Shades Of Gray: When Channel Incentives Go Wrong

"I think channel incentives are both a blessing for OEMs and distributors in how they can incent [partners] to create the right marketplace for their products, but also present the challenge of being an 'attractive nuisance,' let's call it, for misbehavior," said Sally Nguyen, president of AGMA.

In a 2011 white paper titled, "When Channel Incentives Backfire: Strategies To Help Reduce Gray Market Risks And Improve Profitability," Deloitte and AGMA revealed what they call a "direct link" between channel incentive abuse and the gray and counterfeit markets.

One common type of channel incentive abuse involves solution providers receiving special pricing for a specific customer but not selling all the products to that specific customer, according to Deloitte. Those remaining products, instead, are sold to other end customers without the manufacturer necessarily knowing, resulting in what the study called a "potentially significant flow of gray market products."

Deloitte and AGMA said that 42 percent of the companies they surveyed -- nearly half which were large tech companies with revenue exceeding $25 billion -- estimated as much as 5 percent to 10 percent of incentivized products are diverted to other end users when sold through the channel.

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The study found that an even greater 84 percent of respondents agree that channel incentives, in some form, are responsible for gray market activity.

When asked how this gray market activity, as a result of incentive abuse, impacts their companies, vendors cited profit margin erosion and the payment of unearned incentives as the two biggest factors. Deloitte and AGMA, based on their research, found incentive abuse to cost high-tech companies an estimated $1.4 billion in lost profits each year.

To protect themselves from incentive abuse, Deloitte and AGMA urged vendors to communicate more regularly with their partners, especially if they offer stacked incentives, which can open up more doors for abuse.

"Depending on what it is they are trying to incent, [channel incentives] might provide a marketplace, in a way, for counterfeit goods to be injected into the supply chain," said Nguyen. "I think it's something that OEMs and distributors, and really everyone, has to be very aware of."