Combating Grey Market Abuse

One of our independent software vendor customers recently lamented, with a resigned tone, that their software products are available at a 90% discount in the Chinese grey market. A grey market arises whenever your products have an exploitable price differential. Grey markets are quite well-known in pharmaceuticals where prescription drugs are purchased at steep discounts in one country and sold at below-market prices in another country. They are known to exist in consumer devices and in automobiles.

For software and hardware products, a grey market arises in many scenarios. For example, unauthorized brokers might purchase your products from legitimate channels at steeply discounted prices and target end customers by undercutting your prices. You might also have a price differential in different geographies to account for purchasing power differences or currency fluctuations, making it possible for someone to buy your products in the lower priced country and undercut your prices in the higher-priced country. End customers are buying products that often have no warranty coverage. In fact, most vendors we speak to find out about the existence of a grey market when customers call them for warranty or support.

From all accounts, the grey market for hardware and software products is growing, especially for vendors that expand into new geographies. A KPMG study estimates the value of grey market goods grew to about $58B in 2007, up 80% cumulatively since 2002 (equates to 12.5% year over year growth). This translates to a loss of $10B of gross profits to grey market sales, which is about 4% of high-tech industry profits. On average, grey market prices are 27% lower than the vendor’s pricing, which eats into profits for both vendors and their legitimate channel partners.

Are you losing profits to the grey market? Can you quantify the revenue leakage? What are you doing about it? In the next article, we provide some suggestions.

_{[1]  Effective Channel Management is Critical in Combating the Grey Market and Increasing Technology Companies Bottom Line, KPMG Grey Market Study Update, 2008}