- How Grey Market Sellers Operate on the Surface to Fool Large Brands and Inexperienced Brand Protection Companies
- The True Hierarchy Behind The Scenes and All The Players
- Steps Your Brand Can Take To Prevent and Fight Against The Grey Market Problem
Table of contents
How Grey Market Sales Really Work
What is the Shadow Hierarchy?
Counterfeits and knock-offs are such a big problem that many articles are written and laws are passed to prevent it. While not as well known as the black market, there’s a “gray market” for consumer goods that’s just as big of a problem.
Working within the “gray area” of the law, the gray market isn’t technically illegal but is unethical due to unauthorized sales of authentic goods.
Most major companies have terms and policies in their Distributor Agreements clearly stating where and to whom authorized distributors can sell. The goal is to keep the brand’s products in the correct hands so it is not resold below minimum advertised prices and to keep brand integrity intact.
But wherever profits exist, business is made. Using parallel imports, anonymous LLCs, and a wide variety of illicit techniques, gray market sellers get their hands on authentic goods and resell them online or in physical stores at a hefty profit that is usually below the Minimum Advertised Price. What is grey market? This is the gray market.
Why Brands Shouldn't Underestimate the Gray Market
Many brands that learn about gray market goods don’t initially understand why it is such a big deal. If the items are authentic, won’t you make a profit no matter what? Well, not quite. Gray market goods can lead to serious problems including:
MAP Pricing Violations – Since unauthorized sellers have no reason to follow minimum advertised price guidelines, they will sell at any price that gets them a profit margin.
Unhappy Authorized Channels – Authorized sellers who comply with MAP policy become frustrated when they lose customers to gray marketers with lower pricing. This may lead to smaller purchase orders from authorized sellers.
Reduced Brand Integrity – If your product has a MAP of $99 but it is being sold on the gray market for $79, it can impact brand perception and value.
“Black Hole Theory” – This gray market theory suggests that grey marketers will become richer and authorized sellers will become poorer over time if nothing is done to fight gray market trade. With easy online comparison shopping, customers will choose the new product with a lower price. Compliant, authorized sellers will see reduced sales.
Poor Reviews – Grey market sellers may advertise “new” items that are actually older, overstock items or refunded units purchased through liquidation. Grey market sellers may also list the wrong version of the product. Customers who receive these products tend to blame the brand rather than the seller, leaving poor reviews and spreading poor word of mouth.
It is important to understand that grey market sellers have been in business for decades. The more successful they are, the more savvy they are at acquiring products and protecting their sources. They often work in groups, develop strong relationships, and share secrets on how to operate in the shadows and protect their interests.
The key to stopping Grey Market sales is to prevent the seller from acquiring the product in the first place. Cease & Desist letters, trademark infringement complaints, and lawsuits won’t work against the largest and most experienced traffickers. They are not rookies and have contingency plans in place for everything. They’ve been known to go toe-to-toe with large brands such as Canon and Olympus in the courtroom.
Types of Gray Market Sellers
In general, the largest Gray Market sellers are parallel importers. They purchase high-ticket items in large quantities from wholesalers with deep contact lists. The largest sellers get deals that no one else has access to by contacting established and normally trustworthy distributors / exporters in countries such as China, India, Singapore, or the UAE.
This article is not about these types of grey marketers. We will instead focus on Domestic Gray Marketers. These sellers are more common with small to medium sized brands. The smaller the brand, the more likely grey market sellers are acquiring the product either directly from the brand or through a distributor or wholesaler. These will be the easiest to identify and stop in their tracks. This is found most often in apparel, shoe, and travel-related products.
For medium to large sized brands, there is a more insidious hierarchy that often involves rings of people, multiple addresses, and companies. These hierarchies can often be found in gray markets associated with health and beauty, consumer electronics, and kiosk or MLM brands.
How Grey Marketers Appear to Operate
1.
The seller purchases product through an authorized or unauthorized channel (brand, distributor, retailer, friend or family).
2.
Seller ignores distribution agreement or MAP pricing agreement by selling the product on Amazon or another major marketplace.
3.
Seller masks identity behind multiple names and opens new accounts if they receive Cease & Desist letters.
4.
Once a seller is identified and threatened with legal action, unauthorized sales stop.
For many sellers, this process is true and is the extent of their enterprise. But what about the larger sellers making six (or more) figures a month through unauthorized sales channels? Are they becoming millionaires through such a basic and obvious business model?
And why does your brand keep playing Whack-a-Mole despite cutting off the supply?
How Grey Marketers Actually Operate
This is an example of what is likely going on:
Step 1
A wealthy financier starts an e-commerce business and hires multiple employees that he/she can trust. These are likely to be people they’ve worked with in the past or have strong family ties with. They’re intelligent and have a reputation for being comfortable working within the grey areas of the law.
They go to work creating LLC’s with random and vague “salesy” names such as “Best Deals Inc” or “Great Value Corp”. These are created using a Registered Agent name and address so it is difficult to trace.
Step 2
The employees hire dozens of warehouse/logistics employees that usually are unaware of what’s really going on.
They also make quality websites that give an appearance of strong professional legitimacy. This will be important when they approach brands to source products.
Step 3
Next they hire middlemen as “Account Managers” or “Sales Associates”. Officially, their job is to approach brands and distributors and become approved to sell their products online. Success is a major victory for the company since they no longer have to walk the grey line.
Since this is unlikely, their real job is to LIE to companies about selling the product in brick and mortar stores or kiosks. Then, they turn around and sell the product to the Grey Marketing company who re-sells it online.
Step 4
For sophisticated companies, this method is too large a legal risk. It’s possible they’ve been sued before for violating distribution agreements where they promised not to sell the goods online. Instead, they recruit family, friends, or trustworthy individuals they can set up as the “fall guy”.
Once account managers identify brands they can acquire product from at distributor pricing, they look for a patsy — someone who is willing to create a business and acquire products only to hand them over to the grey marketer.
The individual’s effort can be as easy as renting out a kiosk or retail merchandising unit at a mall on a month-to-month basis and telling a brand they want to sell their product there. In exchange, these ringers are well-compensated by the gray marketing company for ordering products from the brand.
Step 5
The middleman now takes the product and sells it at wholesale price to the established eCommerce business. The gray marketing company begins selling the product behind dozens of established Amazon accounts they possess. If one is suspended, they have dozens more to switch to and lawyers on retainer to call and reinstate the accounts.
Since the middleman is often an Independent Contractor with his/her own LLC, there is another line of separation between the main grey market sellers and the source of the product.
Step 6
When brands or enforcement companies attempt to track down unauthorized sellers by test-buying the product from one of these Amazon accounts, the serial number only points to the fall guy and not the head of the operation.
Even if Amazon sellers receive Cease & Desist notices, they ignore them because they can afford Amazon lawyers to combat account suspension (often using the same lawyers that claim to remove unauthorized sellers).
The brands and their lawyers begin sending legal threats to the fall guy, who has no control over the product or the Amazon account since neither is in his possession.
Step 7
Since many of these ringers are low-income individuals, they are technically judgement proof if they are sued. The only legally viable option to pursue is Breach of Contract, which is civil, not criminal, and can be wiped easily with a bankruptcy.
Regardless, most of these cases are lost since they cannot prove the ringer is the owner of the Amazon account (since they are not). The ringer simply claims the Amazon account is a random reseller who received his product through one of many means. To top it all off, there are state jurisdiction questions that can get the case dismissed immediately.
Worst of all, brands, their lawyers, and the enforcement companies may think they nailed the problem and move onto the next violator as soon as the ringer’s supply runs dry, not realizing the next Amazon account is in the same hierarchy. They are unknowingly chasing the same seller, thinking there are multiple sellers.
Step 8
Once the original fall guy is caught, the middlemen recruit new ringers to repeat the process from the start. If the original ringer is smart, they will start recruiting their own ringers, adding one new middleman to the mix and one more layer to cloud the money trail.
Quite a game of whack-a-mole, huh? And for the Amazon brand, a very expensive game.
Lear more about Grey Market
We can help
Brand Alignment is aware of these unethical practices with a proven track record of working against gray market sellers.
We start all our investigations by drawing out the potential hierarchy of identified violators. We focus on targeting the head, instead of the arms and legs, and bleed their supply dry. Not all violators have this type of complexity, but these types of enterprises are often the largest violators who take the most money away from brands. The Pareto Principle is always in effect: 80% of unauthorized sellers will have simple enterprises, but the 20% that have complex enterprises will take 80% of sales and merchandise.
Smart Violators Require Smart Brand Protection. And that is what Brand Alignment is all about.
Thank you for reading our post, “Shadow Hierarchy: How Grey Market Sales Really Work.” We hope it was helpful.
Let us Take Care of Your MAP Monitoring & Enforcement
The first step in removing the different types of unauthorized sellers is spotting them on your listings and that is exactly what the Brand Alignment Monitoring Dashboard will do for you. With price updates every 3 hours and inventory totals for every seller on every listing, you will get the most complete picture possible of your brand on every major online marketplace.
Of course, the most important step in removing unauthorized sellers is prevention and enforcement. This is where Brand Alignment is leagues above the competition.
Clear over 80% of unauthorized sellers: Brand Alignment will make a custom strategy for your brand to ensure the highest rates of removal.
Control Your Authorized Channels: Daily emails informing you of authorized channel violations and price cascading events.
Will Enforcement Solutions Work for My Brand?
We have had our 80%-90%+ enforcement rates in every single industry we have worked in. That includes the following:
- Consumer Electronics
- Apparel and Shoes
- Pharmaceuticals
- Health & Beauty
- Sports & Outdoors
- Mobile Phone Accessories
- And More
As you are already aware, each industry has their own bells and whistles. Please contact us if you have any specific questions about enforcement in your industry.
Are There Any Risks Involved With Enforcement?
Brand Alignment gives the brand the option of using their own personal cease & desist letters or the option to customize Brand Alignment’s proven high performance Cease & Desist letters. These letters were crafted by Intellectual Property lawyers with a full focus on minimizing liability.
Any infringement complaints filed by Brand Alignment are done with the utmost care and transparency. We do not file counterfeit complaints without test buys and approval from the brand. Our trademark complaints are done with caution and all bases covered.
Finally, in this world, anybody can sue anybody for anything. But it does not mean it will stand up in court. There is nothing we can do to prevent frivolous lawsuits from disgruntled sellers. However, we do everything we can to prepare you to have any case against you quickly dismissed. Since 2018, we are proud to say that neither us or any of our brands have had any legal issues of any kind related to our service.
Brand Alignment vs The Competition
If you are new to shopping for a brand protection agency provider, it might be confusing to tell the difference between companies. It might sound like everybody offers the same type of monitoring and enforcement. This could not be further from the truth.
- Crawls marketplaces for pricing changes every 3 hours or 8x a day
- Markets monitored for price cascading are crawled every hour or 24x a day
- Sends a Cease & Desist letter to every unauthorized seller on Amazon
- Since 100% of all unauthorized sellers are contacted, Brand Alignment averages an 80%-90%+ Removal Rate
- Uses hundreds of proprietary investigative techniques to identify personal information of sellers and supply chain sources
The Competition
- Crawls marketplaces for pricing only 1x-4x a day
- Markets monitored for price cascading are crawled every 3 hours or 8x a day
- Requires YOU to send a Cease & Desist letter only if YOU have the email of the unauthorized seller
- Since only a small percentage of unauthorized sellers are contacted, the competition averages a 10%-30% removal rate
- Uses basic investigative techniques like Google searches or buying low quality lists in hopes of finding emails to send letters
How Much Money In Sales Are You Losing Each Year Due to a Lack of Quality Brand Protection?
- What is your current Buy Box Loss percentage? How much unsold inventory do you or your authorized channels have due to Buy Box loss?
- How much are you charged by Vendors for chargebacks related to price matching MAP violators?
- What effect do unauthorized sellers have on your Brand Integrity when they violate MAP policy or sell refurbished, returned, or used items as New?
- Are you dealing with unhappy authorized channels who have difficulty obtaining the Buy Box? Are you being turned down by potential authorized channels for not having better control of your MAP policy?
- Did you know that data shows that less sales are made from 3rd party sellers having the Buy Box than from Amazon having the Buy Box?
- What are your storage and warehousing costs from unsold inventory due to unauthorized sellers?
Frequently Asked Questions
How Long Does It Take to Get Started?
Our on-boarding period takes between 1-2 weeks depending on the amount of custom work required.
I Have More of a Counterfeit Problem Than a Grey Market Problem. Can You Help?
Currently, our specialty is grey market sales. If you are dealing primarily with counterfeits or knockoffs, we recommend speaking to a IP Takedown service instead. If you are interested in both, our services compliment IP Takedown software very well.
Do You Work With Third Party Vendors or Only Directly With Brands?
In the past we worked with 3rd party vendors, however due to liability concerns we now only work directly with brands. We do offer a referral commission so please feel free to contact us if a brand you work with needs help with brand protection.
What Are Your Enforcement Rates on Other Marketplaces Besides Amazon?
We do not offer removal guarantees for other marketplaces, however it is not uncommon to see removal rates on Walmart or Rakuten in the range of 50%-90%
My Grey Market Problem Extends Outside the USA. What Can You Offer?
We LOVE investigating international grey market trade. Contact us about the countries you would like to monitor and enforce, and we will be glad to help.
I Had a Bad Experience With My Last Brand Protection Provider, Why Will You Be Any Different?
We understand your concerns. We are aware of many unhappy brands who have worked in the past with our competitors.
We can talk all day about how we are different, but instead we would like to show you with our Brand Alignment Enforcement Guarantee. Contact us to learn more.
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