This post originally appeared in Human Infrastructure Magazine, a weekly Packet Pushers newsletter. Get it with your free Ignition membership.
The term “gray market” as applied to the sale of IT gear encompasses a wide range of behaviors, from outright fraud to unscrupulous sales tricks to the legitimate sale and use of second-hand equipment.
The gray market is a business arbitrage in which an opportunity to source products at a low cost is used to extract profits. It works best for branded products that are sold at different prices in different markets.
The high prices of new products make it possible for second-hand resale to be quite a successful business. If products were better priced, gray marketing would be less attractive.
There are four aspects of gray marketing technology products that I can think of.
1. Manufacturing Scams
Some manufacturers, often in China, run scams to feed the gray market. “One for you, one for me” is where the factory manufacturers more of the product than was ordered. The original batch is sent to the buyer while the remaining stock is sold through other channels as new and authorized equipment.
This scam can get worse when the manufacturer uses lower-quality or second hand (recovered/recycled) components in the extra run. A poor-quality or outright faulty product damages the brand’s reputation.
Such scams are less of a problem today as complexity increases and technology companies have increased their monitoring in factories.
2. Upcycling Used Equipment
Another gray market issue is selling used equipment as new. This is sometimes done at the factory, where used gear is put into new packaging along with new manuals and cables.
It’s more common with resellers passing off “bench tested” equipment to customers where the boxes have been opened for preparation.
Another variant is when resellers buy used equipment and pass it off as new to customers. Sometimes engineers would find previous configurations on devices.
This particular scam is less common now, but in the past resellers looking for a quick buck would play this game. If they went out of business, they just opened up with a new name and started again.
These days, vendors take a more active role in monitoring resellers and used equipment companies.
3. Profit Maximization
To maximize 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 a 25% markup on products sold there compared to the U.S. or Europe.
Geographic Markets – To get around this, some companies with an international presence were known to buy gear in locations where it was less expensive, and then ship it internally to the higher-priced region.
Similarly, resellers would use a local office or a local buying and shipping agent to ship gear out of market.
In a few cases, vendors had problems with the supply of spare parts because stock was held in local warehouses based on volumes sold into that particular market. When this trans-shipping scam reached a certain scale, the vendors has more reasons to clamp down.
Vertical Markets – Pricing for industry verticals such as schools and universities may be cheaper than a typical enterprise. Resellers might purchase products at the discount price and then sell that gear into enterprise accounts for the full price.
4. Supply Chain Integrity
When Snowden released documents from the NSA, we discovered that tampering with devices in transit was a real issue. There have been rumors 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 was no proof.
What Vendors Are Doing
Equipment with substitute components or used gear that’s repackaged as new can damage a brand’s reputation, create unhappy customers, and cause service problems. Vendors have done a few things to address this:
- Improve monitoring of factories with dedicated employees on location.
- Improve inventory tracking from warehouse to reseller to customer.
- Clamp down on resellers with regular inspections and controls.
- Fight the resale of hardware with tougher software licensing that hampers or prevents resale.
- Use software to collect asset and product information as part of support contract. This will detect gray market products much earlier and allow the vendor to take steps such deactivating equipment, launching a license audit of the customer, or other interventions.
The Etherealmind View
The gray market is driven in part by excessive profit seeking in vendors.
- Companies that build brands will charge higher prices at higher profit margins. There’s value in a brand if the products are good and the customers well served, but many companies charge high prices through monopoly or dominant positions. These vendors drive customers to gray markets.
- Resellers turn to gray marketing to make fast money for unscrupulous reasons or financial problems. Brand vendors bear some blame here because they work hard to prevent resellers from making too much profit and ensuring that most of it goes to themselves.
- Some buyers aren’t willing to consider alternative products at lower costs, but also don’t want to pay the brand’s market rate, so they go to the gray market. 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
I once used second-hand products in a network design that worked very well. The customer saved about 50% of the new price, and equipment worked for a number of years. That’s a lot of motivation!
If you have experiences with or thoughts about the gray market, email me at greg.ferro at packetpushers.net.