From the WTR archive: why a one-size-fits-all approach to ROI for brand protection will never work

A crucial challenge for trademark and brand protection professionals is to ensure that their activities are fully understood by senior management and, consequently, that their efforts are suitably funded. One way to achieve this is to demonstrate clear ROI, with evidence that resources directed towards enforcement will truly pay off. Unfortunately, this is easier said than done.

Quantifying the financial payback of brand protection is difficult. You need to know the size of the financial threat posed by illicit trade and then ascertain how effective enforcement efforts have been. To complicate matters, methodology varies from industry to industry, and a company’s reporting culture affects the way in which data is assessed and presented internally.

Speaking to WTR in 2017, Jerry Xia – then-deputy general counsel and chief IP counsel at Honeywell International – reflected: “The approach really varies from company to company and industry to industry. Some companies look at the entire enforcement programme level if they have massive counterfeiting problems for their major products (eg, those working with luxury brands and consumer products). For those in the business-to-business sector, it is mostly assessed case by case. My personal feeling on the question of ‘return on investment’ is that it is hard (or even impossible) to quantify such enforcement accurately.”

Yet in today’s KPI-driven corporate environment, doing the seemingly impossible is sometimes expected by senior management. Even when it is not required, an accurate ROI can be crucial ammunition for a brand protection department keen to spread the gospel to senior management.

As a result, evidence and data are everything. In this regard, there are generally two types: third-party research into the economic toll of counterfeiting and data generated by the team itself.

The bigger picture

While previous studies have been geared more towards policy makers than the companies actually suffering losses, it is hoped that research on the cost of counterfeiting will be of great interest to senior management. It should, in theory, help to highlight the importance of funding brand protection and anti-counterfeiting efforts. But is senior management getting the message?

Unfortunately, many studies do not resonate with the C-suite. The reason for this appears to be their broad perspective. As Zeeger Vink, IP director at MF Brands Group, previously explained: “We have seen some studies focus on regions and a few on industries and countries, but they are mainly at a global, regional and country level. I think this is because it is both difficult to measure and difficult for companies to disclose the information necessary for company-level studies. But we hope that this is looked at. That would then give us a clear idea on how counterfeiting is directly hurting turnover, income and brand image.”

Tiffany Walden, former general counsel and now COO at Olaplex, previously concurred with the sentiment that “senior management is less swayed by global cross-industry studies”, noting that this type of data “generally doesn’t feel as relevant to them”. However, she adds that industry-specific studies are more useful, particularly where these can be used to support internal data. “As an example, if I were seeing a decrease in customs seizures, I could use information on the value of seizures decreasing or changes in how goods are shipped to help explain and support my theories on why I am seeing such a change.”

Although useful to support internal reporting, external studies are of limited value when it comes to propelling the brand protection investment message onto the board agenda. Therefore, internal metrics and reporting are vital.

Dollar value on past performance

In theory, it should be straightforward to prove the value of past activities. Key metrics could include the number of seizures and cases, recovered damages and products removed from the market. However, obtaining these results costs money. The ROI equation is complicated by both company culture and priorities, as well as the fact that counterfeiting itself is difficult to quantify. A seizure of 10,000 products is one thing if it is known that there are 12,000 counterfeits in circulation – less impressive if the number of fakes is closer to 12 million.

These unknowns are what make it so hard to tell whether true value is being achieved. Michigan State University’s Centre for Anti-counterfeiting and Product Protection has conducted a number of research projects where brands are interviewed about their experience in measuring ROI, the performance metrics that they use and how they report it. “This is something we see brands struggling with a lot,” observed founding director Jeremy Wilson in 2017. “Often the first question asked is ‘how do we measure the counterfeit problem?’, followed by ‘what can we do?’, then ‘what is the return on investment?’”

For Wilson, companies fall across the spectrum – some are far along the process and have solid metrics, others struggle with the issue and do not have the appropriate metrics in place. “A lot of companies we interact with are good at measuring inputs (the investment in brand protection) and capturing outputs (the things they are doing – such as making arrests and shutting down websites). The struggle is in measuring the outcome,” he explains. “What did we actually do to impact brand image and the prevalence of counterfeits in the market?”

A company’s culture – and the industries in which it operates – also makes a one-size-fits-all approach to ROI difficult. “Different companies really take different approaches to how they think about ROI,” argues Wilson. “Some think strictly in terms of finance, others think more broadly about the value of the brand protection programme, rather than look for a financial ROI. You see this particularly in companies concerned with public safety, such as the pharmaceutical industry, where it is all about protecting the consumer.”

A further complication is that brand protection can be embedded in different parts of the organisation. “It may be in security, legal or the supply chain in one company, or centralised into one location in another, with different functions interacting doing pieces of the work,” Wilson points out. “It is difficult enough to measure the core function – it is even more difficult when this is diffused throughout the organisation.”

Soft approach to revenue recovery

Given that the picture is so company-specific, the practical experience of brand protection professionals in different sectors is instructive.

When it comes to online infringement there are various formulae, which can be adopted to put a figure on the cost of counterfeiting. “In terms of hard, measurable revenue recovery, the key items to look at include lost visits to cybersquatted sites or illegal use of a paid search term,” explains Charlie Abrahams, speaking to WTR in 2017 as then senior vice president at MarkMonitor. “When recovered, the real revenue generated through them can be calculated based on the average spend per visit to the relevant e-commerce sites – as well as the additional costs caused by having to compete (in paid search cost per click) with sites selling counterfeit items. Other things to look for include the likely sales of counterfeit goods – which can be estimated by calculating the volume of counterfeit sales and applying a substitution rate to that figure – and the number of calls received by customer service centres related to counterfeit complaints.”

Revenue recovery is arguably the most concrete way to prove ROI and applies in both the online and physical worlds. Put simply, it is based on the theory that the sale of counterfeits has a direct effect on legitimate sales. If you remove access to infringing goods or confiscate such products, it is possible to avoid losses and have legitimate goods be sold in their place.

The substitution figure is central to the equation. It is impossible to objectively ascertain what value should be applied to counterfeits, making it a company-by-company decision. For instance, do you assume that a counterfeit sale results in loss of revenue equivalent to the full price of a legitimate sale?

Walden observes: “My personal experience is that there are goods that will never be confused with your goods (ie, that are low quality) which damage reputation and prestige, and goods that people will buy instead of the legitimate product, where there is a more one-to-one loss. I have dealt with counterfeits that sell within 5% to 20% the manufacturer’s suggested retail price and I do consider these sales that we would have made but for the sale of the counterfeit. I think differentiating those to management makes more sense. You cannot consider 10,000 wallets that were for sale for $7 each in Paraguay the equivalent of 65 wallets that were sold on eBay for $185. For lower value items, I would use the value of the counterfeit.”

This calculation can also be used to get a handle on the financial toll of counterfeiting more generally. “I’d personally think I was seeing about 10% of what was out there in the industry,” she warns. “So I would take the value of the product and times it by 10 and that is what I estimated the problem was for my brands.”

Another consideration in so-called ‘soft recovery’ is which items are given no value at all. Having decided what value is attributed to what product, the losses prevented become easier to quantify. However, it is not an exact science and the approach needs to be reasoned, easily explainable to management and – where possible – based on assumptions with which they are comfortable.

Hard recovery

Another measurable relates to revenue derived directly from brand protection spend (eg, damages received from actions). “What you don’t sell you can’t recover,” Vink warns. “It is about removing the cost of the loss or damage. But you can measure damages obtained as a result of legal proceedings.”

However, in terms of a return on this spend, damages tend to be “a marginal part of what you invest”. Vink argues that court approaches to legal costs often blunt the benefit of damages awards.

However, Walden notes that actual financial recovery (ie, the dollars brought in) is something that company leadership always enjoys. However, she observes that “cost-benefit is generally tied to priorities. If something is a priority (ie, an important market or an important counterfeit product category), solving that problem is more important than dollars spent.”

She further warns that there can be a concerning downside to your business becoming accustomed to anti-counterfeiting actions bringing in dollars; brand protection can be viewed as a profit centre, with the goal of halting the spread of fake goods becoming secondary. “It’s better to try to tie your spend to different metrics,” Walden explains. “For example, how many people had action taken against them and stopped infringing? How many spin-off cases were conducted? How many arrests or prosecutions were made?”

A money-making exercise?

This raises an interesting question. In what circumstances should brand protection be regarded as a profit-making activity? Again, the answer depends on the brand in question, the type of infringement faced and the company’s tolerance level.

Wilson observes: “While for some the brand protection function is seen as a cost centre because it is difficult to relate activities to the bottom line, in others it is viewed as a profit centre. You see this more from the licensing angle, where you have companies engaged in licensing and able to convert counterfeiters and infringers into licensees. They can actually show new revenue coming into the businesses through brand protection, or even successful litigation. The extent to which companies do that varies.”

Build your own measure

Even where there is concern that the figures being used are not an objective measure of success and are prone to market nuances, there is still value in tracking a consistent enforcement data set. “Some folks know there is a fair degree of measurement error,” Wilson argues. “From a practical standpoint, they develop a basket of measures. Even if they know they are imperfect, as long as they can consistently track them over time they can see what direction the ship is heading in.”

Vink concurs. “We follow a certain number of KPIs (eg, the number of actions globally/regionally/by country) and that is a good – but very rough – way to measure productivity,” he explains. “While we do keep track of it because it is interesting, I think the number of counterfeits seized is less relevant as we don’t control it, so it may not be a very good target to set. But at a certain point, over a number of years, you do see patterns and can see whether productivity increases.”

Searching for the magic formula

Ultimately, there appears to be no single formula for calculating ROI. Instead, a company’s brand and financial culture, the industry of operation, tolerance of infringement and positioning of the trademark function all play a part in dictating how it will regard and evaluate ROI. Trademark teams are responsible for tailoring the right approach for their organisation and then seeking to ensure that the message is heard by the right people, in the right way.

(This is an abridged version of an article that was first published on the WTR platform on 1 November 2017)