Q. What does it really cost when you have a product attack?
A. It is difficult to determine precisely what it costs a company when a counterfeit product is found in the market, when grey market goods appear, or when intellectual property is stolen or infringed upon. What can be identified are the categories of issues that arise from each type of attack and what the financial impact of each one of them is most likely to be for the company. These impacts include direct financial loss associated with products near term and long terms revenues, indirect losses such as customer loyalty, brand reputation and internal costs associated with managing the incident. All of these costs need to be aggregated to accurately estimate the true impact on company profitability.
The direct losses include: lower than anticipated revenues or margins from grey market products, copy products being introduced from stolen or infringed technology or counterfeit products flooding a market lowering sales of legitimate ones. Each of these attacks can be quantified and associated with a specific product attack to calculate the loss.
A more complicated but manageable calculation is determining the value of a loss in brand reputation when counterfeit goods are sold in a market. If brand reputation has already been valued then a diminution in it can be calculated. The same holds true for consumer loyalty. If an index of consumer loyalty has been previously calculated, any lowering from a product attack, recall or negative press can likewise be determined and quantified financially. Costs associated with public and press relations, legal advice, and investigative costs needs to be collected as well.
Calculating indirect loss becomes more complicated (but doable) when theft of intellectual property is involved and variables include market share loss, reduced anticipated revenue and market leadership reduction.
Personnel and out-of-pocket costs for management time, legal involvement, brand management and product protection to manage the effects of a single product attack must be collected. Changes to product design, packaging, supply chain and manufacturing controls all need to be identified, calculated and included in making the final loss determination.
Once all these factors have been identified for the loss the true impact of a single attack will be evident. It will be far more than “it’s just another counterfeit product” that was found in the market.
Let’s hope that magnitude of the true cost of a single product attack will force executive management action to prevent it from even occurring.