Travis Brown is an occasional contributor to the buySAFE blog. One of Travis’s particular interests is the dynamics of markets for fake and counterfeit goods, and ways to leverage consumer choice to combat this huge and growing problem.
Travis recently published an article on this, arguing that brand owners could better protect their products from online sales of counterfeits if they required their online channels (resellers, etc.) to become buySAFE Bonded Merchants. This would take a confusing, “grey” market and effectively split it into a “white” – safe – market and a buyer-beware “black” market. Consumers, brand owners AND honest retailers would all benefit from this clarity and safety. In the absence of a solution that scales at the rate of the problem, the situation will only get worse.
Check it out below …
Protecting Brand Integrity in the Online Environment:
A New Approach to a Monstrous Problem
It was the best of times; it was the worst of times.
Charles Dickens precociously put his finger on the tension underlying the enormous growth in eCommerce. A merchant or seller of any kind can now, with a single virtual storefront, offer his wares to every shopper in the world with an internet connection… hundreds of millions of households with more purchasing power than ever assembled in one retail marketplace in history. Wow! Likewise a scam artist, selling fake goods marketed as authentic, can also set up a virtual storefront and offer his wares to that same audience. Never has the enormous equity built into major brands been so vulnerable to destruction by pirates of all sorts. eCommerce is now a battleground for asymmetric commercial warfare.
Only recently has a technology been available that can suppress sales of fakes and harness the power of consumer choice to re-direct sales along the path of demand for genuine goods.
eCommerce: ePerfection or eNightmare?
Good news:eCommerce retail sales in the US are growing at about 20% a year – six times the rate of growth in the underlying retail economy.
Bad news: Online sales of counterfeit goods are growing at twice the rate of all online sales. This means, at current growth rates, counterfeit goods will outstrip sales of legitimate goods online in 2010 about 3:1. This is very bad news for any brand owner, manufacturer, or honest seller of legitimate product.
Why? The dynamics of eCommerce create a uniquely favorable environment for scam artists. Here’s why:
- Sellers tend to have more information than buyers, but on the web, this effect is amplified. The legendary cartoon showing one dog on a computer explaining to another dog best illustrates this issue: “On the internet, no one knows you’re a dog.” In other words, reputational markers of the brick-and-mortar world -- location, inherent promise of permanence, community reputation, etc. – are missing on the web. This creates an immediate disadvantage for consumers, and therefore scammers flock to this environment
- Powerful trends make counterfeiting a high-reward, low-risk crime for a number of reasons. For one, digitization of photos and other media make perfect copying easy. The massive production capacity in China and elsewhere means factories will bid very low for extra work. In addition, consumer place a high importance on brand names, which only further validates the desirability of goods, especially, but not exclusively, luxury goods. Lastly, the prevalence of search engines as a gateway to online shopping means that traffic can be manipulated in new ways.
- Globalization of manufacturing, increasingly complex supply chains, and porosity of national borders all mean that local governments, customs departments face a number of challenges in stopping global trade in fakes. In addition, internet technology is ideally suited to protecting the anonymity of the operator behind such trade. Websites are easy to set up, easy to take down and easy to relocate scam operations. Local police agencies are no match for this.
The internet can be a tough and frustrating environment for owners and sellers of merchandise with well known-brands and consumers who want authentic goods but don’t want to pay more than the market price for that product. It’s a lose/lose/lose proposition for these brand owners, honest online merchants, and consumer who still want to buy genuine goods. The only winners are the bad guys.
Limits of Conventional Approaches to Suppressing Sales of Fakes
So what can brand owners do to combat this threat to their most valuable property: the integrity of their brands? Let’s start by listing what they have done in the past. Common tactics include:
- Hiring private detectives to chase down counterfeit product and determine its source and path through the distribution chain. If these investigative efforts yield real information, they attempt to build legal cases (civil and criminal) against counterfeiters and their distribution chains, despite the near impossibility of getting jurisdiction over the most effective counterfeit producers.
- Lobby governments to deploy resources against the problem: more and better trained customs agent, better intelligence to go after counterfeiting rings, higher awareness of the nexus between counterfeiters and organized crime and even terrorist groups, consumer education, etc.
- Build harder-to-counterfeit products, either by high technology (microscopic ID tags, hidden serial numbers, etc) or low technology (some luxury goods manufacturers make their product more labor-intensive to manufacture, making it more expensive to copy).
- Employ various authentication tactics to help police and other experts identify genuine product, to strengthen ability to bring case against fraudsters.
What do all of these tactics have in common?
They are all essentially reactive. They attempt to go after the fake goods after it has already been injected into the stream of e-commerce. And they are effective in capturing only a very small percentage of the amount of illicit goods in circulation. These actions resemble the popular arcade game, WACK-A-MOLE: as soon as one mole is whacked, another pops up. The algorithm of this game is instructive: since the moles eventually pop up faster than they can be whacked down, the player always loses, sooner or later. A player can “win” only by delaying losing -- the moles always win in any absolute sense. Unfortunately, this is strong and logical metaphor for the effectiveness and scalability of these tactics outlined above.
A New Ally: The Consumer!
Brand owners need to get smart about harnessing the power of consumers to express their preferences for genuine goods. But wait: aren’t consumers the problem? Don’t they buy the fakes? Yes and no. There is a certain sector of consumers that knowingly want to buy a fake Hermes or Gucci purse, but there is a much larger proportion of consumers who want to buy the real thing at a good price, and are frustrated by the difficulty of how to do that without risk. In other words, the increasing rate of counterfeit sales does not necessarily reflect demand for fakes… it reflects in large part the very low level of reliable, transparent information on most eCommerce sites, and the ease with which an illegitimate seller can camouflage itself as a legitimate seller.
How Does this Work?
The simplest and most powerful way to enable consumers to discriminate between real and fake goods is NOT to focus on the goods, but to focus on the merchants. Instead of chasing “bad” merchants, consumers need to be able to identify “good” merchants: honest, reputable online resellers who have been inspected, certified and bonded by an independent third party. One firm that does this is buySAFE, Inc. When buySAFE, Inc. allows a merchant to display the buySAFE Seal, it means that the merchant has been inspected by buySAFE, is determined to be stable and trustworthy and is continuously monitored to keep that status. buySAFE then allows customers to bond any purchase from that merchant: the bond essentially means that the merchant will perform according to his own terms and conditions. If they don’t, buySAFE will pay off the claim via a surety bond. This way, the customer knows in advance that she takes no risk around buying a fake, or any other breach by the merchant, if she relies on that buySAFE Seal.
This simple solution flips the existing situation on its head. Armed with reliable information to identify good merchants, consumers who choose to buy genuine can now do just that… with confidence, safety and peace of mind.
Those customers who want to buy fakes are not the market that the legitimate brand owner or merchant wants in any event, they are essentially in a different segment altogether. While these people are no doubt helping to fund an illegal activity, they are not the core problem. The difficulty of the mainstream consumer buying a legitimate good with confidence is the core problem, and so that is where the greatest opportunity for solution lies.
Next Steppes: How to Defeat the Barbarians at the Gate
The most effective way to harness millions of online decision makers to tilt the market back toward legitimate product is for suppliers to insist that their e-resellers become bonded by a third-party trust company as a condition of being an authorized reseller for that brand. This will revolutionize the marketplace to let the consumer buy real goods without risk, without fear, without hesitation. It would split the marketplace into the honest, transparent market, and the un-lit, underground, black market of fakes and scams. It would harness consumer choice to let their purchases precisely reflect their demand for authentic goods.
Conclusion: It’s the Habitat, Stupid!
If poisoning, trapping, fumigating and enlisting government help were effective, there would be no cockroaches. Cockroaches thrive because they have found a very pro-cockroach habitat, not because they are popular.
For counterfeit trade, the key to making quantum changes is to change the amount and type of information that the online consumer can rely on in making the decision to buy. If brand owners required their online resellers to be certified and bonded by a third party, it would be the beginning of the end of the habitat that allows sellers of fakes to flourish. Brand owners owe themselves no less.
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Travis Brown is General Counsel and VP International for buySAFE, Inc.
For more information on buySAFE, Inc., visit www.buysafe.com.
© Travis Brown, 2007
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