Effective channel management critical to combat gray marketing 8 September, 2008 By Vanessa Ho

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"Not many people in industry understand the magnitude of the problem [with gray marketing]," said Ram Manchi, president of AGMA.

According to the AGMA whitepaper, entitled "Effective Channel Management is Critical in Combating the Gray Market and Increasing Technology Companies Bottom Line," original equipment manufacturers (OEMs), channel partners and end customers have long been plagued by the gray market or the unauthorized alternative channel where branded products have been intentionally diverted from authorized sales channels into the hands of unauthorized dealers, brokers or the open market for gain. Unlike products sold through authorized channels, gray market products may pose serious issues for both OEMs and customers alike. Gray market resellers may advertise products as new, authentic and branded goods, but customers may wind up receiving goods ranging from used or remarketed products to those that have been wholly or partially counterfeited or mislabeled.

"Internet technology has advanced so much that it has become an enabler of this trade but it also has became an enabler [for us to trace it]," Manchi said.

KPMG performed an expanded survey involving OEMs, channel partners and brokers that totaled 189 respondents. It noted that gray market products found their way onto mainstream auction sites, and 59 per cent of channel partner respondents said these websites presented another opportunity to buy gray market goods.

KPMG also looked deeper and broader into channel management and found not only a direct link between channel management effectiveness and gray market exposure but found other losses associated with incentive programs that have not been adequately processed and monitored.

"The major shift is that some of the resellers openly admit that they now deal in the gray market," said AGMA treasurer, Peter Hlavnicka.

38 per cent of channel partner respondents admitted to receiving offers from the gray market. Of those respondents who said they received gray market offers, only nine per cent said they received incentives from gray market sources. The incentive for them is the initial lower price and, in some cases, faster delivery. About 66 per cent of respondents said they make gray market purchases but claim it amounted to less than five per cent of their annual purchases while nearly a quarter said their gray market purchases represented 11 to 30 per cent. This activity created demand and legitimacy for brokersupplied products. Therefore, participation in gray market activities contributed to the overall continuance of the problem.

The most commonly purchased gray market products are hard-disk-drive storage products (48 per cent of gray purchases). Consumer electronics and memory/integrated circuits (37 per cent) account for the next highest proportion.

"Many companies have bolstered their channel management since our 2002 report was published, but without channel commitment to clean up their part and without a comprehensive approach to channel management with robust consequence management, these efforts are not solving the problem," Hlavnicka wrote in the whitepaper.

The whitepaper provided detailed insight into key areas where IT companies can implement measures designed to mitigate the risk of gray market activity.

The first recommendation is to review incentive programs to identify potential areas of weakness that could be exploited by channel partners (either deliberatively or accidentally). If they are uncovered, take steps to strengthen them.

Secondly, issue a comprehensive channel policy that outlines expectations in terms of compliance and reporting. Spell out consequences for noncompliance and always follow through.

Also, companies should monitor their channel reporting and look for unexplained sales spikes, atypical customers and put automatic alerts in place. Act on those alerts as appropriate.

As well, organizations need to implement a robust process for performing due diligence on new partners and special pricing deals. Ensure new partners are capable of meeting reporting requirements. Before announcing a special pricing deal, make sure that objectives and ways of measuring performance against those objectives are clearly identified and established (including making sure the deal is genuine and the product really goes to the required end user).

AGMA also suggests that companies give someone within the responsibility to manage channel integrity. That function needs to provide ongoing communications, training and guidelines to channel partners making it very clear how the company will respond to incentive abuse, reporting manipulation and gray market behavior. Additionally, companies should train employees to help identify and avoid gray market problems.

Finally, implement a channel partner review program that includes on-site comparison of sales data from their "live" system, with information provided through the point of sale (POS) and/or sent to support incentive claims. Ensure robust consequence management is supported and implemented by executive sales management.