How to Defend Against the Gray Market Threat Part 1

Last updated: 08 January 2018

In this three-part blog series, we will address gray market trade; Though gray market trade may be the least talked about risk factors that software developers and intelligent device manufacturers face, it can have a devastating impact on your brand, your channel, and your revenue. It is therefore wise to understand how gray market trade can affect your business and develop countermeasures to mitigate the risk.

What is it?

A gray market, as defined by Wikipedia, is the trade of a commodity through distribution channels that are legal, but unintended by the original manufacturer. Pretty simple explanation, right? But what does it actually entail? Let’s take a closer look at how gray markets work.

How does it work?

Gray markets exist for many products produced and sold around the world. Some examples of gray market goods targeting consumers include luxury watch brands, automobiles, mobile phones, professional haircare products, digital embroidery patterns, and PC gaming software. B2B examples include medical devices, industrial automation equipment, business software, and so on. This is not an exhaustive list, but you get the idea.

The gray market for mobile phones is a good case in point. Many mobile phone manufacturers do not offer unlocked phones in the United States. Customers must purchase mobile phones that are locked to specific cellular service providers (e.g., T-Mobile, Verizon, AT&T, Sprint).

As you might expect, this has created a gray market for unlocked cell phones. Some mobile electronics retailers acquire new (unlocked) mobile phones from outside the US and sell them in the US, at a lower price than locked phones through authorized channels. Even though this is not an illegal practice, more often than not it isn’t disclosed to the customer and can mislead an unknowing buyer in the following ways:

  • AC charging accessories, if included, are generally incompatible with US power specifications and the user must purchase the appropriate charger separately.
  • The phones themselves are often set to another language by default and must be reset by the user.
  • Instruction manuals, if included, are written in a language native to the region for which the phone was intended. If a user manual is needed, the consumer must search for and access it online.
  • Often, these gray market cell phones do not include a warranty so cannot be serviced by the manufacturer.

Some consumers are willing to put up with the inconveniences of purchasing through parallel markets to get what they want at a lower price. Though when they need service, and realize that their purchase did not include a warranty, device brand loyalty and reputation can suffer.

Stay tuned for Part 2 of this blog series, where we will be looking at the impact of gray market sales on software vendors and device manufacturers.

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