Reclaiming Uncustomers: Don’t Brush Aside Counterfeiting

Many CEOs consider the problem of counterfeiting, and the losses stemming from it, as a legal problem. It’s the in-house counsel who attends counterfeiting conferences alongside representatives from customs, law enforcement and boutique law firms. With a few notable exceptions in the software industry or some parts of the luxury goods sector, it is usually these lawyers—or their proxies in the confusing number of anti-counterfeiting trade associations—who front public pronouncements on the subject.

Internally, the fight against counterfeiting is marginalized. It becomes a “dirty secret.” This, however, is a dirty secret that it’s hard to ignore. The International Anti-Counterfeiting Coalition places the global cost of counterfeiting at $600 billion—100 times more than it was 20 years ago. Anti-counterfeiting policies of investigation and enforcement—with legal remedies aimed predominantly against suppliers—has been the standard way of tackling this problem. There’s hardly an industry where the revenue from legitimate products has grown at a faster rate than that of the revenue from selling their fakes. It is time to admit that this policy has failed spectacularly, and every day that it continues to fail, counterfeits are lose their stigma.

Why is this failure not on the A-list of priorities for every CEO in the business? One reason has been that while we focus on the motivations and hot buttons for customers for the legitimate product, purchasers of counterfeit or pirated product are considered “uncustomers.” Little attempt is made to persuade them. At best, we ignore them. At worst, we want to see them punished.

Not all uncustomers—and a huge proportion of the purchasing public is in this category—are worthy of scorn. Even a simple classification of consumers who knowingly purchase counterfeits can split them into four groups, on a scale of their willingness to buy genuine product matched with their ability to afford it:

The “Aspirers” at the top left of Figure 1 are the least of our problems. These are uncustomers who would buy the real thing but can’t, either because it’s not available where they live (emerging middle classes in developing economies, for example) or it’s not available at prices they can afford.

Aspirers like genuine products when they are appropriately distributed or priced. One example of how to serve Aspirers is luxury clothing brand Daks, which manufactures products in India, using local fabrics, manufacturing and styles and sells them at affordable prices. It has translated its brand values for local customers.

“Losers,” by contrast, can’t afford the product—but currently wouldn’t see enough value in authenticity to prefer the real thing even if it were within reach. Brand reputation is meaningless to them, and there is no way to build this reputation because they are not engaged with the genuine brand.

The “Liars” are those consumers who could afford genuine items and see their value but have been seduced by the easy availability of the fake product. When we pass off our purse-party purchase as genuine, we’re in this category. Liars have potential: A yearly survey of fake luxury goods purchasers conducted in the United Kingdom by Ledbury Research shows that purchasers of fakes are actually more likely to buy the genuine luxury brands. They are dangerous because for them, the genuine brand is just one purchasing option. Fakes are effectively an unofficial franchise of your brand.

Finally, “Cheats” are the hardest group to reach: They have disposable income but actively seek out fakes or pirated material—and see no reason to change. They are a subset of the whole category of uncustomers, yet the industry often caricatures every purchaser of counterfeit as such a Cheat. In the world of the Cheats, the brand is actually a negative; they feel free to advertise the fact.

One customer may move from category to category: With 24 out of 25 music downloads being illegal, the music industry has online Cheats for customers. Yet these Cheats may also be Aspirers when purchasing a fake Swiss watch or Liars when passing off their golf clubs as the real thing among their workmates. Perhaps more cross-industry cooperation would help companies learn about these customers: What cements desire for authenticity in one category and not another?

In the current environment of oversupply and easy availability of counterfeits, enforcement against uncustomers can deliver a return on investment only when it involves Aspirers and Liars. For consumer products especially, Losers and Cheats find it simple to get fakes whether you’re enforcing your rights or not. Also Aspirers are potentially a promising and sympathetic group of uncustomers who might respond to more carrot (appropriate products, better service) and less stick. By contrast, long-term losses to the bottom line, and to the brand, are greatest among Losers and Cheats, who are committed uncustomers and give authentic product a smaller share of their wallet across the board. To deal with them, the priority has to be education about the value of authenticity. Also internally, companies might ask themselves why wealthy customers don’t get the message: Do your brand values mean as much to skeptical Losers and Cheats as you think they do?

Figure 3 shows how, In the short term, the biggest contribution to future earnings can be achieved from convincing Cheats (extremely tough) and Liars (less tough but not easy) that your brand reputation is more than a label. Yet the business has to have a longer-term strategy to seduce Losers and Aspirers too, even if there is little return in the short term. Those strategies will be different.

In many areas, enforcement alone may achieve short-term results but actively destroy the long-term potential for value creation. Creating an image of the company as a punisher, rather than an enabler, or failing to supply appropriately-priced product to fill the void created when the counterfeits disappear is just a refusal to listen to what uncustomers are telling us.

Consider the BRIC nations—Brazil, Russia, India, China—which have not only a rapidly developing and sophisticated middle class that is exposed to major brands but also huge counterfeiting problems. Much of this stems from a lack of the appreciation of value of authenticity: These uncustomers are sometimes Aspirers but usually Losers. A simple discussion of the value of authenticity is met with a shrug. Brand reputation is something remote and intangible in their lives.

The risk is that economic development in these countries may create personal wealth but not a corresponding shift in attitudes to authenticity. In effect, development turns Losers into Cheats. Cheats are the hardest category of uncustomers to reach.

This isn’t a definitive categorization. What matters is that CEOs have the responsibility to lead a strategic, sophisticated analysis of their uncustomers that goes beyond simplistic “right and wrong” thinking. Some uncustomers, perhaps, can’t be converted into customers. But the lesson of the last 20 years is that uncustomers, in general, are responding much more to the sales pitch of their existing suppliers—counterfeiters—than the failed tactics of authentic brands.