Updated June 12, 2023
Introduction to Grey Market
Let us first clear the confusion between the grey markets, the black market, and the grey economy. Usually, people miss interpret and estimate all the three to be the same, however, there is a difference amongst the three.
Grey Market: Sales of legal commodities or goods through a distribution channel that are also legal however not intended for sales by the original manufacturer is called selling in the market.
Black Market: Products or goods that are restricted legally or are prohibited from selling; however besides the restrictions they are sold in the black market.
Grey Economy: Economy or goods and products that are not taxed or monitored by any form of the government comes under the grey economy. This is a very informal type of economy.
This term that is ‘The Grey Market’ is also spelled as ‘The Gray Market’ however the meaning is the same and it has the same definition. Let’s read the definition given below.
To be precise this is a market where the products and goods are bought and sold outside the, not within the original manufacturers authorized distribution channel. You can also refer the Grey Market to selling and importing products by dealers that are not authorized by the manufacturer; however, the selling activity is not illegal still it is unofficial.
In a Grey Market Brands that are sold are genuine these goods are also known as Grey Goods are sold not within the authorized distribution channel by authorized Market dealers, in fact, these products are sold in an unauthorized sales territory by unauthorized Market dealers. These products are sold at a lower price than the price of the same product sold in the authorized sales market and by authorized Grey Market dealers.
Explanation of the Term Grey Market
Well, the above statements have made the term quite clear. However, let’s still try to understand the same better.
The market is also known as the parallel market. The reason behind calling it the parallel market is because the products or goods are sold in a distribution channel that is not authorized by the manufacturer of the goods, this system forms a parallel distribution channel for buying and selling of goods that created two different prices for the products in the market.
Not confusing the term with the black market or the grey economy is important. The most important factor here is that the market deals with legal goods or grey goods that are sold in an unauthorized distribution channel by unauthorized dealers who are not permitted to sell the products by the original manufacturer of the products.
Most of the times these legal products are sold through an illegal distribution channel, the channels are either individual distributors or small companies who are not authorized to sell the products by the manufacturer of the product. The reason for selling in the market is selling the product at a lower rate than the rate available at the authorized dealer through the authorized distribution channel. Or selling of products in a country where the product is not available.
Types of Grey Market
Did you know that there is a variety even in the grey market? What I mean is that the market has types. Let me explain them in brief.
- The original market where the legal products are sold through unauthorized distribution channels. This is where new products are sold. Mostly the market deals in new and original products.
- At times it is difficult to differentiate between the new and the used goods in the market. The market where used goods are sold is also called the green market.
- And the third type of market is also called the dark market. The dark market deals in secretive and unregulated trading of commodities such as crude oil.
The grey market and its explanation is now very clear. Now we need to understand this market even better by understanding, what causes give birth to the grey market? How does it affect the market, the industry, and the manufacturer? What are the pros and corns of the market? And finally, how can we prevent the loss?
So let’s begin with what gives birth or the causes of Grey Market. Unauthorized retailers gain in the grey market because of the following reasons:
1. Low Price Competition
Many manufacturers distribute their products through very large distributors in order to increase sales, and they also want to sell in huge bulks. This creates a selling competition amongst authorized market distributors. In order to sell their goods, they slash the product rates by offering discounts and selling the products at lower rates. This reduces the profit per product.
2. Price Difference in Different Countries
Manufacturers offer different prices or different costs for the same product in different countries. This is one of their strategies to maximized profits on the basis of the demand for that product in that particular country. The grey marketers are aware of the same and purchase goods from the country they get the products at a lower cost and sell them at a low cost in the host country. This creates different prices for the same product in the host country.
3. Blocked Distribution
Some manufacturers block a few distributors from selling their products; however the distributors want to sell the product of the manufacturer, hence they buy the product from the grey market. This is where they buy the product from a cost lower than the price set by the manufacturer. This involves buying a product at a lower cost and distributing the goods though an illegal distribution channel.
4. Sales Targets
The manufacturing companies do enforce huge sales targets on their employees especially their sales team. This creates sales pressure and that is how in order to meet grey market sales targets the employees sell these products in the grey market. This gives rise to the buying and selling of a product in the grey market from a sound business.
5. High Product Cost
Some premier products have a very high selling price, some are overpriced, some are costlier than their competitors, etc. in order to sell their products and balance grey market sales in the market, the companies do sell their products into the grey market to keep their products selling and rolling.
How does the Grey Market Effect Business?
It is important to understand that this grey market or the parallel market has an adverse effect on the manufacturer’s business, the industry, and the economy. Let us look at a few effects.
1. Affects Profitability
In the grey market, the goods are sold at a lower cost than the cost decided by the company. The company sets the prices bases their calculations of profits. When goods are sold at a lower cost the company’s profitability is affected.
2. Brand Reputation
Products of the grey market do not come with a guarantee backed by the company. If the products sold in the grey market do face an issue with its performance the name of the brand will be affected.
3. Cannot Guarantee the Product
As discussed earlier that in the grey market it is very difficult to differentiate between the new products and used ones. You never know what the grey marketer might sell to you an original new product or a used one. Trusting the grey market might also not be as easy as it seems.
4. Multiple Market Prices
Because in parallel marketing the goods have different prices it confuses the consumer. The authorized dealers sell genuine products at a higher cost whereas the grey marketers sell the same original and legal products at a lower rate than the market. Hence there are price differences for one single product developed by the same manufacturer.
5. Effects the Government
Grey goods are goods that are sold without tax charges. Taxes are applied to both buying and selling of the products. An increase in the transactions puts the government to loss.
Pros and Cons
Customer’s Point of View:
Yes, there are few benefits that the customer gets if he buys his products. These benefits, advantages or pros are listed below.
- Products are available at a cost lower than the normal market price.
- Products that are not available in the market in a specific country are also made available in the market.
However, the disadvantages that this market has are much more than the advantages so let us have a look at the disadvantages or the cons of the grey market.
- The goods available in the grey market do not come with a guarantee or a warranty from the company.
- The grey goods are not trustable as you never know if the products supplied are used or new products.
- Grey goods do not have an after-sales service available for the products.
- The customer cannot differentiate between the original and the duplicate product in a grey market.
- Products not made as per the specific audience is sold here
Companies, Industry, and Nations Point of View:
Of course, the grey market has more disadvantages than the advantages for everyone, yet let’s take a look at the little benefits it give the companies.
- The companies that sell very high-value goods for an exorbitant value can also supply their goods through the grey market to increase the sales of their products.
- To meet the sales targets the employees sell the products through the grey market in order to reduce the cost of the product.
However, now that we know about the advantages let us check the disadvantages of the grey market on everyone.
- The 1st most important disadvantage is that it affects the companies and the industrial profitability
- The company’s brand image and reputation come at stake for the grey marketers can also supply products that are not original
- Products are sold without taxes which is why the government loses out on a collection of taxes.
- The product has a dual price in the market due to parallel marketing or parallel imports.
- The company cannot guarantee the products bought from the grey market.
- Business relationships and client confidence are at stake because the grey market is used to distribute the products in the market.
- An increase in the transaction of the grey market does affect the economy and the turnover of the industry. This affects the market in the industry.
- Customers lose their trust on the company products as they do not get the quality they have paid for.
- The products are sold out of the manufacturer’s authorized distribution channel.
- Everything above states that company the industry and the nation suffer a huge loss due to the parallel market the loss is not just monetary, it is also a cost to the reputation and the brand image which is much costlier than the monetary gains and losses.
How to Avoid the Losses?
Every problem in this world has a solution and hence the problems that arise in the market can also be taken care of by working ways out to stabilize or sorting these problems out. Let’s see how.
- The company should set a single cost policy for its products.
- The companies in the industries need to increase their distribution channels in order to avoid grey marketing.
- Strict terms and conditions for distributors.
- Track the distribution channels and distributors and the stock rolled out to them.
- Manage manufacturing costs in order to stabilize the cost of products and reduce selling costs in comparison to their competitors.
- Control over the product supply market needs to be kept by the company and the distributors.
- Set realistic goals for the employees of the company especially the sales team to avoid selling the same in the grey market.
This is a guide to Grey Market. Here we discuss the Introduction to Grey Market, types of grey market and the pros and cons of grey market. You can also refer to our other related articles to learn more –