Dumping is the practice by which a business reduces the price of its products to well below the cost price, to generate higher demand. Although its most direct consequence for the business is a reduction in profits and even losses, some sellers use dumping to enter new markets and obliterate the competition.
Dumping is mainly related to international trade, as it is a more common practice in the case of businesses seeking to overcome local competition in sales volume. This tactic ultimately harms the proper functioning of the market, so it is not advisable to apply it to your pricing strategy. Read on to learn about the consequences of dumping on online and offline commerce.
Aims of dumping
The primary purpose of dumping is to overcome competition, to generate a very rapid transfer of demand from one seller to another. In the medium and long term, the aim is to establish a monopoly. Consumers will continue to choose the brand that offers them the same products at substantially lower prices.
Types of dumping
Predatory dumping: Malpractice
Predatory dumping is considered unethical business practice. It occurs when a company is fully aware of what it is doing, and the objectives it pursues. A clear example is the barrage of Chinese products in multiple international markets, both through physical stores and portals and marketplaces such as AliExpress. The arrival of products at prices well below the cost value caused bankruptcy and the closure of multiple companies across various sectors.
Due to its aggressive nature, this practice is usually carried out temporarily, then afterwards different price strategies are applied to maintain and retain customers. Furthermore, dumping is currently being pursued and condemned by various international control authorities, such as the European Commission.
Other types of dumping
- Official dumping: Occurs when products have a tax exemption or subsidy that allows them to be sold at a much lower price. Although businesses’ profits may make minimal profits in this scenario, it enables them to start trading in new territories. An example of official dumping is the introduction of Spanish black olives into the American market. This situation has already caused the filing of several complaints due to prices that are only possible due to European Union subsidies. It is a legal and transparent process, but it creates problems for local companies.
- Social dumping: This type of dumping is very different from predatory dumping. In social dumping a law obliges brands and retailers to reduce the price of certain products as they are considered essential goods for citizens. This occurred with masks and antigen tests in various countries during the COVID-19 pandemic.
Negative consequences of predatory dumping
- Company closure and loss of workers.
- Customer dissatisfaction when, in the future, the industry leader raises prices.
- Damage to the goods-producing industry.
- Reduced investment in markets where instability is perceived.
To avoid this, brands and retailers must have a pricing strategy consistent with their objectives and with the characteristics of supply and demand. Carry out an in-depth analysis of consumers’ needs and competitors’ prices before you start to send prices into freefall. You can use automated pricing tools to help optimise pricing and achieve the best results.