November 25, 2015

Strategies for Stopping Online Product Diversion, Unauthorized Online Sales


Businesses across many industries want to control product distribution. Among other things, they do not want third parties to engage in product diversion and sell their products below retail prices.

However, many businesses are, indeed, finding their goods online at reduced prices. This issue of product diversion and related unauthorized online sales is all too common for many businesses.

In fact, according to a Deloitte study cited in a 2009 Bloomberg article, this practice of unauthorized selling– not limited, of course, to internet sales – “siphons as much as $63 billion of U.S. industry sales.”

Product diversion is particularly difficult for those in the beauty industry. Per a 2013 Beauty Industry Fund survey conducted by Nielsen, product diversion within that industry was nearly $337 million. And from the same report, product diversion had actually decreased by 13 percent, to its lowest point since 2004.

Finally, within the beauty industry, nearly $84 million was diverted in the hair care product industry in the first quarter of 2014, according to Beauty Industry Fund. This figure actually is a decrease from $129 million in the third quarter of 2008.

But this issue extends well beyond salon products and other beauty industry products. In a March 2015 story in an electronics publication, a former Cisco executive estimated that about 80 percent of Cisco’s products are online due to unauthorized sellers.

And businesses are starting to take notice.

In particular, many companies are now working to combat this issue. Specifically, most of these companies are adopting anti-diversion policies to protect their brands and products from the unauthorized sellers. Some of them even prohibit the sale of their products over the internet altogether.

While the above statistics relate to product diversion in general, the issue is particularly unique online. This is due to the ease with which someone can sell a product on eBay or another website.

When consumers search for a business’s products online, they often will stumble upon both products sold by actual businesses or their authorized distributors. However, they are likely to find professional unauthorized sellers' products as well, frequently below the business's intended retail prices.

Unauthorized sales negatively impact businesses on many levels.

For example, unauthorized sales can:

  • cause authorized distributors to reduce prices, ignore MAP policies and negotiate lower purchase prices;
  • turn brick-and-mortar stores into showrooms (where customers visit before purchasing the products online for less);
  • reduce overall online sales;
  • erode the value of brands;
  • make it more difficult to attract new distributors; and
  • reduce company prices, profit margins and sales.

Therefore, quite simply, businesses must stop unauthorized sellers from selling their products online. This includes stopping any authorized distributors who are diverting the products.