In a previous GreyScout blog, we took a look at the importance of selecting a distribution model for your e-commerce business. The selective distribution model, for example, is a distribution strategy that sees a brand’s products for sale only at authorized retailers in specific markets.
Maintaining brand reputation is at the heart of the selective distribution model. As grey market activity in the e-commerce space continues to pose a threat to all brands, it’s easy to see why so many e-commerce businesses go this route.
According to Forbes, e-commerce marketplaces such as Amazon, Alibaba and eBay have seen unprecedented growth in the last decade. However, with this growth, comes increased risk that a brand’s products will end up on the grey market as many of these marketplaces do not have stringent procedures to authenticate their sellers and can often provide easy access for unauthorized sellers and counterfeiters to sell on their platforms.
What is product diversion?
One ever-present threat to the supply chain of consumer brands is product diversion: when an unauthorized party is found to be selling a brand’s products without permission, often in a different geographical market or through a different sales channel than was intended.
Examples of product diversion include; Health & Beauty products that are intended for exclusive resale in authorized salons but are instead sold to local retailers or listed on e-commerce sites like Amazon or eBay. Also, products manufactured for sale and distribution in Asia are being re-imported and sold in the US market.
In most cases of product diversion, an unauthorized retailer will reach out to an authorized distributor of a product to purchase items in bulk to sell on e-commerce marketplaces at a discounted rate.
When these products fall out of a brand’s carefully planned out supply chain, a threat to both a brand’s perception amongst the public and product integrity rears its head.
Why is product diversion a threat?
Brands operating in the e-commerce space spend a great deal of time and money establishing themselves as a producer of high-quality products.
What’s more, it’s a lot of work for a brand to maintain its reputation and the careful selection of quality distributors is a big part of this.
Once a brand’s product falls out of the authorized supply chain, all control is lost. The brand’s product is no longer being handled by a trusted authorized retailer and there’s no telling if a product will be properly displayed, packaged, handled, or shipped.
A product that has become broken or defective in the hands of an unauthorized retailer could lead to anything from negative customer reviews to seriously harmful or malfunctioning products reaching end consumers, plus many other implications that can be damaging to your brand’s reputation.
In most cases, diverted products are being sold by unauthorized retailers for far less than the agreed-upon retail price, posing a significant threat to a brand’s perceived value: the price the public is willing to pay for a good or service.
How to prevent product diversion
If you find your product on the grey market, it is often a sign that you need to establish tighter control over your brand and how it’s products are being distributed.
The first step towards preventing products from leaking out into the grey market is ensuring you enter into contracts with resellers you can trust to stick to the agreed-upon distribution guidelines.
There are several other methods brands have employed to combat product diversion, including:
• Ensuring distributors sign anti-diversion contracts that state clearly that they will not sell a brand’s products outside of authorized stores.
• Using QR codes, RF Tags, serial numbers, and other identifiers combined with test buying to pinpoint unauthorized sellers.
• Utilizing blockchain technology and digital certificates to track products
The Bottom Line
A selective distribution strategy with tight controls surrounding how retailers are selected is a solid first step towards preventing goods from ending up in the hands of unauthorized sellers on the grey market
Still, staying on top of things with e-commerce brand protection and monitoring tools is critical. By performing real-time scanning across online domains including marketplaces, search engines, websites, social media channels, and web forums, brand protection software can alert brands of exactly who’s selling their products so they can take any necessary action in the event of a distributor not complying with the terms of a selective distribution strategy.
