Manufacturers Combat Grey market and Counterfeit Products Challenges
Manufacturers often find their products being sold through distribution channels they had not agreed upon or intended. These unauthorized channels, also called the grey market, though legal and consisting of genuine products, have serious consequences for the original manufacturer or brand owner. A different issue but posing many of the same problems and challenges are counterfeit products. Methods of combating counterfeit products vary depending on the sales models OEMs use to deliver products to market.
Sales Channel Conflict
A lot of grey market products originate overseas, but not all are imported. Authorized dealers sometimes sell overstocked items “out the back door.” These products make their way to online marketplaces or to retail stores where they are sold at prices that are significantly lower than those agreed upon between reseller and manufacturer. This undercuts authorized dealers who are abiding by pricing agreements and leaves them with few options to compete. They must choose to violate a sales channel agreement and accept less money for the products they carry or quit carrying them altogether due to low margins.
Erosion of Brand Reputation and Trust
Grey market products are often sold without a warranty resulting in confused and angry consumers when they attempt to have their products serviced. The items may be defective or damaged providing users with a poor experience or possibly damaging other equipment; for example, a faulty grey market camera lens could damage a camera body purchased through approved sales channels. These negative consumer experiences erode confidence and damage brand reputation.
Combating the Grey market
A manufacturer of small appliances repeatedly found their products being sold online at nearly 40% below their contracted distributor sell price. By implementing covert technologies and trap buys they were able to ascertain the identity of the distributors who were selling products outside of their approved channels. They recovered over 50% of the margin they were losing in the first quarter and either disqualified or placed on probation multiple distributors.
The Challenges Posed by Counterfeit Products
Another issue that is similar to the grey market problem, and presenting many of the same challenges for OEMs and Brand owners, is the proliferation of counterfeit items. Counterfeit items though similar in appearance vary greatly in quality and performance with the genuine product. They are almost universally made from inferior materials with a lower caliber of workmanship. This is particularly troublesome for companies that use a “base model and consumables” approach. In this model, the manufacturer sells an item (at a low margin) that must use their consumables (priced at a high margin) for it to be useful. Consumers using counterfeit items can damage or negatively impact the performance of the base model and also eat into the expected profit of this approach. Some examples of companies that use this model are Keurig (coffee maker and coffee pods), Gillette (razors & blades), Hewlett-Packard (printers and cartridges).
Combating Counterfeit Products in the “Base Model and Consumables” Sales Model
A packaging equipment manufacturer sold packaging machines and the consumable materials used in the machines to end users. Their margin on the equipment was small, as they expected to lock users into their consumables for long periods of time. In order to protect this revenue stream and ensure only their consumables were used, they implemented a technology solution that verified each roll of packaging material was indeed genuine and that counterfeits or knock-offs could not be used.
Another example of this model has very serious consequences of counterfeit use. A medical device manufacturer uses disposable covers to protect patients from possible cross-contamination in environments where their device is used by multiple patients. If a patient uses the treatment pad without a new cover, this poses a significant risk to patient health. To prevent this misuse and eliminate patient risk an embedded technology solution was implemented ensuring that the disposable covers were indeed genuine products from the same manufacturer as the device. Each cover could only be used once. If a patient or caregiver attempts to re-use a cover, the medical device will not function.
Many companies face these same challenges in combating both grey market and counterfeit products. The irony of the grey market is that the threat to the business comes from within as authorized dealers disregard agreed upon sales channels and pricing undercutting and damaging authorized distributors who play by the rules, and the OEM or brand owner’s reputation and bottom line. Counterfeit items are a threat from the outside and also require outside the box thinking and the smart application of technology in order to protect hard-earned market share and ensure sales models create the expected margin and in some cases, protect the health and safety of the end user.