Gray-Market Feeding

List prices have long been a joke. So, too, are prices solution providers pay for the products they sell. Customers long ago learned that in a down economy, with vendors eager to cut their competitors' throats, they can negotiate prices that have little to do with what solution providers pay for the goods.

It's a dangerous game that vendors play with customers and foist on the channel, and it has now become a standard way of doing business. It's also a scenario that's one of the primary causes of gray marketing. Vendors know this, but their response is to go after unscrupulous solution providers that try to manipulate the system. The smash-and-grab way to cheat is to claim you are in a competitive bidding situation that requires special pricing, acquire the discounted gear, and then sell it for a profit on the open market. A more refined way is to inflate the number of products on the bid and broker the excess.

Vendors are vigilant in blocking these scenarios and are stepping up their solution provider audits to make sure everything is on the up and up. We've seen a spate of deauthorizations tied to brokering and gray-market activity, but those police actions are simply theater and do little to solve the gray-market problem.

That's because customers know how to play the game, too. So savvy are customers in playing one vendor against another to win ridiculous pricing that buying excess product is a no-lose proposition for them. Customers have no trouble brokering excess products, solution providers say; in fact, many solution providers claim that products dumped by customers are one of the biggest sources of gray-market gear.

But when's the last time a vendor accused a customer of unauthorized brokering? Has a customer ever been deauthorized?

Until manufacturers are willing to take those steps, chasing solution providers in an attempt to quell gray-market activity is simply a public relations sideshow. Vendors will continue to feed the gray market unless they inject some discipline into their special-pricing gambits.

CRAIG ZARLEY is Industry Editor at CRN. He can be reached via e-mail at [email protected].