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When Channel Incentives Backfire: Strategies to Help Reduce Gray Market Risks and Improve Profitability


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The figures are staggering. Channel incentives--designed to boost sales by increasing loyalty and motivating channel partners to sell products--are vulnerable to abuse which may cost high tech companies an estimated $1.4 billion in lost profits each year. In addition to this lost profit, the abuse of channel incentives helps fuel the high tech gray market. These are two key findings of research conducted by Deloitte and the Alliance for Gray Market and Counterfeit Abatement (AGMA®).

For technology companies, channel incentive abuse can translate into all manner of ills --from payment of unearned incentives, profit margin erosion, service and warranty abuse, and disruption of distribution channel environments, to an unlevel playing field across channel partners, negative impact to a brand, increased presence of counterfeit products in market, and reduced customer satisfaction.

To better understand the current state of the industry's vulnerabilities to these issues and identify potential solutions, Deloitte and AGMA conducted a survey and a series of executive interviews with leading technology companies. The research found that channel incentive abuse may be a much larger problem than previously believed. While respondents estimated that incentive abuse may affect up to 25 percent of all channel sales and result in significant lost profits, they also stated that it often goes largely undetected due to a lack of active program management and inadequate internal controls related to channel incentives.

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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