International Pricing Gone Wrong: The Grey Market Risk

According to investopedia, a Grey Market is a market where a product is bought and sold outside of the manufacturer’s authorized trading channels. For an International Grey Market to be established, it needs to be profitable for entrepreneurs to buy from another country for cheap and sell it in another country for more. Grey Markets exists globally, for alcoholic beverages, tobacco, gas, automobiles and luxury items.

The most crucial measure to prevent a grey market is the pricing strategy. If the price of an item is very high compared to the market price in other countries, entrepreneurs will start to buy from cheaper countries and sell in the market with high prices. This will not only impact the company’s profits, but also damage the economy of the country as a whole due to lack of regulations and loss in the sales tax/income tax.

Grey Market Differential = (A product’s price in Country 1) –  (A product’s price in Country 2 + Cost of transferring the product to Country 1)

When the Grey Market Differential is a positive number, a grey market is ready to form.

Grey Market Risk = (Grey Market Differential) x (Expected Volume of Demand)

While it’s impossible to completely eliminate the Grey Market Risk, there are several methods. First, every marketing team responsible from the pricing in different local markets should be aware of the foreign currency rate fluctuations and more importantly work in coordination to set floor and ceiling price levels. These price levels are called Collars. By setting minimum and maximum price levels for each local market, and coordinating it globally, risk of grey market can be minimized. A narrower collar means more control on the grey market, but also can mean less profit in some of the local markets. Marketing teams use advanced statistical models to forecast and determine the effects of different prices and make trade-offs between grey market risk and local profit.

 

 

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