June 2008 - Marketing Judo Revisited

How to stop ruthless retailers, unscrupulous
affiliates and fraudsters by learning and averting their dishonest practices, Part 2

By Anthony Sziklai

Often when I speak to direct response marketers, I hear the same complaints time and time again: “These knock-off artists got to the buyer at Wal-Mart before I could.” “My web affiliates have been slamming orders and now I am up to my elbows in returns and chargebacks.” “This jerk has been stealing credit cards, buying my product using the three-payment option, canceling before the second payment and then selling the product on eBay.” And the litany goes on.

Last month, I revealed some key techniques for beating the knock-off artists to the punch before they can swindle you out of lost product sales (see May issue, page 52). In Part 2, I’m going to tell you how to avoid getting ripped off by other marketers, your own trading partners and fraudsters.

If you have any plans to sell your direct response product through the retail channel, be advised that it can get ugly out there. If your product is a mega hit and you are spending a lot of money on media, your experience with the big-box retailers will probably be honeymoon-like at first. You will get big purchase orders-and actually get paid for them. You will start talking about your “relationship” with Wal-Mart and Target as if you were newly married and had your whole lives to look forward to. But all of this can unravel quickly if your product loses momentum. Chargebacks will come out of the woodwork, orders will drop off, payments will be held back, and slow-moving goods will be unceremoniously shipped back to you. Even if your product is doing well, some retailers will go out of their way to make it hard for you, poaching your brand name on the search engines and advertising your product at fire-sale prices well below your authorized retail price. Following are some judo moves to help you survive, and even thrive, in this retail jungle:

*Beat them on the search engines- There is no reason why any retailer, including the major retailers, should be ahead of you on the search engines for your own product name. I see this happen regularly, and it can lead to a decline in your web sales, as well as dilution of your brand. Before you start selling to retailers, make sure that your website is properly optimized. Optimize the site’s title, description, keywords and content so that you are number one for your product’s name. Develop an external link strategy to ensure that retailers with stronger web rankings don’t upstage you. Finally, don’t forget to bring your pay-per-click game. “Bid first and bid high” to prevent others from stealing your thunder.

*Enforce your retail pricing, even when major retailers start breaking the rules- If you want to protect your reputation with other retailers, you may need to part ways with a rogue retailer who is advertising below your authorized retail price. I have seen this happen on many occasions. I have even seen retailers sell below the wholesale price. If a smaller retailer does it, cut them off immediately. Set an example. If a big-box retailer does it, talk to your sales rep and apply pressure indirectly. If this tactic doesn’t work, send a cordial cease-and-desist letter. At the end of the day, campaigns work better when the retailers are willing to be supportive of your pricing strategy. If a retailer drops their price prematurely, it may drive you off TV, which is counter to their long-term goals. Remember that price fixing is illegal, so you can’t actually dictate price. But you can get the advice of an attorney who is knowledgeable about retail and take the appropriate action.

*Don’t get greedy and accept any old deal-If you have a mega hit on television, you have more clout than you think. Once sell-through has been confirmed, don’t accept guaranteed sales agreements (consignment agreements where you are paid only after the goods sell). If you are stuck with a consignment deal, limit the amount you allow the retailer to buy to minimize your exposure.

*Fight retail chargebacks- Though they won’t admit it, chargebacks are a profit center for the big-box retailers. Picky routing guides, impossible turnaround times and indecipherable compliance charges all whittle down the unwary marketer’s profits. Fight back by monitoring every EDI transaction, QC’ing every order and even filming the order as it’s packed, labeled, marked and loaded onto the delivery truck. If your inventory is just-in-time, make sure you plan ahead and stay on top of each retailer’s ship-by and cancel-by dates so you don’t miss a critical deadline. Many retailers provide online portals that allow you to track new compliance charges. Check them daily. If you get a chargeback, dispute it immediately.

*Don’t count on retail for survival- Retail is ideal for many products and should definitely be part of your long-tail strategy. That said, direct response marketers should not bet all of their chips on retail. According to Grant Gordon of interactive agency, Infomercial.tv, “it’s helpful if your DR product differs slightly from the retail version, e.g., it includes some free gifts or special items. ‘Not available in stores’ can be a powerful selling point. It can even help you on the web long after you are off the air and off the shelves.” In the final analysis, retail can be an expensive proposition with demanding order volumes, guaranteed sales agreements, holdbacks and chargebacks. You need money to play this game and you may ultimately decide that it’s not for you.

There are several interactive agencies that provide affiliate-marketing services to DRTV marketers. Some, in fact, specialize in this kind of marketing and call themselves “affiliate management agencies” to underscore their value-added role. In case you have never heard of affiliate marketing, it involves using third parties, such as independent web publishers or e-mail marketers, to generate online sales on a cost-per-sale basis. The upside is that you only pay when an actual transaction takes place. The downside, as many DRTV marketers have found out, is that you can get ripped off by affiliates who steal or re-use credit cards to slam orders. Some of the more unscrupulous affiliates use the old trick of cramming paid search with multitudes of affiliate sites and “official” sites to totally dominate your product’s presence online. In short, they hijack your direct web sales. Following are some judo moves to help you fight back:

*Set the rules for selling your product and enforce them- Don’t let your affiliates poach your hard-earned web traffic, e.g., traffic generated by television or radio media. According to Gordon, “some affiliate networks can prevent their affiliates from competitive paid search bidding. Trademarked keyword search terms should be your ‘low hanging fruit.’ Web orders are often your most profitable, as they do not have an associated telemarketing cost (and in some cases, no associated media or processing costs, either). Affiliates who cannibalize your order stream should be terminated immediately. Also, be sure you have the capability to dictate what materials affiliates can use to market your product, such as images, banners and copy. This way you will avoid any potential problems vis-a-vis claims made, legal issues, etc.”

Rick Fisher of interactive agency, Permilia, agrees: “Keep your CPAs high to attract affiliates, but keep your rules tight to police fraud. Establish a true-up period with your affiliates, since you’ll need time to evaluate and verify which affiliate sales are valid. Factor your CPA payouts based on ‘typical’ behavior, reward overachievers and penalize underachievers. If your affiliate rules restrict PPC search on branded terms, be sure to keep an eye on search results from 11:00 p.m. to 6:00 a.m. EST. It’s when your long-form show is probably running, and your affiliates are probably jumping into search. Services like Ispionage.com can help you monitor regularly.”

*Monitor your affiliate orders- Closely monitor affiliate order trends, such as increased declines, chargebacks and returns. The first step is to work with your payment processor and/or fulfillment house to separate your affiliate orders from your call center and direct web orders. Once you have done this, you can start monitoring for unhealthy trends and cut off a source before it impacts your merchant account or leads to BBB complaints and lawsuits.

According to Fisher, “real-time processing or pre-authorizing is a must. Validate CVV and date/time/IP stamp all leads and transactions. Don’t be pennywise when it comes to merchant fees; structure your process to best suit your site’s sales funnel. Good affiliates will appreciate that you’re keeping the bad guys out and it will pay for itself many times over.”

Mick Rispoli of payment processor APG adds that “sometimes it is even advantageous to set up a sub-account [an additional merchant account under the main account] to help separate and reconcile your specific affiliate transactions, which can also protect your main merchant account from being shut down or fined if you run into a chargeback problem with affiliate transactions.”

*Require your affiliate management agency to identify which orders came from which affiliates-
Affiliate management firms can pass you an affiliate ID with each order, allowing you to better pinpoint sources of fraud. Sometimes, order slamming can occur at the sub-affiliate level, so make sure you are able to identify sub-affiliates within larger affiliate networks. Ken Osborn of interactive agency Liquid Focus is a big believer in this kind of tracking: “We had one sub-affiliate that would place nine orders every morning before 9:00 a.m. We caught them for our client because we had the right tools to identify these kinds of things.”

Permilia’s Fisher further advises, “Sub-affiliates will hop from network to network, so keep a database of the IP addresses related to fraudulent orders. Even if you are tracking sub-IDs in networks, they will get removed from network A and go to network B, or just sign up at the same network with a new name. Having their IP filtered usually restricts this type of mayhem. Keep in mind that the networks will help you if you are helping yourself, but they lose money by stringently policing their own affiliates.”

At the end of the day, the most important thing is working with someone who knows what they are doing. Osborn contends that most people get slammed because they cut corners and do things on the cheap: “Just joining a major affiliate network or taking whatever comes along is a risky way to navigate affiliate marketing. Find a valid third party that has the tools, people, abilities and financial backing to support what you’re doing and protect you.”

Fisher agrees: “people don’t often recognize the effort that goes into real affiliate management. Some affiliate management firms view the process as taking your CPA and engaging in network arbitrage [getting paid $40 per sale and distributing it at $20 per sale]. Real affiliate management involves a secure foundation, enforcing clear affiliate rules and understanding how to make good affiliates happy.”

According to Infomercial.tv’s Gordon, “the best kind of affiliate is one that charges only when a sale has been fulfilled. In this scenario, order files are delivered directly to your fulfillment company for processing, and you pay a fixed commission [known as a fixed cost per order or CPO] on fulfilled orders only, eliminating many of the risks found online.”

Fraudsters are people who use stolen credit cards or other scams to acquire goods without legitimately paying for them. These kinds of fraudulent transactions can result in chargebacks, additional merchant account fees, increased reserves and, of course, lawsuits. Following are some judo moves designed to stop fraudsters dead in their tracks:

*Use the card security code and AVS options offered by your payment processor- The card security code is a three- to four-digit value that is printed on the card, but not encoded into the magnetic strip. When an order is being placed, this extra measure validates that the person ordering actually has the card in his or her presence and is an excellent way to weed out fraud. Make sure that your telemarketing sales centers, websites and fulfillment house are set up to capture and pass the code to the payment processor.

APG’s Rispoli reminds us that collecting the card security code information is not mandatory by the card associations at this time, but is a valuable tool in appealing a chargeback and winning a dispute. It is mandatory to delete the security code information after receiving approval on the transaction. Under no circumstance or in any level of encryption can this information be stored with credit card or any other consumer information.

Address verification system (AVS) is a system that compares the card billing address provided by the consumer with the address on file at the credit card company. It can remedy many “Unauthorized Use” and “Non-Receipt of Merchandise” chargebacks. The only problem with AVS is that it can do too good a job, penalizing legitimate customers who just moved to a new address, or who had their billing records mis-synchronized by the card companies’ systems. I speak from authority here-it’s happened to me.

*Use suppression files and other tools to filter out bad orders-Customers with track records of fraud, chargebacks or BBB complaints should be maintained in a “bad boy” file. When new orders are captured, they should be checked against the bad boy file before being pre-authorized, charged or sent to the fulfillment house for processing. A number of suppression criteria can be used to filter orders, including name, address, credit card number, maximum dollar amount and number of units.

Sometimes suppression files are not enough. According to Fisher, “fraud online comes in many forms, the most harmful being ‘order spamming.’ This usually involves large files of stolen credit cards, with all the data necessary to pass your processing checks. Implement your own tools to help filter these orders out or at least flag them for further review. Those tools are as basic as reviewing the e-mail address on every order. For example,

[email protected] isn’t a real person’s e-mail address, but it might pass your checks. The tools get as sophisticated as using Geo IP location, BIN validation [bank ID number], Geo phone location and referring browser detection [sometimes "bots" are used to create the illusion of a person placing an order]. On Permilia’s sites, if your address is in Texas, your IP pings you in Los Angeles, no browser is detected, your phone number matches a residence in Florida, and your credit card was issued in Taiwan, then you get thrown in the ‘do not process’ bucket.”

*Use refund/reship approvals- Depending on the price point of your product, in some cases, it makes sense to slow down the refund and reship process in order to spot fraud. There are many instances where brazen fraudsters try to get a refund or re-shipment by claiming that they didn’t receive their first shipment (even though the delivery tracking information says otherwise). If your customer service rules are lax and your agents are timid, fraudsters can bully your organization out of a lot of money. In the example of a fraudulent reshipment, it can get worse when a multi-pay option is being used and the thief cancels after the first installment. These culprits effectively get two units for the price of one payment that they can then sell on eBay well below the wholesale price. A simple approval workflow can be used to identify this kind of fraud before reshipments are processed.

*Fight friendly fraud-Don’t un­der­estimate the damage done by so-called ‘friendly fraud.’ As consumers buy and download more through direct and digital channels, so rise claims of unauthorized purchase. According to Litle & Co.’s Bob Botelle, “for as many consumers as there are who make such claims deceptively, there are as many who have an equal or greater sense of responsibility for a purchase made by a loved one or another using a card that belongs to them. Train your customer service agents to push back appropriately. You shouldn’t have to face chargebacks for goods purchased and received through friendly fraud.”

*Have a plan for “prepaid perpetrators”- As use of prepaid gift and stored-value cards has grown, so has fraudsters’ use of them. According to Botelle, “direct response selling popularized recurring or installment payment options and so direct response merchants are easy targets of prepaid perpetrators. While most card presenters are legitimate buyers, prepaid perpetrators are credit criminals who purchase from you knowing that a card has only enough funds to cover the first two “x” payments-just enough to get the goods shipped to them and leave you holding the bag. A plan to identify these potential credit criminals should include working with your processor to expose possible risks. Such a plan allows you to make informed decisions before completing questionable card-not-present transactions.”

From out-maneuvering knock-off artists to blocking prepaid perpetrators, the master of marketing judo is someone who not only understands the preceding pearls of wisdom, but who is also willing to use them. It is very easy to take the path of least resistance and not invest in IP, launch lawsuits or offend your trading partners, no matter how bad they are behaving. But Grasshopper, the marketer who walks this path is doomed to walk it again and again.

Anthony Sziklai is president of Moulton Logistics Management in Van Nuys, Calif. He can be reached at (818) 997-1800.


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