Negative effects of counterfeiting on Brands

Counterfeiting is everywhere – it can affect what we eat, what we watch, what medicines we take and what we wear. Brands are often posed with the question as why to invest resources in fighting counterfeits.

Here’s why: The impact of counterfeits spans a very broad scope, much farther than the brand owners are likely to know.  In fact, if you stop for a moment to really think about it, any item that is consumable can be counterfeited.  It’s not just about purses, DVDs, and sports team merchandise. Counterfeiting encompasses cosmetics, body care products like shampoo, conditioner, soap and toothpaste, perfume, clothing, footwear, purses, luggage, auto parts, food and beverage items, medicine and baby formula.

In addition to lost revenues, negative reputations and publicity, counterfeiting immeasurably impacts the employment rates around the world. Below mentioned are the adverse effects of brand counterfeiting on legal right holders.

  • Undermines and discourages investments.
  • Increases cost of doing business.
  • Leads to misuse/abuse of intellectual property rights.
  • Biggest unfair competitor.
  • Leads to increased taxation and low tax yields in the long term.
  • Erodes consumer confidence.
  • Inhibits growth of enterprises.
  • The rise of counterfeit products can potentially cause businesses to experience an increase in costs, as well as loss of productivity. Most importantly, counterfeits can negatively impact a company’s reputation and cost millions, sometimes billions, in lost revenue.
  • According to research analysts, approximately 2.5 million jobs worldwide have been dismantled by counterfeit black markets. If counterfeiting continues to grow, which researchers predict it will, the unemployment rate will continue to rise around the world.
  • Trademarks are used by producers to distinguish their products from competing products. They generally create expectations with respect to the quality and characteristics of the products concerned, and therefore serve as an important informational tool that consumers use to evaluate different products. Improper use of a trademark compromises or destroys its value to producers and consumers.
  • The proliferation of counterfeits makes hunting down infringers and their products a financially crippling operation that most rights holders cannot afford. As a result, many companies focus only on key markets and large seizures, abandoning efforts in smaller markets. Unfortunately, this strategy favors infringers, which – instead of being discouraged – simply readjust their methods and focuses in line with the new circumstances.
  • Affected companies incur additional costs for conducting investigations and litigation to protect their IPR against infringement.
  • Production and sale of counterfeit products damages the reputation of the trademarks concerned, inasmuch as those products are defective and/or harmful. This problem is particularly acute for small and medium-sized enterprises.
  • In countries where counterfeiting and piracy is widespread, foreign direct investment may be lower.
  • The consumers, who believed they were buying a genuine article when in fact it was a fake, will likely blame the manufacturer of the genuine product if the fake does not fulfill expectations, thus resulting in a loss of goodwill.
  • If consumers never discover that they were deceived, they may be reluctant to buy another product from that manufacturer and may communicate dissatisfaction to other potential buyers.
  • The brand may suffer reputational damage through complaints from dissatisfied customers, even though the goods were counterfeit.
  • Right holders may bill the costs related to the destruction of the fake goods.
  • Sophisticated counterfeiters employ savvy marketing tactics to confuse consumers and intercept Web traffic; including illicit promotions in search and social media, and as is especially the case with luxury goods, spam. Legitimate brands pay a heavy price: lost revenue, flagging demand, angry channel partners, skyrocketing warranty and service costs, and increased product liability as consumers are duped into buying sub-standard goods. Brands risk losing their cachet as brand equity erodes and customer trust diminishes.
  • Without adequate protection of these intellectual property rights, the incentive to develop new ideas and products would be reduced, thereby weakening the innovation process. The risks are seen as particularly high for those industries in which the research and development costs associated with the development of new products are high compared to the cost of producing the resulting products. Pharmaceutical products are a case in point.

The OECD (Organization for Economic Co-operation and Development) estimated that the impact of counterfeiting on international trade (excluding domestically produced goods and digital products) amounted to $200 billion in losses in 2005. This amount was predicted to climb to $1.7 trillion by 2015, based on projections made in a 2011 report by Business Action to Stop Counterfeiting and Piracy (an initiative of the International Chamber of Commerce).

Counterfeiting and piracy is far from a “victimless” crime. On the contrary, it has an immensely damaging impact on knowledge societies. IPR criminality thus harms all of us – even if we have not ourselves suffered physical harm from a fake product. The proliferation of distribution channels makes the protection against this phenomenon difficult because it involves a continuous effort of brand monitorization and this is why a strong brand reputation monitoring strategy implemented by experts is nowadays imperative for the industry. We have already seen the economic impact fake goods can have on the profits of a brand, but we cannot forget that a trademark and brand reputation are what differentiates a company from the rest. They are its greatest assets and should be protected at all costs.

Firms spend their resources and time in building their brands over a period of years to have prominent positions in consumers’ minds and to build the desired image equivalent to the brand identity. For brand owners, brands are the most valuable – tough intangible assets of the firms; a brand without the brand itself is just another product nowadays.

Understanding what effects counterfeiting has on brands is a vital first step brand managers have to familiarize themselves with. In case of deceptive counterfeiting, necessary actions should be taken to make it simple for buyers of original goods to distinguish between originals and counterfeits and in the case of non-deceptive counterfeiting, brands have to develop necessary strategies on a high level to tackle the menace.


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