The Gray Market

Gray Markets and Punishing the Customer

A Channel Marketing Primer

Wikipedia defines a gray market as, “the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer.” Grey markets exist because companies are motivated to maximize their profits. They've discovered that they can maximize their profits by charging different prices to different people. There is an economic concept called "consumer surplus" which is the difference between what a company charges and the maximum any given customer would have been willing to spend. Gray markets are created when companies try to capture more of this surplus by charging different prices to different customers.

Now if you wanted to employ this strategy solely in the United States, you would be guilty of a crime: price discrimination. But to charge a different price to people in different countries is perfectly legal. In the modern world, however, there is little to stop a lower priced product sold in one country to make its way back into the higher priced market.

I know about this first hand. In the 90s I managed channels for a technology manufacturer and spent all too much time chasing and fighting gray markets. Of course we were our worse enemy. We sold a version of our product in the United States for $185 and we sold a virtually identical solution for about $90 in Asia. Was it any wonder that an enterprising people might import them and split the difference with the customer?

In my case, we could have done a much better job of controlling this gray market. We were our worst enemy. We had a sales rep in Asia, paid on commission, who was lining his pockets by selling as much as possible. He profited but cost the company millions when he sold to companies that had no visible business model other than exporter.

The Gray Market Bites Back

Little did I know that when I went shopping for a high end digital camera a few years ago, that I would end up with a gray market product. I, like most consumers, had no clue that there are “authorized” and “unauthorized” sellers. Sure I did my research, but in the end I searched the web for a seller, found an out-of-state supplier (to avoid sales tax) and placed an order. I didn’t even get all that great of a deal! As you can no doubt tell from my website, I love this camera, but had no clue it was from illegitimate lineage.

I had no clue that is until the day it stopped working. On the final day of a photo-happy vacation to Alaska my beloved camera stopped working. Luckily I had already taken 1300 shots and had only a few hours left of photo opportunities.

Upon my return I called Nikon to report my problem. They asked me a series of questions and then directed me to a web form. I filled out the form, followed the packaging instructions, purchased the necessary insurance and sent my camera to the Nikon hospital for repair. Two weeks later I still hadn’t heard a thing. I finally called and was told, “I’m sorry we can’t fix your camera.”

“Can’t? You built it. Why can’t you fix it?” I asked. That’s when I was told that Nikon couldn’t repair gray market cameras. We quickly clarified that “wouldn't fix it” was more appropriate. I acknowledged that the product was long out of warranty and said I was willing to pay, but was told “no.”

They wouldn’t fix it. They wouldn’t tell me where I could get it fixed. I asked what market it was sold into and they told me Japan. I asked if they could put me in touch with a Nikon repair facility in Japan and they told me no. Ultimately they relented and sent me to an all Japanese website which I couldn't read.

When I asked “why” the answer was clear. "You should have come to our website and validated that you were buying from an authorized distributor before you purchased the product" and this was my punishment for not having done so. “Really?” I replied, “well it’s funny that you’ve never once created an ad that explains that requirement to your customers, nor do you have a “warning: only buy from authorized distributors” notification on your website.

When I sought an independent repair facilities they said they could not work on gray market cameras either for fear that they would harm their relationship with Nikon. After much whining they agreed to look the other way and repair my camera.

In a Nutshell

What’s the moral of the story? Greedy camera company tries to maximize profit by conducting a practice that is illegal within the US. Ultimately the company decides to punish the consumer for not being aware of a problem that the camera company does its best to downplay for fear that people would think poorly of them for charging Americans more for the same product.

Frustrating…you better believe it. Take a moment and join me in complaining to Nikon there is an e-mail address below. I'm sure they would appreciate hearing from you!

Rick Houghton

Nikon USA

Sr. Customer Relations Manager

310-414-5150

rhoughton@nikon.net.

Update

Unlike Nikon, I discovered that Seiko publishes a very visible warning on its website. When I asked a seller I found if they were authorized they said "no" but that there was no difference. The item would be fully warranted and there was benefit to buying from an authorized reseller versus an unauthorized reseller except a lower price. The company I spoke with said they are trying to become authorized but Seiko makes it extremely difficult in an attempt to constrict supply and thus drive up the price of the product.

October 2, 2009