How Product Diversion Works

The opportunity for diverted goods largely springs from “tiered pricing,” in which one product may be sold at different price levels in different markets or circumstances. Accelerated globalization of business has created more opportunities today, as in this example:

Step 1. U.S.-based Acme Widget wants to break into a particular Eastern European country, forecasting potential annual sales of 100,000 widgets. A low price point is mandated by the government of the target country, providing Acme with a 10 percent margin.

Note: Read much more about black and gray market goods in Unwelcome (Product) Diversions and about counterfeit products in Counterfeiting: Faked in China

Step 2. Acme finds a European distributor, ChannelCo, that offers even more optimistic forecasts and purchases 150,000 widgets.

Most of the widgets may be sold by ChannelCo in exact accordance with their Acme agreement. However…

Step 3. ChannelCo surreptitiously ships the extra 50,000 units back into the United States, where ChannelCo can undercut Acme’s usual U.S. price and still make a healthy profit. ChannelCo marks packages and shipping documents “returned goods, manufactured in the U.S.”--which is technically true--to help evade Customs.

Thus the legimate products have been ‘diverted’ to a market which was contractually prohibited, in order to make more money for the diverter.

Product diversion at home

Diversion happens domestically as well. For example, a West Coast distributor or retail chain might over-purchase on widgets to get a better volume discount, then resell the extra inventory to another chain on the East Coast. In that case, Acme’s East Coast sales team might start missing its quotas because its sales territory, mysteriously, is already saturated with Acme widgets.