How to Conquer Discount Fraud

Discounts provide many benefits to not only customers, but to retailers as well. From employee to military discounts, they all serve a purpose to drive long-term sales, loyalty, and profits. Proper implementation can influence frequent purchases, new product trials, and increase order sizes from shoppers buying more products encouraged by discount usage. 91% of shoppers that use coupons say they will be a returning customer.  

The Diverse Range of Discounts 

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

Employee Discounts 

An employee discount is a strategy that retailers provide as a perk to employees and an incentive to seek new hires. Not only do employee discounts increase the recruitment pool for more potential workers, but also can be used to strengthen sales. Since an employee will spend a great amount of time becoming familiarized with a retailer’s brand, products, and services, this could convert the employee into a loyal customer as well as a valued team member. As an extension to becoming a loyal customer, employees may be a source of free advertising for the company’s products. This is due to the consistent usage of products that may even gain attention from their peers or family members.  

Exclusive Discounts  

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

Military discounts offer benefits to shoppers who are currently or previously members of military services. Military discounts are eligible to active-duty, veterans, retired personnel, and often extend to military families as well. This shows military personnel that the retailer thanks them for their selfless service to our country. Likewise, many brands offer police 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 during pandemic lockdowns. 

Promotional Discounts 

Promotional discounts are commonly used by retailers to drive sales in various ways. Promotional discounts are personalized to the business’s brand, product, or service and the relationship they share with the target audience. Retailers implement promotional discounts in order to clean up surplus inventory, generate awareness for new product launches, encourage more trips to brick-and-mortar or ecommerce storefronts, encourage brand loyalty, and/or to grow customer interactions and consistent business. 80% of marketers believe promotional discounts are vital towards their customer engagement and acquisition.  

Although there are many upsides to various discounts, retailers must be mindful of discount policy exploitation or misuse that can lead to revenue and inventory loss.  

Three Types of Discount Profit Loss 

Discount Policy abuse comes 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 maliciously deceives or misrepresents fact to apply a discount for personal gain.  For example, a customer may purposefully mislead a retailer and claim to qualify for an exclusive discount, like a military discount, even though they have never actually served in the military.  Another example is when a customer has completed their purchase and pays in cash, an employee applies their discount card to lower the customer’s total.  Then, the employee pockets the price difference for themselves. One Agilence customer found that a single employee was pocketing a portion of nearly 50% of all cash transactions in a single location using error corrects, voids, and discounts. 

Another example of discount fraud occurs when a customer purposefully exploits the terms and conditions of the retailer’s coupon policy. These fraudsters can potentially redeem a coupon more than once, copy coupons, create fake coupons, or use the coupon on unrelated products. Proper coupon use is a great way to boost the number of sales transactions, however, coupon fraud and other types of discount fraud can quickly cut 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 that isn’t permitted or when a limited time discount is applied outside of the intended timeframe.  Our customer, Rack Room Shoes was able to add $1.3 million back to their bottom line annually by cutting down on out-of-policy employee and military discounts. 

Stacking discounts can be another form of discount abuse. This occurs when multiple coupons, promotions, and/or discounts are applied to a single transaction, compounding cost savings beyond the intended use.  These types of out-of-policy discounts stretch beyond the intended scope of use and will quickly erode margins if left unchecked. For example, one Agilence customer found that a single discount code applied on top of an already generous employee discount was costing them $250,000 annually and resulted in certain items being sold 90% below cost.  

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

3. Discount Policy Gaps

Policy and training gaps can often cost retailers more than any thief, fraudster, or dishonest associate.  Proper discount policy creation, distribution, implementation, and training can prevent many instances of fraud and abuse as well as operational issues that can cost retailers millions of dollars annually.  In addition to being abused, stacking discount issues ran also be caused by certain policy or technology gaps.  For example, 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 a line item or “$ off” coupon will offer a larger amount off the total purchase price.  Applying certain settings into the POS to always apply “% off” offers before “$ off” discounts revealed an opportunity to add $2.5 million annually back to the bottom line of one Agilence customer. 

Neglecting to train employees on how to appropriately apply certain discounts can 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 step isn’t properly communicated to associates, it could lead to ballooning inventory issues as items are given away without being rung into the system.  One Agilence customer “misplaced” $300k worth of inventory in a single month because of this issue but was able to identify the issue and retrain associates to properly apply the discount. 

Identifying Instances of Discount Fraud, Abuse, and Policy Gaps 

After identifying the red flags of potential discount abuse, it is important to have the proper measurements and tools implemented to identify discount policy violations, and to prevent them from reoccurring in the future. 

All of the examples of discount fraud, abuse, and policy gaps were identified with a data analytics solution which allowed users to easily analyze transaction data for certain events, behaviors, and other indicators of profit loss.  There are many ways to analyze discount transaction data that may reveal profit-reducing activities.  One option is to compare discount applications by employee or location to company averages and identifying over and under-performers. 

Questions to Consider When Analyzing Data for Employee Abuse 

• Does the employee purchase a 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? 
• Is there an extensive degree of purchase overrides used by the employee to receive a discount as compared to other employees? 
• Comparatively, is the employee’s overall percentage discount received greater than any other employees’ discount at the store level? 

In order to avoid faulty discounts, employers should put a monetary limit on the amount per month an employee can redeem with their employee discounts. Furthermore, it is encouraged for store managers to approve every employee discount prior to its application to a purchase.  Video surveillance (CCTV) footage can also be incredibly helpful when determining if improper discount usage is due to a dishonest associate or an honest policy or training issue. 

Moving Forward 

Utilizing proper security surveillance and cashier monitoring, having concise discount policy procedures, reviewing potential risks within discount policies, implementing proper employee training, and having integrity screenings for new hires will place your business in the best position to avoid discount abuse and fraud.  

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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