Grey Marketing: Perspectives and Implications - Essay Example

Grey Marketing: Critical Evaluation of Management Perspectives and Implications Introduction According to Bucklin (1993, p387), “Gray market goods are genuinely branded merchandise distinguished only by their sale through channels unauthorized by the trademark owner.” his practice is widespread across the globe and is also termed as parallel importing (Duhan and Sheffet, 1988). According to market estimates, grey markets generate revenue of more than 40 billion dollars annually (Kotler and Keller, 2009). The major reason accounted for the existence of grey markets is price differentials maintained by manufacturers across various international markets (Berman, 2004). For creating and maintaining competitive pricing, marketers tend to price same products differently across markets. This gives an opportunity for grey marketers to purchase products at much lesser rates from distributors established in other nations, where the manufacturer has maintained lower prices compared to the parent country. The purpose of the current study is to evaluate the strategies and actions international marketers need to undertake in order to reduce or eliminate the growth or emergence of grey markets. The paper will also throw light on the brand implications of a company’s marketing decisions on other countries. Emergence of Grey Markets In general, grey markets cannot be considered as illegal, as in case of black market of counterfeit or stolen goods. Rather, grey market products are genuine and from real manufacturers as well; but distributed in an unauthorized manner (Maskus, 2000). This occurs when the trademark registrant or manufacturer has not given any authorization to the seller for making any sale. They are sold in another country for a relatively lower price, triggering price differentials without the manufacturer’s knowledge and authority. For instance, marketers of pharmaceuticals in Europe are often restricted by price regulations; this offers opportunities for grey marketing. According to current estimates, grey markets account for about 10 percent of total European pharmaceutical market and is likely to rise in future (Chaudhry and Walsh, 1995; Ministry of Health, 2000). Besides the above factors, various other reasons have been accounted for the emergence of grey markets, such as: 1. When authorised brands have established performance, price, market recognition as well as popularity, ensuring demand and minimising consumer education. 2. When the authorised brand channel lacks market focus. As a result of market selection, distribution and expansion of the manufacturer, the brand might be inaccessible or unavailable to the authorized resellers (Buchanan Simmons and Bickart, 1999). In such situations, customers seek unauthorized distributors of the brands with lesser pricing. Any imbalance of demand and supply presents an opportunity for grey marketers to make profits (Huang, Lee and Ho, 2004). 3. When major changes are seen to take place in buying behaviour of consumers. For instance, government policies might accelerate the demand for lower-priced products (Fisher, 1999). Though it is true that parallel importing or grey markets increase brand penetration in areas where the manufacturer has not reached, it can also be damaging for the brand as the owner has no control over the manner in which the brand is presented and portrayed. This includes pricing decisions, marketing communications as well as quality of service provided. Numerous renowned and branded products are increasingly being distributed through grey markets, ranging from cigarettes, pharmaceutical drugs to automobiles and consumer electronic goods. So, it is essential for international marketers to be alert of future risks associated with grey markets as well as create strict monitoring policies in order to avoid brand damage due to grey marketing. Negative Implications Grey markets have various negative implications, especially for international brands. An understanding of the exact implications of negative short-term and long-term consequences will help in better planning so as to counter grey marketing and prepare strategies for minimising their occurrences. Grey marketing can be serious and inflict long-term damages on the channel marketing strategies of an organisation, which create a gap between marketing resources and marketing results, thereby reducing efficiency of operating costs (Ahmadi and Yang, 2000). Various other resources such as, capital and research, might be adversely affected. The issue with grey marketers is their ability to disguise themselves; this reduces any chance for organisations to pin point their market or distribution area. Also, consumer perception of grey markets is fairly different from organisations and marketers. For consumers, grey marketers provide an opportunity to obtain and use certain products, which otherwise are inaccessible or unavailable to them. Grey marketers provide price differentials by lowering prices of goods by large margins and diminishing popularity as well as preference for authorised deals (Hsiu-Li, 2007). Other reasons attributed for price differentials include disparate taxation and fluctuations in exchange rates. Thus, restricting the grey markets might create an imbalance in the society. Grey marketing also results in damage of values and goods of brand names, minimising their worth in the marketing channel as well as to the society and consumers. This presents a serious threat to the life-cycle of a product. Since grey market goods are sold at lower prices compared to the original ones, the actual pricing strategy of a manufacturer or brand owner becomes ineffectual (Palmeter, 1990). Many a times, excess distribution of products without proper services taints image of the brand, thereby lowering the brand value. Lastly, customers might feel that manufacturers or brand owners are applying unethical measures to market their product, which further diminish the brand’s image. Apart from that, there is always confusion regarding the pricing and customers are often suspicious of the authorised deals. Strategies to Overcome Grey Marketing Authorised dealers and manufacturers are in definite need to overcome grey marketing. Analysts have evaluated both pro-active and reactive strategies that can be employed. Various reactive strategies for combating grey marketing include product limitations to certain markets, acquisition and collaboration, strategic confrontation, price cutting, participation and supply interference. Although few of these strategies are able to provide short-term relief, it is still more important to establish planning that can curb their reoccurrences. Thus, pro-active strategies fare better and are more beneficial. These strategies include service or product availability and differentiation, dealer development, establishment of legal precedence through trademarks and copyrights and establishing a strategic pricing system (Palia and Keown, 1991). Strategic Pricing Strategic pricing can be prescribed as one of the best methods for curbing grey marketing activities. While it is not advisable for brand owners to implement standardised strategies for pricing across all categories, manufacturers are able to minimize the effects of grey marketers by re-evaluation of the trade and supplier discount structure as well as pricing strategies. Narrowing the discount and pricing structure will result in incentives and bonus for authorised dealers and distributors. This will persuade deals to order more inventories with the objective of earning higher incentives, thereby reducing availability of inventory for unauthorised distributors. Apart from the above pricing strategy, global firms are also restructuring their pricing decisions with the objective of coordinating the prices of global products. Both formal and informal methods are present for coordinating. Formal methods are formalizing and central decision processes. Informal coordination includes implementation of a corporate culture and creating additional communication channels as well as reward systems for various channel members. Strategic pricing is directly implemented by the manufacturer or owner. The implementation costs can be medium to high, depending on the market reach as well as type of strategy to be followed. Nonetheless, implementing pricing strategy to lessen grey marketing can be complex and the pricing needs to be monitored frequently and strictly. Though relief to authorised distributors can be a little delayed, this strategy is very useful in long-term. It also successfully curtails grey marketing activities at the source and the associated legal risks to dealers and manufacturers are very low. Presently, Porsche is implementing pricing strategy to wade off its grey marketers (Malueg and Schwartz, 1994; Czinkota and Ronkainen, 2006). Product Differentiation Another method that majority of the global brands are implementing in order to restrict grey marketers is strategic product differentiation. Establishing different product versions with varying local tastes, safety rules, technical standards, packaging requirements, income levels as well as national health for different local markets will largely reduce activities in the grey market. For instance, Minolta Company, manufacturers of cameras, distributes identical products in Japan and United States, but with different warranties and names (Douglas and Craig, 2010). Though the strategy might negatively affect capital expenditure and increase product, marketing and inventory costs, yet marketers should look at the bigger picture and long-term benefits of the same. It will also be wise to weigh the negative factors of product differentiation against the huge opportunity costs connected with grey marketers. Product differentiation as well as product availability take place with joint effort from brand owner as well as authorised dealers. Though implementation costs are high, the strategy is not difficult to carry out. The strategy also successfully curtails activities of grey marketers at the source. Nevertheless, the biggest disadvantage of applying this strategy is that no effect can be seen in short or medium-term as a direct result of the huge capital expenditures; this cancels out the profits and gains. Long-term advantages of product differentiation are clearly evident in companies such as, General Motors, Kodak and Ford (Tan, Lim and Lee, 1997). Trademarks, Labelling and Copyrights Copyrights and trademarks can also be used to reduce grey marketing activities. This is implemented by preventing flow of products that bear the trademarks or copyrights associated with their authorised dealers (Clarke and Owens, 2000). This process is implemented even for genuine products and the objective is to provide legal protection. For instance, customs offices label a brand’s product with specific marks or features, pertaining to that particular market or nation. This helps in distinguishing products of authorised dealers from unauthorised ones. Another process of labelling is by marking the distribution nations, thereby helping consumers to identify whether the products are traded legally or illegally. In addition, another method of using labelling is inclusion of all relevant information on copyrights such as, notices, design marks, usage manuals, packaging and instructions specific for the market or nation. This will also aid in distinguishing unauthorised dealers as well as pinpointing their sources (Mitchell, 1998). However, this strategy needs to be heavily supplemented with advertising and spreading consumer awareness regarding grey goods and how to differentiate them. Even after that, grey marketers can exist by providing goods at a much lesser price compared to authorised dealers. At the distributor level, manufacturers need to review the licences as well as distributor agreements in order to ensure that products are distributed by legally recognised and ethical dealers. Other strategies include printing the expiration date on perishable items, reducing the timeframe and opportunity for parallel importers. This also helps in protecting consumers from grey marketers, who might sell them expired and unfit products. Apart from the above, offering extended warranties only for authorised dealers can also be implemented and advertised (Tan, Lim and Lee, 1997). Supply chain and distributor/dealer management Strict monitoring of the supply chain with frequent audits and regular adjustments can facilitate effective diminution of grey marketing activities. Manufacturers should involve in dealer development though enhanced relationships, better incentives and bonuses as well as by improving their knowledge about long-term and short-term negative consequences of grey markets (Sookman, 1990). It should be noted here that dealers and distributors are integral and sometimes the only intermediaries between manufacturers and customers. Thus, it is important to transform these dealers into loyal organisational partners, thereby increasing positive word-of mouth and disseminating awareness about grey marketing to the local customers (Cross and Stephans, 1990). Manufacturers can also introduce strict qualification criteria for distributors; for instance, selecting only those distributors with strong control over their territories. Maintaining close relationships with dealers and authorised distributing will allow better implementation of the strategy and exposure of grey areas. Conclusion The above essay was a comprehensive analysis of contemporary marketing programs aimed to reduce and eliminate grey marketing activities. Grey marketing is unauthorised selling and distribution of products with lower pricing. It creates severe negative impacts on the genuine brand such as, loss of brand image, superseded pricing strategy, loss of customers and even loss of product usage due to confusion in authenticity and price. As a result, many organisations have started implementing pro-active strategies for reducing long-term effects of grey marketing. Few of the well-established and tested strategies include altering the pricing, dealer and distributor development and establishing relationship with them, product differentiation and availability as well as copyrights, labelling and trademark. Monitoring and identification along with pro-active action plans are the only solutions for long-term relief from grey marketers. Reference List Ahmadi, R., and Yang, B. R., 2000. Parallel imports: Challenges from unauthorized distribution channels. Marketing Science, 19(3), pp. 279-294. Berman, B., 2004. Strategies to Combat the Sale of Gray Market Goods. Business Horizons, 47(4), pp. 51-60. Buchanan, L., Simmons, C.J. and Bickart, B.A., 1999. Brand Equity Dilution: Retailer Display and Context Brand Effects. Journal of Marketing Research, 36, pp. 345 – 355. Bucklin, L.P., 1993. Modelling the international gray market for public policy decisions. International Journal of Research in Marketing, 10(4), pp. 387-405. Chaudhry, P. E. and Walsh, M.G., 1995. Gray Marketing of Pharmaceuticals. Journal of Health Care Marketing, 15(3), pp. 18-23. Clarke, I. and Owens, M., 2000. Trademark rights in gray markets. International Marketing Review, 17(3), pp.272 – 286. Cross, J., and Stephans, J., 1990. Gray Marketing: A Legal Review and Public Policy Perspective, Journal of Public Policy & Marketing, 9(2), pp. 183-195. Czinkota, M.R. and Ronkainen, I.A., 2006. International Marketing. Mason, OH: Thomson South-Western. Douglas, S.P. and Craig, C.S., 2010. Global marketing strategy: Past, present, and future. Advances in International Management, Volume, 23, pp.431-457. Duhan, D.F. and Sheffet, M.J., 1988. Gray Markets and the Legal Status of Parallel Importation. Journal of Marketing, 52(7), pp. 75-83 Fisher, S., 1999. The Impact of Parallel Importing on Consumer Law. Auckland: The University of Auckland. Hsiu-Li, C., 2007. Gray marketing and its impacts on brand equity. Journal of Product & Brand Management, 16(4), pp.247 – 256. Huang, J., Lee, B.C.Y. and Ho, S.H., 2004. Consumer attitude toward gray market goods. International Marketing Review, 21(6), pp. 598 – 614. Kotler, P. and Keller, K.L., 2009. Marketing Management. Upper Saddle River, NJ: Prentice Hall. Malueg, D.A. and Schwartz, M., 1994. Parallel imports, demand dispersion and international price discrimination. Journal of International Economics, 37(1), pp. 67 – 195. Maskus, K. E., 2000. Parallel imports. World Economy, 23(9), pp. 1269-1284. Ministry of Health, (2000). New Regulations Controlling Internet Drug Sales. Press Release. Wellington: Ministry of Health. Mitchell, A., 1998. Customer rights a gray area in distribution ban. Marketing Week, 7, pp. 30 – 31. Palia, A.P. and Keown, C.F., 1991. Combating parallel importing views of US exporters to the Asia-Pacific region. International Marketing Review, 8(1), pp. 47 – 56. Palmeter, N. D., 1990. Gray Market Imports: No Black and White Answer. Journal of World Trade, pp. 89-92. Sookman, B., 1990. Can gray marketing be stopped? Computing Canada, 16(4), p.48. Tan, S.J., Lim, G.H. and Lee, K.S., 1997. Strategic responses to parallel importing. Journal of Global Marketing, 10(4), pp. 45 – 66. Read More