How to Conquer Discount Fraud (2024)

Retail

There are many upsides tovarious discountsbut retailers must be mindful ofdiscountpolicy fraudorabuse thatcan lead torevenueandinventoryloss.

Discounts provide many benefits to not onlycustomers, but to retailers as well. From employee to military discounts,they allserveapurpose to drive long-term sales,loyalty, andprofits.Proper implementation caninfluencefrequent purchases,newproduct trials,andincreaseorder sizesfromshoppers buying more productsencouraged bydiscountusage.91% ofshoppersthat use couponssaythey will be a returning customer.

The Diverse Range of Discounts

There are various discount types for retailers to implement including employee discounts,exclusivediscounts, and promotional discounts.

Employee Discounts

Anemployee discountis astrategythatretailersprovideasaperkto employeesandanincentivetoseek new hires.Not only do employee discountsincrease therecruitment pool formore potentialworkers, but alsocan beusedtostrengthensales. Since an employeewill spend a great amount of timebecoming familiarized with a retailer’s brand, products, and services, this couldconvertthe employee into a loyal customeras well as a valued team member. As an extension to becoming a loyal customer,employees may be a source offree advertising forthe company’s products.This is due to the consistent usage of products that mayevengain attention from their peers or family members.

ExclusiveDiscounts

Some discounts are meant for exclusive audiences likeloyalty or rewards members, members of the military and their families,first-responders, front-line workers,orevenstudents.

Military discountsoffer benefitstoshopperswho are currently or previouslymembersofmilitary services.Military discountsare eligible toactive-duty, veterans, retiredpersonnel,andoften extend tomilitaryfamiliesas well.This shows military personnelthatthe retailer thanks themfor their selfless service to our country.Likewise,many brands offerpolice officers, firefighters, EMTs and other first-responders a discount as a thank you for their contribution to the community.Recently,that same sentiment has been extended to many front-line or essential workers putting their lives at risk duringpandemic lockdowns.

Promotional Discounts

Promotional discountsarecommonly usedby retailers to drive sales invarious ways. Promotional discountsare personalized to the business’s brand, product, or serviceandthe relationship they share withthe targetaudience. Retailers implementpromotionaldiscountsin order toclean up surplusinventory, generateawarenessfor new product launches,encourage more trips to brick-and-mortar or ecommerce storefronts,encouragebrandloyalty,and/ortogrow customerinteractionsand consistent business.80%of marketersbelievepromotional discounts are vitaltowards their customer engagement and acquisition.

Althoughthere are many upsides tovarious discounts,retailers must be mindful ofdiscountpolicy exploitationormisuse thatcan lead torevenueandinventoryloss.

Three Types ofDiscountProfit Loss

Discount Policy abusecomes in many forms, but it is more easily detectable when employers know exactly what to look for.

1. Discount Fraud

Discount fraud occurs when an employee or customer purposefully and maliciouslydeceives or misrepresents factto apply adiscount for personal gain.For example, a customer maypurposefully mislead a retailer and claim to qualify for an exclusive discount, like a military discount, even thoughthey havenever actually served in the military.Another exampleis when a customerhascompleted their purchaseand pays in cash, an employee appliestheir discount card to lower the customer’s total.Then, theemployee pockets the price difference for themselves.OneAgilencecustomer found that a single employee waspocketingaportionofnearly50% of all cash transactionsin asingle locationusing error corrects, voids, and discounts.

Another example of discount fraudoccurs when a customerpurposefullyexploits the terms and conditions ofthe retailer’s coupon policy.These fraudsterscan potentially redeem a coupon more than once, copy coupons, create fake coupons, or use the coupon on unrelated products. Proper coupon use isa great wayto boost the number of sales transactions, however, couponfraudand other types of discount fraudcan quicklycut into profits.

2. Discount Abuse

Discount abuse occurs when an employee or customer applies a discount inappropriately or in a way that falls outside of policy.A perfect example is when an employee tries to share their employee discount with family or friends in a way thatisn’tpermittedor when a limited time discount is appliedoutside of the intended timeframe.Our customer, RackRoom Shoes was able toadd$1.3 million back to their bottom lineannuallyby cutting down on out-of-policy employee and military discounts.

Stackingdiscounts can be another form of discount abuse.Thisoccurswhen multiple coupons, promotions,and/or discounts are applied to a single transaction, compounding cost savingsbeyond the intended use.Thesetypes ofout-of-policy discounts stretch beyond the intended scope ofuse and willquicklyerode marginsif left unchecked.For example, oneAgilencecustomer found that a single discount code applied on top of an already generous employee discount was costing them $250,000 annuallyand resulted in certainitems being sold 90% below cost.

In addition to discount stacking abuse,retailers must be mindful when permitting multiple promotional discounts to a transaction, because theorder of how the promotions areapplied can make a huge difference. For example, a military discount could be appliedto a transaction on top of a store promotion,butif they are different monetary values or discount percentages thenapplying them out of order could cost the retailer money.

3. Discount PolicyGaps

Policyand traininggaps can often cost retailers more than any thief,fraudster, ordishonest associate.Properdiscount policy creation, distribution,implementation,and training can prevent manyinstancesof fraud and abuseas well as operational issues that can cost retailers millions of dollars annually.In addition to beingabused, stacking discountissues ran also be caused by certain policyor technologygaps.Forexample, when applying multiple types of discounts to the same transaction, the order in which the discounts are applied can have an impact on the overall cost savings. Applying a“% off total order” discount after aline item or“$ off” coupon willoffer a larger amount offthe total purchase price. Applying certain settings into the POStoalways apply “% off” offers before “$ off” discountsrevealed an opportunity toadd $2.5 million annually back tothe bottom lineof oneAgilencecustomer.

Neglecting to trainemployeeson how toappropriatelyapplycertaindiscountscan also cause preventable margin erosion and operational issues.For example,when retailers are running a “gift with purchase” promotion, the gift item must be rung into the POS system and then fully discounted to zero.If this stepisn’tproperly communicatedto associates, it could lead toballooning inventory issues as items are given away without being rung into the system.OneAgilencecustomer“misplaced” $300k worth of inventoryin a single month because of this issue but was able to identify theissue and retrain associates to properly apply the discount.

IdentifyingInstances of Discount Fraud, Abuse, andPolicy Gaps

Afteridentifyingthe red flags of potential discount abuse, it is important tohave the proper measurements and tools implemented toidentifydiscount policy violations, and topreventthem from reoccurring in the future.

All ofthe examples of discount fraud, abuse, and policy gaps were identified witha data analytics solutionwhich allowed users toeasilyanalyze transaction dataforcertain events, behaviors, and other indicators of profit loss. There aremany waystoanalyzediscount transaction data thatmay reveal profit-reducing activities. Oneoption is tocomparediscount applications by employee or locationto company averages and identifying over and under-performers.

Questions to Consider WhenAnalyzing Data forEmployee Abuse

• Does the employee purchasea higher volume of items at a greater discount due to the use of employee discount benefit?

• Is the employee regularly seeking super discounts by adding his employee discount on top of an already marked down item?
• Isthere anextensivedegree of purchase overrides used by the employee to receive a discount as compared toother employees?
• Comparatively,is theemployee’s overallpercentagediscountreceivedgreater thananyother employees’ discount at the store level?

In order toavoidfaultydiscounts, employers should put amonetary limit on the amount per month an employee can redeem with their employee discounts.Furthermore, it is encouraged for store managerstoapproveeveryemployee discountprior to its application to a purchase.Video surveillance (CCTV) footage canalsobe incredibly helpful whendeterminingifimproper discount usage is due to a dishonest associate or an honest policy or training issue.

Moving Forward

Utilizing proper securitysurveillanceand cashier monitoring,havingconcisediscount policy procedures, reviewing potential risks within discount policies, implementing proper employee training, and havingintegrity screenings for new hireswill place your business in the best position toavoid discount abuseandfraud.

Recently, Agilence teamed up with Loss Prevention Magazine on a research report aimed at measuring the changing perceptions and value of Loss Prevention teams. Responses were collected from a hundred LP professionals at every level, operating in various industries. Download your free copy of the full report today to see the results.

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