goods accumulate or the expiration date is approaching. Reducing the price for the fastest possible sale and obtaining free working capital.

Consequences of dumping

Dumping can have different consequences - depending on how correctly the strategy of the dumping company was chosen, how competitors and government agencies reacted to it, and how widespread the campaign was.

Positive consequences

These may be the case for companies that achieve their goal and gain the desired market share or displace competitors. A textbook example is the famous John Rockefeller and his company Standard Oil, which, through dumping prices, conquered region after region, and in the second half of the 19th century became a monopolist in the fuel production market in the United States. Equally successful was the strategy of Sony, which suppressed its competitors in the American market by selling televisions at half the price of those in Japan.

The USSR did not disdain dumping either, supplying Zhiguli cars in the 70s of the twentieth century, for example, to Canada at a price of 2,600 rubles (about 5 thousand Canadian dollars). In the Soviet Union at that time the same car cost 8,400 rubles. Now it looks funny, but back then Canadians were not amused. This country never managed to fully establish its own automobile industry, not least because of Soviet dumping. Over 20 years, more than 300 thousand VAZ cars of the 6th and 7th models were sold to Canada.

A more modern example is the strategy of Nissan, which exported not only inexpensive cars to Europe, but also built factories there. Due to the technology of organizing enterprises that was more advanced at the end of the 90s and the beginning of the 2000s and competent dumping, the Japanese were able to increase sales tenfold, seriously displacing German concerns.

Who does the dumping?

To reduce negative impacts on water resources, most countries prohibit the discharge of liquid and solid residues. Using this method of solving the dumping problem, it is only possible to partially reduce the volume of garbage disposed of in the seas.

The source of the bulk of pollution is industrial enterprises and production processes, during the operation of which many residues are formed that cannot be fully processed or reused. Pollution occurs when discharging solid waste, wastewater, neutralized or active chemicals, slag, and other types of waste.

The London Dumping Convention states that the disposal at sea of ​​waste generated during the normal operation of ships, aircraft or other artificial structures is not considered purposeful, that is, it is not dumping. Pollution of large bodies of water often occurs as a result of man-made disasters and natural disasters.

How to dump correctly

You can’t just go ahead and cut prices – you first need to think carefully and do the math. The first step is always marketing research of the most profitable product positions of competitors. Once these positions have been identified, you need to decide on your own strategy. When determining it, several important factors should be taken into account:

• Price in the customer's mind is very often associated with quality. Therefore, it is not easy to combine the introduction of a new product to the market with dumping. Then it will be difficult to convince the buyer that he needs to pay more for a cheap product. Another thing is proven products. The low price for them is regarded by the client as a bonus, especially if it is not stipulated by any conditions (“buy three for the price of two”, etc.).
• Dumping most often occurs in the low price category. Therefore, if you want to sell a product or service with high added value, artificially lowering the price alone is not enough; you need accompanying marketing activities (and perhaps dumping is not at all useful as an effective tool).
• Dumping almost inevitably leads to an increase in labor costs - in order to maintain turnover, you will have to sell more goods at a lower price. Sometimes this leads to an increase in the number of staff and reduces the efficiency of the organization. Customers want to buy inexpensive goods, but do not want to stand in queues or buy late ones.

Taking into account all of the above, we note several rules for competent dumping:

• the approach to reducing prices must be individual in each case. You can discount the product that brings the greatest profit to your competitor (and thereby cause damage to him), or you can discount the one that brings the biggest jackpot to you (and win a larger market share);
• dumping cannot be endless: it is necessary to determine for yourself the time limits of trade at the dumping price;
• any dumping needs to be wrapped in a beautiful marketing wrapper - announcing promotions, sales, loyalty programs, etc., so that the client does not think that you are achieving your business goals at their expense.
• Before you reduce prices, make sure that resellers will not take advantage of this; The benefit should be received by the end consumer - it is his loyalty that you need.

Consequences of dumping policy

Purposeful lowering of prices leads to very different consequences, often negative in the long term. It all depends on the goals, the accuracy of the strategy calculations, the protective capabilities of competitors and the intervention of government agencies, and the scale of the campaign.

Positive consequences

• Only one company benefits, provided that it wins and displaces its competitors and captures the part of the niche it needs.
• Prices are temporarily reduced for buyers.

Negative consequences

Collapsed prices in many industries are hindering the economic development of companies and states. Dumping impedes economic growth for everyone and undermines the profitability of entire industries.

Anti-dumping measures of the state

State competitive procurement, which is carried out within the framework of federal laws No. 44-FZ and 223-FZ, is especially vulnerable to dumping. An unreasonably sharp reduction in the starting price for the sake of winning the auction often led to non-fulfillment of the contract: the supplier simply did not meet the amount declared by him. The work was not carried out in full, the goods were supplied of inadequate quality - this caused damage to the customer, forced contracts to be terminated in court, and time wasted on new tenders. As a result, to protect against unfair competition, special legislative measures were adopted, which, although they do not protect 100% from dumping, still pose a serious barrier to it:

1. If the initial purchase price is less than 15 million rubles, if the participant reduces this amount by more than 25%, he must pay contract security at one and a half times the usual amount (this amount is paid by the contractor as a deposit: if the work is not performed, the money remains with the customer) . Or provide proof of your solvency (information on the completion of at least three government contracts in the previous year, the absence of penalties and fines for completed purchases).
2. If the initial price is more than 15 million and the bidder tries to reduce the price by more than 25%, there is only one option - one-and-a-half security for the execution of the contract.
3. For goods necessary for normal life support (food, drinking water, heat, electricity, etc.), if an auction participant reduces the price by more than 25% of the initial price, he must provide a letter of guarantee from the manufacturer indicating the selling price for product; confirmation of the availability of goods from the contractor, an agreement on the transportation of goods, licenses, certificates and other documents confirming the reality of the offer.

Another way of government regulation of dumping is through measures taken within the Customs Union. At the request of domestic companies, a special commission recommends that the governments of the CU member countries introduce one or another duty on imported goods. The duty can be protective (very high, its purpose is to completely block access of goods to the country by economic means) or protective, which leaves the opportunity for importers to trade, but strengthens the competitive position of local producers.

A purely Russian method of protection against unfair imports is Federal Law No. 165-FZ (“On special protective anti-dumping and countervailing measures for the import of goods”). It provides for investigations into the sale of goods on the territory of the Russian Federation that harm the country’s economy or impede the development of economic sectors due to the deliberate uncompetitiveness of domestic analogues. Based on the results of the investigations, anti-dumping duties are also imposed.

Is dumping good or bad?

Like any method of promoting a product or company to the market, dumping has positive and negative sides. Let's try to summarize them in one table.

Pros and cons of dumping

Like any method of influencing the general course of economic activity, dumping has its positive and negative sides, which divide entrepreneurs into its supporters and opponents.

To the most pronounced proscan be attributed:
• the ability to quickly enter a certain market cell, even in the case of strong monopolizing competitors;
• its effectiveness for marketing purposes, since the process attracts customers as quickly as possible, but does not require additional investments and efforts to carry out;
• As an economic technique, it is quite simple, but highly effective.

Has a phenomenon and many negative aspects, which in most cases boil down to the following statements:
• dumping reduces the economic efficiency of the enterprise, reducing income and profitability;
• the process always involves a negative attitude and retaliatory actions among competitors;
• a decrease in the general opinion of consumers about the level of product quality, since, according to popular belief, the low cost of a product indicates appropriate quality.