By Rodney J. Johnson, Prescient Consulting, Inc.

January 9, 2006

When most people think of counterfeits we think of cheap athletic shoes, fake leather handbags, and knock-off luxury watches. This perception is about to change, however, as fake goods have taken a turn for the serious. Counterfeits are more than just a problem facing athletic shoe makers and purveyors of fine handbags. They are a problem facing every successful company in virtually every industry imaginable. After 20 years of war on counterfeiting and counterfeiters, counterfeits are arguably more pervasive than ever.  While the forces of anti-counterfeiting are more organized and numerous than at any time in the past the magnitude of their task is also growing.

A true understanding of the reality of fakes and the practice of counterfeiting is necessary to comprehend why counterfeits exist, and why we still see them on the streets, seemingly sold with abandon, right under the nose of law enforcement.  However we may feel about the correctness and efficacy of patent law, trademark law, copyright law, large corporations, and developing markets, we must understand that increasing the demand for fake products increases the cost to end users and consumers and the overall level of risk to everyone having to live in a world driven by markets. In short, the economics of counterfeiting touches us all, and the effects of counterfeiting threaten us all. Whether we are producers or consumers understanding why this is will help us to know what we can do about it and help us to make better decisions when confronted with possible counterfeit products.

Live by the Brand. Die by the Brand.
Counterfeiting feeds in various ways on various branding issues. Branding is a multifaceted thing, and companies, countries, and groups of all types build different brands in different ways for different purposes. Countries build the brand of trust through broad acceptance for their currencies. Counterfeiters of currency feed on this ubiquity and the recognition that comes from it to pass their fakes on as the real deal. Luxury brand companies build brands based on rarity, exclusivity, and quality. Fake luxury goods makers feed on these brand points in totally different ways.

All brands exist to reduce transactions costs. A transaction cost is the cost in time, money, and knowledge, required to complete a transaction. A consumer of a branded product need not find out what is 'under the skin' of the product - the brand does the work for him. Consumers who don't have the time, knowledge, or skill to evaluate alternatives, quality, or correctness for purpose are very reliant on brands to cut short the product selection process. A car buyer can't properly evaluate the quality of parts and construction for a potential car purchase. Neither can he evaluate the effect the design will have on his popularity with friends or how well the car will hold its resale value. The brand steps in to allow easy evaluation of all these things without 'real' knowledge or skill. The consumer need only trust the message that the brand has cultivated. That message is communicating the information he needs to know.

Brands cut down to their core not only communicate the value of a product, service, or experience to the consumer, but actually create that value. Information, aside from branding, is the key component of any product, whether it is a can of soup on a shelf in the supermarket or a sportscar in a sales lot. Whereas a can of tomato soup with a simple label saying 'tomato soup' on it may sell for $1 sitting on a shelf, the same can without any label at all is now worth almost nothing. How much would the average consumer be willing to pay for an opaque tin can of 'something' believed to be soup?  If the answer is 5 cents, then now we can see that the labeled information is actually 95% of the value of the product. And the soup in the can is only worth 5%. A brand is an attempt to enhance and control the information content in order to customize the 'value' being communicated for the benefit of both producer and consumer.

Of course, there are instances where the intrinsic value of the product and the value being communicated by the brand don't match. It is verification of the simple role of value communication by the brand that these cases can't and don't last long. Over time, the two must converge to bridge the gap. Either the intrinsic value must change, or the brand message will change - often against the will of the marketing department trying everything in their power to stop it.  It is this convergence that guarantees the lasting value of the brand as a barometer of 'what's inside the box'. Efforts by companies and organizations to confuse the market collapse when the truth gets around, a brand loses its lustre, and marketing money spent in the meantime trying to stop the convergence is simply wasted. Furthermore, when we say value, we don't mean quality. Value is much larger than quality, and includes 'all' the value that the product imparts to a consumer, including how ownership makes them feel about themselves.


Counterfeits feed on all of these points for profit. Counterfeiting is the alter ego of branding. It is the equal and opposite reaction in the marketplace of the success of the branding function. The more successful a brand is at communicating value, the higher percentage of the total value it creates. In effect, the brand becomes the product. The brand and product become completely intertwined to the point where the consumer chooses first the brand, and only second the product itself. Counterfeiters live for this situation. Counterfeiters love a company that does a good job branding, since what is to be counterfeited is not the product, which is difficult, but the brand, which is arguably easier. It is the highly successful way in which the producer has 'communicated' that has produced his favorable market position, but it is also this skill, that has attracted the counterfeiters and created the problem.