How to Defend Against the Gray Market Threat Part 2

Last updated: 08 January 2018

The previous blog post in this series provided an overview of the gray market and the threat it poses to your business. In Part 2, I will be addressing the impact of gray market sales on software vendors and intelligent device manufacturers.

Advances in technology, connectivity, and globalization have all enabled massive opportunities for software vendors and device manufacturers to sell their products around the world. However, these very same influences have also created openings for gray markets to exist.

In the case of PC gaming software available through online streaming sites, gray market sales of legitimate gaming software keys are being purchased using stolen credit cards and then being resold through online sites such as G2A and others. This is just one example of gray market sales of legitimate software.

Many device manufacturers are acutely aware of the possibility of diversion, so they use serialization and bar codes to track devices from time of manufacturing to delivery at the customer end. The problem with this example is that serial numbers and bar codes can be removed or filed off, leaving you open to unauthorized distribution of your product at lower gray market prices.

Another example involves device designers who use contract manufacturing companies to produce their products. In some of these cases, the contract manufacturer intentionally creates manufacturing overruns for the purpose of diverting legitimate branded products, which are then sold at lower prices through gray market channels.

The Impact? Gray markets undermine segmented pricing schemes, causing damage to channel relationships, reputation, and brand loyalty. For more information on IP protection.

  • Reduced Customer Satisfaction and Erosion of Brand Loyalty
    Gray market products are often sold at lower prices to unsuspecting customers who find out, only after the fact, that the product they’ve purchased includes invalid warranties, was designed for use in countries other than where it was sold, or worse yet, is obsolete or does not meet regional regulatory requirements.These customers are deprived of service, warranty support, and replacement parts from authorized resellers if and when needed. And if the product fails to meet customer expectations, customer satisfaction and loyalty suffer – which ultimately erodes brand loyalty.
  • Strained Channel Relations
    Though difficult to track, KPMG estimates that up to 24% of profits in the channel are diverted to gray market dealers. However, potentially the costliest impact of the gray market is on relationships within your authorized distribution network. The partners you’ve authorized to provide parts, repairs, and promotional support for customers in their regions are under increasing pressure to extend their support to customers who have purchased your products via gray sources.
  • Damage to Your Corporate Image and Reputation
    You’ve likely invested millions of dollars in product research and development and in building a positive brand image. When your premium-priced products begin to appear in gray markets at cut-rate prices, it can damage your brand and have a negative impact on your company’s reputation.
  • Sales & Product Marketing Disruption
    Gray market imports carry the potential to disturb sales forecasting accuracy, pricing strategies, market positioning, and other marketing efforts.

In Part 3 of this blog series, I will reveal some of the ways you can defend against the gray market threat – don’t miss it!

Where can you learn more?

Download our white paper on the subject: Defending Against the Quadruple Threat to Intellectual Property


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