Avi Greengart is the Research Director for Consumer Devices at Current Analysis (Mobile Phones, Connected Devices, and Digital Home). He also regularly writes for Slashgear, sporadically blogs at Home Theater View and Tweets far too often as @greengartAvi's expertise lies in understanding consumer electronics marketing, consumer behavior, and technology adoption patterns: where new technologies meet the mass market. 

 

 

Avi Greengart is an expert on the convergence of technology and entertainment: video, audio, computing, and wireless, how these are coming together, and what's likely to survive long enough to make a difference in your life.

Column #30 (05/03/02)

Authorization Denied: Dealing with Sales Channel Management

Click Here For Column 30 Follow Up (Posted 9/26/02)

Question: What’s the deal with “authorized dealers?”  I was looking at receivers at a local hifi store, but they cost a lot more than what I saw on the Internet, and the rude sales guy told me that if I bought it online the warranty would be invalid.  Is this true?

 AskAvi replies:

Sales channel (sometimes referred to in the computing industry as “the channel”):

A way to get your product to the purchaser, typically, a network of distributors and retailers

There are two basic types of dealers in the consumer electronics world: authorized dealers, and “grey market” dealers. Authorized dealers get their stock direct from the manufacturer or the manufacturer’s distributor. “Grey market” dealers get their stock from any number of places – the most common source is overstock from authorized dealers buying in larger quantities than they actually need.  Why would an authorized dealer do this?  1) To lower their per-unit costs.  2) Manufacturers, trying to meet short term sales goals, sometimes dump product on the market by pressuring their dealers to take on more inventory than they can reasonably sell.

Another grey market tactic is to buy from an authorized dealer in a country where the unit is identical, but costs less for any number of reasons (differences between the two countries in taxes, transportation, currency, supply and demand, etc.  I covered this topic in Column 21 (1/31/02) Consumer Electronics Arbitrage).

There are a lot of variables with authorized dealer programs: they may have to jump through hoops to obtain authorization – or not. They may have to prove that their sales and service are top notch – or not. They may have to send their staff for extensive training – or not.  They may be given exclusive sales territory – or not. They may be allowed to sell on the Internet – or not.

Most manufacturers try to protect their authorized dealers from competition.  One good reason: they may want to sell only through dealers with specialized expertise, which requires higher profit margins.  In one company I know of, warranty claims are almost always due to faulty installation or incorrect application.  This boils down to bad sales advice – the customer should have been steered towards a more appropriate product or model for their needs.  In these cases, it’s obvious that it makes sense to restrict the places customers can buy the product to dealers trained to provide proper advice and installation.  Otherwise, customers won’t be happy, warranty claims rise, and profits plummet for the manufacturer and the dealer.

A similar situation is where the product requires special shipping, handling, and storage.  Computer chips need to be shielded, rear projection TVs are heavy but can’t be jostled, and many products need to be protected from temperature extremes.  Here too, using trained or specially equipped authorized dealers can help a manufacturer ensure that their products are alive and well when they arrive in the customers’ hands.

On the other hand, for many products, the primary reasons for maintaining exclusive dealer arrangements are to maintain control of the sales process and pricing. 

·       Controlling the sales process is just another way of saying “keeping your dealers happy.”  Never mind Internet retailers, a manufacturer could simply use the Internet to sell their merchandise directly to customers.  But for any company with an existing sales channel, it would be suicidal to jeopardize the bulk of their sales just to add some extra sales volume and profit margin on the side.

·       Pricing in particular has a strong psychological basis.  By keeping prices high, a product appears to be high end – regardless of the actual manufacturing or R&D costs that went into producing it.  High end products have bigger profit margins, which is good for everyone involved (except the consumer, that is).

Back to the original question: will the company deny warranty service if the product is purchased through an unauthorized dealer?  The first thing to do is to check the company’s actual policy, not what a sales person told you.  Sales people are known to – gasp! – lie about this to protect a sale. 

Some companies explicitly deny service to products bought from unauthorized dealers.  Denon’s web site contains the following statement:

The warranty on DENON Electronics products is NOT VALID if the products have been purchased from an unauthorized dealer/on-line E-tailer…”

Some companies leave things deliberately vague.  Marantz’s site says:

Buying a Marantz system... through an Authorised Marantz Dealer, and you… receive a comprehensive warranty with your purchase. Until now, this could not always be guaranteed…. Every Authorised Dealer has a contract with Marantz, and when you purchase one of our products from them, it means they automatically have a commitment to you. Should a problem occur, your warranty ensures only authorized personnel will address it, only genuine Marantz parts will be used, and even if your dealer should move or close, Marantz will still honour your warranty.

Note that Marantz deliberately does not say whether they will honor a warranty claim if you don’t buy “through an Authorised Marantz Dealer.”

And some companies don’t discuss the issue at all, but treat the warranty as an obligation to the customer, not the sales channel.  For example, business projector manufacturers – who are all getting into the home theater business – tend to have generous “we fix it, we don’t ask questions” policies.  At least for their business models.

Note however that unless it specifically states this in the warranty policy, it may be a violation of law (state law, in the U.S.) to refuse warranty service to customer based on where the product was purchased.  Of course, just because in your state it’s illegal to withhold service, doesn’t mean that the company will make it easy on you.  You may need to add in the time and expense of dragging the company into small claims court into your purchase decision.

There are other issues here as well: some sellers of gray market goods are perfect citizens, and have been in business for decades.  Buying through an unauthorized dealer doesn’t mean that the product fell off the back of a truck …but it might have.  It might be factory fresh (brand new).  Or it might have been remanufactured.  Or it might be factory fresh, but with the serial number scratched off to prevent the manufacturer from tracing which authorized dealer originally bought and sold it, or …because it fell off a truck.  Of course, as a general rule, you should only buy things – any things – from companies you know and trust.  Even on eBay.

There are several approaches a company can take to protect its dealers and its customers.  To discuss this issue further, please contact me directly at AskAvi@Greengart.com.

-avi 

Column 30 Follow Up (Posted 9/26/02)

Question:

I recently purchased a Klipsch speaker from an online retailer at a significant discount from a local brick and mortar retailer's price.  At first I thought the discount was due to the lower overhead costs faced by the online retailer.  However, after some research it appears that the lower price is the result of my buying from an "unauthorized dealer".  What is it about this unauthorized status that enables them to sell at such discounted rates?  Thanks for sharing your knowledge!

AskAvi Replies:

I touched on this briefly in Column 30: Authorization Denied: Dealing with Sales Channel Management.  It could be one or a combination of several things:

bullet

Authorized dealers are sometimes contractually obligated by the manufacturer to maintain a minimum advertised price (usually in order to get advertising kickbacks from the manufacturer).  An unauthorized dealer may be willing to accept a lower profit margin by selling below this price.

bullet

An unauthorized Internet dealer may have lower costs due to being an Internet retailer - much lower rent, warehousing costs, potentially reduced advertising costs, and limited sales force salaries (or none at all).

bullet

An unauthorized dealer may have lower costs due to not training their staff on the products, or by hiring less knowledgeable sales staff.

bullet

An unauthorized dealer may have lower costs due to not providing after-sale support.

bullet

An unauthorized dealer may charge less initially, but won't absorb the cost of returns (by charging you a 15-40% restocking fee, or not accepting returns at all).

bullet

An unauthorized dealer may have bought the merchandise from an overseas distributor where the cost of goods are lower due to exchange rates and/or lower prices in that market.

bullet

An unauthorized dealer may have bought the merchandise from an authorized dealer which bought more inventory than they could sell. The unauthorized dealer then passes along part of the savings to you.  Why would an authorized dealer buy more than they need?
bullet

They misjudged demand.

bullet

To get a bigger volume discount from the manufacturer

bullet

The manufacturer pressures them to take on a lot of inventory to goose earnings.  The dealer bows to this pressure for these goods in order to get favorable treatment with other low-supply/high-demand items.  

bullet

Your unauthorized dealer may have bought the merchandise from a "friend" who "found" the merchandise after it "fell off a truck."

-avi

Please note: All submissions to AskAvi@Greengart.com become the property of Greengart.com, and Greengart.com retains all copyrights of both questions and answers. (Don't send us anything you intend to copyright or patent.) Not all submissions will be answered.

 

© 2001, 2002 Avi Greengart