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The scariest things your business isn’t monitoring — Counterfeiting and diversion

November 1, 2019 |

Picture this: You’re traveling in a foreign country and you stop at a street vendor to look at what they’re selling. You notice some high-end Prada bags at an unreasonably low price, but on closer inspection you notice the shoddy workmanship and incredibly subtle difference in the logo. It’s obviously a fake.

Now imagine this: You’re in the market for a new phone, so you’re doing some online shopping to see what’s out there. You follow a few too many links and all of a sudden you find yourself on a site you’ve never heard of before, and they’re offering brand new iPhones for a fraction of the cost of anywhere else. It appears to be a legit product, but you know there has to be a catch.

As a consumer, we’ve probably all been in at least one of these scenarios before. You may have even been pretty tempted to make the purchase (despite the red flags) and save yourself a ton of money. But as a business owner or employee who works for one of the companies that makes the real versions of these products, this can be one of the most terrifying things to discover.

It’s easy to think, “Prada and Apple are doing just fine. My company isn’t nearly that large, so why would any scammers target us?” That’s just the thing—it can happen to anyone. Almost any product is susceptible to these scams, from clothing and beauty products to electronics and pharmaceuticals.

No doubt your company has spent many years and pumped countless dollars into the R&D and marketing of your unique line of popular products. A business’ brand is one of its most valuable assets, which is why it can be so devastating to find out that someone has been leeching off your hard work.

You have patents, trademarks, and other securities in place, but none of it seems to be working. So, what can you do to stop these heinous acts of counterfeiting and diversion? Quite a lot, actually. But before we dive into how to combat these issues, it’s important that we fully understand them first.

What are counterfeiting and diversion?

Counterfeiting is a lot like identity theft. Commercial counterfeiting is when a good is made or sold using another company’s brand name without permission. These “knockoff” goods are made to seem identical to the real product for the sole purpose of tricking consumers into buying the fake product, which is usually of a lesser quality compared to their legitimately trademarked counterparts.

Diversion refers to the act of selling goods through a distribution channel or in an area of the world that was not intended or authorized by the brand owner. Diverted goods are genuine products, only pirated. Diversion often occurs when a contract manufacturer produces more than the customer ordered and then sells off the excess goods through other channels. It can also occur when a distributor buys a large amount of merchandise and then sells the surplus products elsewhere.

How might they be affecting your business?

On average, counterfeiting and diversion cost U.S. businesses billions of dollars each year. Counterfeit merchandise and product diversion pose significant risks to businesses (and their consumers) in several ways:

  • Product safety: Your potential customers are being tricked into spending their money on low-quality, poor-functioning knockoffs that can result in dissatisfaction or, depending on the industry, bodily harm, illness or even death.
  • Reduced revenue: Counterfeit and diverted products introduce more competition which can lower both your sales and market share.
  • Brand erosion: Consumers that are dissatisfied with the counterfeit items may eventually stop purchasing your products entirely and/or complain to others about it.
  • Warranty and legal liability: Counterfeit products often result in a greater number of warranty claims since consumers feel that it’s still your company’s responsibility to service the knockoff item.
  • Supply chain confusion: Diverted or fake goods can interfere with a brand’s distribution channel, undermining the trust between suppliers and buyers.

What steps can you take to stop it?

Unfortunately, there are always going to be consumers who might be interested in buying a cheaper version of your popular product. Fortunately, there are also several ways companies can combat these counterfeit and diverted goods. These strategies fall into three distinct categories: detection, prevention, and deterrence.

  1. Detection
  • Implement authentication and tracking technologies: Building anti-counterfeit and brand protection into your product packaging allows for traceability and monitoring throughout the supply chain. The gold standard for authentication and tracking technology is GPAS, which we’ll cover in more detail in a little bit.
  • Develop a question tree for consumer call centers: Your consumer call center is the front line of detection for counterfeit products. An experienced customer service agent can use a series of questions to identify knockoff products and where they originated.
  • Conduct audits and inspections throughout your supply chain: To make sure the source of your goods is clean, scrutinize outlets that specialize in discounted goods, conduct regular surprise audits, or do some “mystery shopping” to gather samples of products in different markets to test for authenticity.
  1. Prevention
  • Make your product difficult to replicate: Unique product attributes in packaging, design, or customer experience can make it difficult for counterfeiters to copy your product. Consider using a unique finishing effect, ink, labeling system, or material to make it easy for consumers to detect fraudulent goods.
  • Educate retailers and consumers: A product awareness program can help educate retailers and consumers on products that are susceptible to counterfeit. For example, luxury good and pharmaceutical manufacturers have posted tips and visual aids on their websites to help consumers distinguish between real and fake products.
  • Contract with a single solution provider for security and/or packaging: These are two of the strongest steps to prevent counterfeiting, as the more closely controlled your network is the better. Brand owners should audit their packaging solutions and security providers at least twice a year and institute a strict vetting process if manufacturing is outsourced.
  1. Deterrence
  • Include right-to-audit clauses in contracting processes: Establishing that you may conduct unannounced audits at any time will help to deter contractors from conducting illicit product diversions.
  • Take legal action: Legal expertise may be needed to prosecute offenders or seek damages. A legal route will often be a drawn out process but may prove to be successful in the end.

GPAS—What is it, and how does it work?

So, how do you check the authenticity of a product, particularly one sold online? That was the problem that technology giant Hewlett-Packard aimed to solve with GPAS. The Global Product Authentication Service (GPAS) is an innovative and comprehensive cloud-based brand protection, track-and-trace consumer engagement service that addresses challenges relating to product counterfeiting and diversion.

GPAS integrates digital authentication and tracking technologies into product packaging using cryptographically secure codes such as QR Codes and Data Matrix Codes. With its numeric code encryption engine, GPAS creates huge batches of numeric codes that gives businesses the ability to uniquely identify and track individual products. Moreover, customers can scan a product’s code using their smartphone to report and gain instant verification of a product’s authenticity. Sounds pretty great, right?

Protect your brand with GPAS from Lofton

Now that you’re aware of the rampant issues with commercial counterfeiting and diversion, you’ll want to begin to implement a comprehensive strategy that incorporates detection, prevention, and deterrence measures to limit any fraudulent activity throughout your supply chain.

Are you worried that your company may be losing money due to counterfeiting and diversion of your products? Lofton Label is proud to be the only label and packaging provider in the Upper Midwest to offer GPAS. Contact us today to start developing your custom security solution.

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