How to Curb Gray Markets

Gray markets are a perennial problem in some industries and even some of the biggest of companies are searching for a solution to this problem. While no fool-proof plan has been devised yet, below I have shared some ideas which may work in many cases, especially in the technology industry. Below I have mentioned some of the methods, followed by the expected results:
During the Product Launch/Market Skimming Stage:
•    Monetary targets and discounts to salespersons  and distributors rather than volume targets

  • Incentive to sell at volume discounts,  when product prices are at its peak, is low as it reduces profitability

•    Don’t price similar products vastly different in different markets without tangible or intangible benefits to the consumer for the price differential

  • Reduced price differential along with transportation and government duties make gray market activity much less attractive

During the Market saturation/Volume Trading Stage:
•    Maintain Sales records and note abnormal spikes and make distributor relations more transparent

  • Unauthorized gray market sales can be caught both by data and by affected distributors. Repeated malpractice by the same party can be detected

•    Ignore gray market activity if there are no complaints or in areas not covered by the distribution-network

  • Volumes are most important in this period of low margins. If a distributor’s network is strong he will out-perform the gray marketer, else company might think of replacing him

During the Servicing Stage:
•    Performance over the previous 2 periods determines the servicing opportunity of the authorized dealers. Company should maintain separate service centers for gray market sales, which should be more costly compared to the conventional channels

  • Products sold by unauthorized people have no chances of making it to the distributors, adds to the disincentive of selling to them. Company maintains its profit and brand name by still providing service to genuine products. However the higher costs involved makes the customer averse to products obtained from gray markets

Apart from the above steps Continuous Involvement in the following ways is also expected of the manufacturer:
•    Create awareness among consumers of difficulties with gray market products. Educate customers about brand-offerings. Like “Cheap is Bad” for high-end exclusive products. E.g. HCL

  • Awareness even in case of undifferentiated products will increase. Only successful branding can overcome price-sensitivity. Brand won’t be held responsible when customers suffer on buying gray market products

•    When reaching the masses is important, increase dealers and check on under performing dealers. Allocate orders based on past-performance

  • More distributors mean lesser volume discounts for them and lesser untapped area for gray market to develop. Most competitive distributor can grow at the cost of less competent ones, reducing chances of under performance

•    Continuous Monitoring of Distributor performance and transparent target setting and dialogue. Make distributors increase beats to stock the retailer before the gray marketer can

  • Sales data and distributor relationship are 2 efficient ways of controlling gray market influence. Gray marketer survives on thin margins, if his sales are badly affected once, he will think twice before repeating his ways

•    Monitor own salesperson performance strictly and take necessary steps in case of malpractice to set an example

  • A company which itself resorts to malpractice has very little bargaining power over malpractising distributors

•    Survey Markets regularly, audit distributor accounts on suspicious gray activity. If action needs to be taken, take before it hurts

  • Without sufficient information no action can be taken, so the route to gray market needs to be tracked. The key against gray marketing is to strike early, strike fast and strike hard

•    Identify hidden reasons behind gray market success and analyze if something can be done by the company

  • Gray market activity can point at some weaknesses on the part of the manufacturer. They can also identify untapped markets and help in expansion and segmentation
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Author: Guest

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