“Grey Marketing” is a business arbitrage which a low cost source of products is used to extract profits. In short, buy the same product cheaper and sell it for the same price.
It works best for branded products that are sold at different prices in different markets.
There are four aspects of gray marketing of technology products that I can think of. They simplify to supply chain integrity, profit maximisation and maintenance.
Various scams performed by manufacturers, often in China. The “one for you, one for me” is where the factory runs an over-sized production run and ships the order. The remaining stock is sold through other channels as new.
This scam can get worse when the manufacturer uses lower specification or second hand (recovered/recycled) components in the extra run. Poor quality or outright faulty product is very damaging to the brand.
Less of a problem today as complexity increases and technology companies have increased their monitoring of the production in factories.
Upcycling of Used Equipment
Another grey market issue has been the re-packaging of used equipment as new. Sometimes done at the factory and treated with new packaging, manuals and cables but more common with resellers passing off “bench tested” equipment to customers where the boxes have been opened for preparation.
A less common variant was resellers buying from used equipment resellers and them passing it off as new to customers. It was this area where engineers would find previous configurations on devices. There was a time when some used equipment sales didn’t include refurbishing.
In the past, many vendor resellers were looking for a quick buck before going out of business and restarting under a different name every few years. Its less common now and vendors have taken a more active role in monitoring resellers and used equipment companies.
Note: I am using the term ‘upcycling’ ironically in case you missed it.
The gross profit margins on technology products are typically 80-90% not including software and other intangibles. To maximise revenue global vendors will vary the pricing according to the market’s ability to pay, cost of operations and other factors. For example, Cisco has a dominant position in the Australia networking market and applies about 25% markup on products sold there compared to the US or Europe.
Geographic Markets – Some companies were known to use local offices in those companies and ship internally. Similarly resellers would use a local office or local buying and shipping agent to ship out of market.
In a few cases, vendors had problems with spare parts supply since stock was held in local warehouses based on volumes sold into a market. When this trans-shipping reached a certain scale, the vendors has more reasons to act.
Vertical Markets – pricing for vertical such as schools/universities may have additional discounts. Resellers might purchase additional products at a discount then sell into enterprise accounts.
The high prices of new products make it possible for second hand resale to be quite a successful business. If products were better priced then grey marketing would be less attractive.
When Snowden released papers from the US secret services, we discovered that tampering with devices in transit was a real issue. There have been rumours of components or modules with hardware implants for some time but no compelling evidence has been found.
Notwithstanding, the brand damage to well known vendors was substantial around trust of the supply chain. More recently we saw Bloomberg make hysterical and unsubstantiated claims about a hardware implant with Supermicro and everyone went nuts even thought there is no proof.
What Vendors Are Doing?
Vendors have been stuck with brand damage, unhappy customers, and service problems. Vendors have done a few things to address this:
- improved their monitoring of factories with dedicated employees on location.
- Improved their inventory tracking from warehouse to reseller to customer.
- clamp down on resellers with regular inspections and controls
- attempts to prevent the resale of hardware with tougher software licensing that makes it difficult or prevents resale.
- release of software to collect asset and product information and report to vendor as part of support contract. This will detect grey market products much earlier and allow the vendor to proactively take steps. e.g. assets deactivated at Customer A but appear at Customer B might result in a licensing audit or other intervention.
The Etherealmind View
I could generalise that grey marketing is driven excessive profit seeking in vendors, a very common occurrence in technology:
- Companies that build brands will to charge higher prices at higher profit margins. If the products are good and customers well served then value is offered but there are many companies that charge high prices through monopoly or dominant positions. These vendors drive customers to grey markets.
- Resellers turn to grey marketing to make fast money for unscrupulous reasons or financial problems. Nor surprising since brand vendors work hard to prevent resellers from making too much profit and ensuring that most of it goes to themselves. Again, vendor drives reseller to gray marketing.
- Some people are not willing to consider alternative products at lower costs and look for ways to have to both ways. These customers should be honest with themselves and accept that they are being overcharged and find other ways to manage the situation.
Addendum: I’ve done it, it works
I have recommended and used second hand products and worked out very well. The customer saved 60-80% off the as-new price and equipment worked well for a number of years. Thats a lot of motivation to go down the grey market road.
I wonder if you have any experiences with grey marketing and what are your thoughts ? email me at [email protected] or leave a comment.