Counterfeits, fraud, and theft: Why Silca changed its return policy

Date: 2022-07-26T02:32:33+00:00

Location: cyclingtips.com

The digital world has changed retail as we know it and the bicycle industry has had to adapt. More than ever, consumers now expect products to be delivered faster and returns made more seamless, but what are the actual costs of these demands? Are we just paying for these conveniences in other ways? Have return policies become too generous and simply now just promote waste? And are they realistic for small businesses to offer?

This is an extremely big and nuanced topic that stretches far beyond our relatively micro-size cycling industry. And yet, it was Josh Poertner, owner of Silca, who responded to a customer question on a public forum with more insight into the topic than any industry report, white paper, or similar study that I’ve seen before.

Upon reaching out, Josh was kind enough to dive even deeper (it’s a long, but worthwhile read) on the topic of why Silca recently changed its return policy. It’s a conversation that covers the risks associated with selling goods online, the gross costs of credit cards, the power of Amazon, the reasons why return policies are likely going to become progressively less generous, and so much more.

CyclingTips: Silca previously offered a surprisingly generous 30-day return policy that was recently changed. This prompted a discussion on the Paceline forum, and in your response, you said the change was due to the ongoing issue of fraudulent returns through both Amazon and your direct E-comm stores. What is the change in question?

Josh Poertner: After a few years of dealing with this, we ultimately changed our 30 day no questions asked returns policy such that you could only return for store credit and not a straight refund. This was pretty quickly noticed and brought to internet forums as an example of a poor customer service policy.

However, I think I’d start with the policies at issue here. When I bought the Silca brand and restarted the company, the vision focused around this phrase, ‘The Ultimate Customer Experience’ which I thought encapsulated the whole thing, the ordering, the look, the feel, the sound, the customer service, you name it. We wanted to be the best. And so we looked at what the rest of the industry was doing and went one further in all those aspects. 

Most companies had one year warranty for the USA and two years for EU warranty (which is EU law). Commonly the warranty was void for shop use or pro team use, didn’t cover hoses or gaskets and so on. And so we did lifetime warranty for materials and workmanship, seven years for wear and tear (not covered under any warranty), and two years on rubber parts with no limits for shops or teams. It was great!  

But I think the biggest thing we did early was that instead of getting a phone tree, you know, dial 1 for sales, dial 2 for whatever, we invested in a VOIP routing system that sends calls to our individual cell phones. We strived to cover 12 hours a day between the three of us to ensure we were always available. And with that, we decided to offer a 30 day no questions asked return policy, with the belief that if you didn’t like or want the product, you’d call us, we’d talk to you about it, the feedback would be valuable and that over the long-term any short term losses would be long term gains.

For years that was true, and it was also valuable. I remember one of our first Ultimate pump customers returning it because he thought the hose was too stiff, and we had a 30-minute discussion about it, refunded his money for the pump and he kept the t-shirt he bought. Well, we put that to heart and changed the braid of the hose to soften it and within a year had developed the new softer Ultimate hose and then an even softer type of kevlar over-braided hose in the next pump and included this fact in our marketing. When we launched the SuperPista, roughly the fifth customer for it was this guy! Six years later he’s a top customer and we continue to hear from him with feedback positive and negative all the time. It’s great. and thanks Dan, you’re probably reading this!

However, the last three years have seen some dramatic changes in behaviour that honestly we really never experienced in the past or even imagined. All companies deal with fraudulent orders, people stealing credit card information, buying stuff and then disappearing. We’ve had that since the beginning and while it’s much worse now than before, I think of this as pretty traditional fraudulent behaviour by bad actors, with the modern version of it being very coordinated.

 What’s new is what we’re calling ‘returns fraud’, and it’s not just us. You can Google this phrase and find hundreds of articles about what companies are facing. Essentially, people buy something, put something else in the packaging and return it for full refund. If you (the company) don’t refund it, they will go to the credit card company and file a claim against you that can get very, very expensive to deal with, or they threaten to drag you through the mud on the internet, on Amazon, in reviews, etc. 

Can you provide some examples of such fraud?

Sure, but first let me say, all of this fraudulent purchasing and return stuff is being done by a fraction of a percent of people, so I really want to be clear, we love our customers and 99.8% of them are amazing to work with on all levels. We even enjoy working with the disappointed ones as it’s such an opportunity to learn or improve the product. The problem here though is that the bad actors hit with a profound asymmetry in both volume of issues and dollars in play. So that 0.2% of people are causing 100% of the fraud which can be as high as 25-30% of total returns depending on the sales channel.

The most common form comes from somebody buying an item and returning a similar item in the packaging. Maybe you buy a Mattone seat bag and return a 3-year-old Mattone where a multi-tool has worn a hole through it, or an old cheap no brand bag is used to fill the packaging. Most commonly we see latex tubes being returned as ‘defective’ but it’s been replaced by a butyl tube, or an older flatted latex tube (they have date codes on them, so while heartbreaking, it is a bit funny when the customer swears the tube was defective and it’s got a 4-year-old date code on it!).

Returns through Amazon are on a whole other level! People will buy Ti cages, put their old crappy cages in the packaging and return as defective. We have a whole wall of cages returned this way, it’s pretty unbelievable and it happens probably once a week! We’ve also had people replace lube with motor oil, and most painfully, people buy a pump and just put their old pump in the box and return it. We’ve had maybe 40 of those over the last year.

The other thing we see are people buying things like pumps, stripping them for spare parts and returning them as defective. We’ve had people buy say a Pista pump and take the leather gasket, rubber chuck seal, piston glide ring, gauge… all the internal replacement parts that you can buy separately, and then put it back together and return. That one really had us going crazy internally after the first one as we just couldn’t figure out how on earth we could have shipped a pump like that when we pressure test every one of them at the end of assembly by inflating against a gauge.. but the Pista has two little screws that you have to remove take the thing apart and when we looked, all of these returned pumps have had those screws unthreaded which you can see as deformation in the screw head, whereas a new in box pump has only had them installed, a pretty clear giveaway of what’s happening. 

I’ll say that the repeatability of some of these behaviours makes you feel that somebody has to be talking about this on the internet, but maybe it’s just people having the same idea, either way, it hurts.

How have you been dealing with these fraudulent returns? And does it differ for Amazon vs direct sales?

In general, fraud is really difficult to deal with for direct sales. We always try to side with the customer and our initial assumption is always that we made the mistake, but some of these are really just so egregious that it’s really clearly fraud. 

However, the biggest headache is that they possess the nuclear option which is to call the credit card company and claim that we’re the ones acting improperly, and that can be really expensive for companies both in the short term and long term as now we’re on the hook to provide a bunch of data to prove that we’re not misbehaving. The company then also starts to be flagged in a sort of points system that can cause long-term problems and lead to increased credit card processing fees. 

With Amazon, it’s amazingly a bit easier, as Amazon has massive leverage with the credit card companies, and they also know that this is a big problem. Up to half of our returns through Amazon are fraudulent or at best unethical, and so when fraud does happen at Amazon, they are actually great about it.

We put a report together for Amazon showing what has happened and if approved, they will allow us to keep the payment as if the item had not been returned and then they are now supposedly putting customers on a three-strike system where Amazon will potentially cancel their account for repeated misbehaviour. Amazon can be very hard to work with, but this is an area that they surely know more about than any of us. There was a report from Deloitte a few years back estimating that large retailers like Amazon were losing $5.90 to return fraud for every $100 in online revenue. And there was a story a year back of a single customer generating $290,000 in return fraud with Amazon!

The problem is significantly less by volume for our consumer direct sales, but the headaches are exponentially higher. For one, we have to completely inspect and test every single item that’s returned by hand to ensure nothing is wrong, missing, broken, etc. If an item is in good shape or really is new and just unwanted, the packaging is almost always damaged beyond what could be considered a new item, so at best we might be able to sell it in a damaged package sale, which we do twice per year. However, for most items, we either strip them for spare parts, throw them away, or donate them to a local junior team who understands the situation and will let us know if there is something wrong that we just didn’t catch. 

For clothing and soft goods, what isn’t obviously worn is washed and given to Goodwill, but a lot of t-shirts that ‘didn’t fit’ seem to come back to us with armpit stains or tears in them and obviously just end up in the landfill. Our most embarrassing situation ever was one of the first return fraud situations we ever had, a customer who returned a Maratona gear bag in the package as unused and unwanted, it really looked unopened and as-new, so we put it into inventory and sold it. The second customer got it and opened it and in one of the small pockets found a used razor and pack of condoms – it was horrifying! 

From there we implemented significant inspection protocols, and yes, gloves are worn!

Do you think Amazon’s extremely generous approach to consumer returns has helped to foster this mentality in customers that they can get away with such theft? 

I think that the race for market share in online retail really created a whole host of bad behaviors that are both costly to them and other retailers, but are also just flat out environmentally destructive and really need to stop. 
We have to really blame Amazon and especially Zappos (who Amazon owns) for driving most of these bad behaviours which most other retailers were forced to go along with or even try to one-up in the race for market share. 
The consumer expectation now is that not only will you get a product in a day or two at most, but that you can return it for any reason, and that if you say the product is ‘defective’, then the return shipping is free. So of course, everything returned is claimed to be defective! 

Along with that, Amazon has become a sort of big, bad monster that everybody loves to hate on, but also still shops with, so there is this sort of ethical self-justification for people who think that they are ‘screwing Amazon.’ I hear this all the time from folks who think that they’re pulling one over on Jeff Bezos but who don’t understand that Amazon doesn’t own that inventory, it belongs to companies and that when you think you’re screwing Amazon you’re actually screwing directly with some smaller company behind the product.

The other behaviours that they normalized and now all of us deal with are what they call ‘serial returns’ where you buy maybe one of everything and return what you don’t want. Another issue, called ‘wardrobing’ is where a customer buys something to use once and then return, this is mostly an issue with apparel and fashion, which we don’t see a lot of. For us, it’s more common to have somebody buy maybe every seat bag we make and then return all but the one they like most. This isn’t fraud, but wow, it’s costly for the company. 

That same Deloitte report looked deeply at Target and found for every $1 of sales, they net $0.05 in profit. While for every $1 in returns they net $0.25 in losses. Our experience here mirrors that closely. However, that’s assuming you can resell the item, so the ratio is worse for fraudulent returns! 

Let’s say you buy five different seat packs and you return four. A box comes in to our offices, a human has to open it, figure out what it is and who it came from, look up that order, and determine why it was sent back. Those return items are then given to the customer service team for inspection, items and packaging are carefully inspected and possibly tested. If the packaging is damaged, we have to send to the factory floor for new packaging, then the production supervisor has to remove that packaging from Inventory, then upcycle the inventory count, and then send the item back to the warehouse for placement so that it can be picked again. Best case scenario you have five-six people each spending five minutes or so touching the return and determining how to proceed. 

As a result of this, you saw this year that many companies like Target and Kohls were just refunding money on some returns and refusing to take the products as returns. One hand this makes sense, if you’re losing all of the revenue from the item and it’s likely not resellable, why spend any more employee time and labor on that item. On the other hand, you have now created an entirely new form of potential bad behaviour as people are buying stuff with the intent of forcing a refund without having to return the item. It’s a nightmare!

Related, Amazon has arguably changed consumer expectations over delivery speed and freedom of returns. What has Silca’s experience been with this? 

Yes, they’ve changed the game on all fronts! 

The reality is that the customer base is sorting itself into three camps: those who still want the hands-on retail experience, those who want to deal with or support a company directly (these people are often small business owners themselves or enjoy the connection and education the brand provides), and those who want some combination of convenience, anonymity or maybe just want it cheap and now – or as I like to say ‘free and yesterday!’ 

In this sense, yes, you really have to be on Amazon, especially with lower-cost items and many to most of the Amazon shoppers are not even considering other options. The data shows that while Google is still the world’s largest search engine, 60% of product searches now originate at Amazon with Google, Bing, DuckDuckGo, and 50 others filling the other 40%. Amazon has not only changed expectations but have really changed the game so deeply that for everything but the most niche products you really have to be there or you don’t exist to 60% of potential consumers.

How draining on company resources are these fraudulent or dodgy returns? 

Emotionally they are extremely draining and not a week goes by that we don’t have something crazy or unbelievable happen on this front. It’s especially draining for our customer service team. Anybody who’s dealt with us knows Martha who handles this. She really approaches every customer situation from the perspective that she wants to really engage, understand, and help them, and to then realize it was all a lie, it’s hard not to take it personally. So I know for her it can be hard to stay positive about people when somebody has scammed you to your face. 

From a company owner perspective, it’s extremely costly in both time and resources. We’re a small company, everybody has something to do all the time, so if we’re spending 15-20 hours per week trying to sort, diagnose, and determine what to do with returns because we can’t trust what people are telling us, then that’s 50% of one employee spent on this matter, and that’s before you think of the lost product value, the lost shipping fees, the credit card fees, and the rest. 

To put some perspective on it, with what we lost in both purchase fraud and returns fraud last year I could have hired a full-time engineer, and outfitted them with a nice CAD workstation, CAD software, desk, chair, etc. So think about what a small company could do or create with a resource like that versus essentially throwing that money away in time and materials costs.

Do you believe this issue impacts larger brands more because the few bad-behaved humans feel the company can “afford” it? What is the sentiment like among other brands with direct E-comm selling that you speak with? 

I know for a fact it hits the big guys worse than the small and it hits those with higher dollar items worse even still. 

We have a large retailer friend who shared a story with me about a customer who bought a very high-end bike, swapped out many of the components for cheaper stuff and returned it. That retailer is now in an impossible situation where they’ve lost the value of the bike, are going to have to spend hours sourcing parts, replacing, rebuilding, etc. And on top of that, they face a choice of either trying to keep the money for the bike to help cover these losses or have the customer (who is threatening to do so) open a claim with the credit card company claiming the retailer is the one committing fraud. And this is all happening while the customer is also dragging them through the mud online through numerous forums, product review sites and Google reviews. The bad actors who really know how to work the systems have so much more leverage than the retailers at this moment that I’d estimate 80% of these frauds are successful, not to mention a company fighting it can be then stuck with some significant additional fees and penalties if they lose. The burden of proof for the retailer is insanely high. 

To put perspective here, I know that two of the big online bicycle retailers have installed multi-position hi-def cameras in their shops’ assembly and boxing areas so that they have video proof of the spec. and assembly of every bicycle that leaves the door. And they’ve done the same in their shipping/receiving areas in order to also have video proof of the receiving and unboxing of returns so that they have a leg to stand on in these sorts of part swapping or part stealing frauds. Just think about the time, energy, cost, and hassle of doing that and it tells you the scale of the problem. 

What measures or strategies have you found to be effective against these fraudulent returns? And do you believe there is anything that can be done to prevent them? 

For starters, our change in policy (that started this conversation) that provides store credit instead of a refund, along with return shipping to be paid by the customer has been really successful. While I really hate to add that bit of friction to the returns process, it does seem to add enough risk to the fraudster that many of them go elsewhere. 

We have also eliminated any sort of automated returns interface. This goes 100% against the current popular e-commerce trends and I have a company a week calling trying to sell us some AI powered, automated chatbot that can automate returns and customer service issues and all that stuff, and we just say NO. 

I think of this two ways. For our standard customer who has a question, I don’t want them getting frustrated with a chatbot; we all hate those things! But also, I think that bots and automation do feel like they add just one more layer of self-justification when people are behaving poorly. It’s like you go from scamming a small company, to scamming a big company that can afford it, to scamming a rich company that doesn’t even care enough to talk to you, or maybe people are more comfortable lying to a robot. 

Either way, I think that people running these sorts of fraud really don’t want to talk to anybody in person. And given our customer service is human-based, I think that alone helps tremendously with these issues.

I’ll also add that if we know you, and you call us, we’re going to work with you. We had a longtime customer order an Ultimate Artist Edition pump right before Covid blew and up then called saying he lost his job. Of course, we didn’t force store credit in that situation, even better we celebrated with that customer a few months back when he re-ordered that same pump now that he’s settled into his new job and felt comfortable with the spend – tears were shed, not gonna lie, and honestly, that’s how all of this should work, not just for my company but for all of us.

As far as Amazon goes, it’s really hard to say how things are going. We continue to see fraud all over the place and they continue to be pretty easy to deal with in recognizing it and working with us. We’ve implemented a photo/video system for all Amazon returns so that we have the chain of evidence if needed, and that makes things go pretty smoothly, but they are very secretive about what they are doing from their side. Realistically, you can pretty much only talk to robots at Amazon anyway so could be getting better, could be getting worse. We only see our tiny slice!

Another reason for moving to store credit or gift cards as a means of product returns is related to credit card fees, correct?

Sure, I mean, primarily it’s really meant to eliminate the sort of ‘product update’ scam the people will run, where they buy a new seatbag and send back a 3-year-old seat bag. It’s also to make people think twice about buying all the seat bags and sending back the one they like. While that behavior isn’t a fraud or scam, it really hurts a company. Like I said before, there’s about a 5:1 loss-to-profit ratio on returns, so if you buy three items and keep one of them, we have to sell two more items to other people just to break even. It really hurts. 

If you’re reading this and were thinking about buying a bunch and trying them, please just call us. Martha will talk to you for an hour or get on a Zoom call to show you what fits in what if you have needs not covered in our online tutorials. Or we can direct you to a local bike shop where you can see, touch, and feel all of them and then purchase locally. Even better!

But yes, it also helps with the credit card fees, which can be pretty steep on returns depending on the card.

What sort of fees do you get hit with for each purchase? And is it the same for Amazon? 

This is a good one. Most people have no idea how this works.

For credit card purchases, you have three entities making money on every transaction. Firstly, you have Interchange. This is where most of the money goes. This would be the issuing bank, such as Citi, Chase, or Bank of America. These fine folks are taking 1.5-3% depending on the card type and the cardholder benefits, so as a customer, you get that 2% cash back on purchases. The retailer pays extra for that.

Next up, you have the assessment fee. This is where you pay the card network, so Visa, MasterCard, or AMEX. These businesses are getting paid for routing the transaction to the bank and some backend data analysis. They are charging 0.5-1%, or in some cases, a flat fee per transaction. 

And lastly, you have the payment processor fee. This would be Square, or PayPal, or Shopify, or 1000+ others who offer a software interface that connects your business’s point of sale system or computer software for handling sales. These folks take 0.5-1% or a flat fee as well as a monthly fee for access to their software.

When you add it all up, you can expect that 3-5% of a transaction is going to these fees with the difference being the type of card and its benefits, as well as the size and leverage of the retailer to negotiate the other fees. 

If you are a very tiny business just starting out, you are paying through the nose. If you are Amazon or Costco, this is practically free because those banks would rather have 0.5% (or less) of a billion dollars than see their competitor have it. Also, at Amazon or Costco scale, you just work directly with the bank and processor, both at extremely low rates and you can be your own payment processor. This is not an option for small-to-medium or even rather large companies.

(Ed. – The topic of credit card fees is a difficult one and varies based around the world. The fees mentioned here are applicable to the United States. This topic and how it relates to Amazon is continued below).

Fraudulent returns are one thing, but I’d imagine that credit card fraud is just as common for Silca? 

Yes, this is a huge issue for all of us. For Silca.cc, purchase fraud is a bigger problem than returns fraud. At Amazon, it’s the reverse, although they don’t disclose purchase fraud to us so it’s hard to say.

Ok, let’s say you have a purchase for a Silca Pista Plus floor pump. This is a US$199 product. Just how out of pocket would you be if this sale turned out to have been a fraudulent credit card purchase?

A fraudulent purchase would be somebody using somebody else’s card, fraudulently buying the item and then disappearing.

To make the math easy: a customer buys a $200 pump with a platinum AMEX. Silca receives $190 net of credit card fees after the payment is processed, then Silca employees in Indianapolis pick and pack this pump into a $2 cardboard box and ship it free of charge (free shipping is the expectation that Amazon has ingrained in us!) and that shipping costs me $25 to Utah. 

A month later, the actual cardholder finds this charge and files a claim of a fraudulent purchase. The credit card company then gives us 14 days to respond. We then spend 30 minutes to an hour collecting all the needed proof. First is the transaction proof which shows that the credit card processor reported a low risk of fraud at the time of the transaction – this is just a pitiful zip code matching thing that good scammers know how to circumvent. Then we source the delivery proof which shows the product was shipped, it was delivered, photo of it on the porch, etc. We collate all of this information and load it into the credit card company’s online template. The credit card company immediately rejects this claim because they already know that the shipping address is not known to the cardholder (information they don’t provide to us) and in many cases that this card has other fraudulent purchases shipped to same address. 

At that moment, the credit card company refunds $200 to the cardholder. But wait, they want their transaction and processing fees, so they then bill us the original $10 in credit card fees that were assessed on the original purchase. And then, they also hit us with a $20-50 fine for filing a lost dispute. And also hit us with another fee up to 2% of the original transaction value for ‘claims processing.’ Better yet, the fraud then goes on a vendor scorecard where they can increase your fees if you have too many fraudulent purchases. 

What really kills me is that the credit card companies make predicting fraud really hard. We pay quite a bit for third-party software to help predict these cases as the credit card companies tell you almost nothing. Even if you call the credit card company specifically about a single transaction, they won’t give you guidance. And why would they? They can be making 3X the amount in fees on a fraudulent transaction as they do on a legitimate one, and their customer, the credit card holder, is thrilled that the fraudulent charge just disappears. It’s a win-win for them.

That sounds like an impressively bad situation. Is there an answer to credit card fraud? What added measures would you like to see the credit card companies and/or e-comm platforms offer?  

Seems to me that there are two problems here. One is that there’s a bit of a perverse incentive for the credit card companies to accept fraud amongst small retailers as they actually can make more in fees on fraud than legit transactions. 

Our understanding is that the big players are able to negotiate out many or most of these fees, so they really need us little guys to subsidize the losses from the big players. Overall, my experiences in trying to dig into specific fraud cases with credit card companies have been insanely maddening. Even when we just want to verify a large purchase, they refuse to tell you anything more than that the zip code matches their records, which means nothing if the fraudster knows the zip code of the person they stole the card from. 

Second, I think that there is a combination of complacency within the credit card companies and processors that they don’t want to spend unless they really have to. Remember that massive Target fraud that resulted in all of our new cards having chips (Ed. – Josh is referring to credit card holders within the USA)? Well, those chips were mandatory in Europe for ten years before that and the companies just didn’t want to spend the money in the US until they weren’t forced to. And of course, we all paid for that in the long run.

Lastly, as with doping, the fraud will generally always be a bit ahead of the means of detecting it, so the odds are always against the good guys. Like they say, to prevent this you have to detect and stop 100% of attempts while the bad guys just have to be successful once.

(Ed. As Josh references, credit card fraud protections vary around the world. Many banks and card providers in Europe, Australia, and certain Asian countries already have strong protections in place that better benefit the retailer and original card holder.)
 

In your forum post, you mention that knocking back a fraudulent return can make the customer go public about their bad experience. Has Silca experienced this? What do you think is the rationale behind this? And can a brand even do anything in this situation?

We’ve never experienced anything as bad as the situation I discussed before about the bike component swapping. That guy unleashed full fury for like three months across dozens of channels! 

Honestly, for us, it’s hard to really say as so few people use their names in most online interactions, so we’ve had a few troublemakers on Facebook where you can connect the dots. But for returns fraud, there is always a risk for them of the company outing them for what they did, so those situations manifest as the person generally showing up and hating on everything the company does or says. 

We’ve had people do this over warranty issues. Some of it can get quite crazy, actually. Funnily enough, our biggest internet detractor of the last year had a mid-1990s Italian-made pump break in the cast aluminium base. He came to us wanting a completely new pump under our modern lifetime warranty. I explained that we’d be thrilled to give him a part (if we could) even though that pump was made by a different company, in a different country, and only had a 2-year warranty when it was built and sold more than 25 years ago. Unfortunately, we didn’t inherit any of those parts and the tooling was long gone. And so we offered a discount on a new pump, but he was adamant that we give him a new pump or he would light us up on social media… and he did! 

It was just one of those situations that was like a Twilight Zone episode. Every interaction was just more and more irrational, and he sure seemed to think that we were being as irrational as we thought he was being! Regardless, for a few months, he would show up all over the internet saying how we wouldn’t honor warranty problems and how our pumps were crap that broke and so on and finally I just started responding to him with the actual story every time he posted like that. People turned on him pretty quickly and he deleted dozens of posts if not more! 

Since then, we’ve taken the stance of trying to confront folks like this head-on, but past Facebook, nobody has to use their real name, so in most cases, it’s pretty hard to connect the dots unless they are giving lots of details.

Related, I am always surprised at how quickly any customer service situation can escalate to threats regarding reputation bashing on the internet. We’ve had customers open the conversation with ‘this thing broke and if you won’t fix it I’m gonna…’ and I’ll say in 99% of those cases it’s fun to shock them with ‘yeah, you’re covered under our warranty and if you verify your address we’ll ship that part today.’ Sadly, you have to be wary as the fraudsters are always quick to lead with reputation threats.

Let’s talk Amazon. As a company, Silca seem quite pro-industry in working with countless distributors and retailers. So what led you to first sell on Amazon?

The challenge with Amazon is that they really don’t care about anything other than having the product to ship to the customer that has the money to buy it.

Before we were on Amazon we’d see bike shops or distributors selling stuff through Amazon with no pricing control, or worse, selling on Amazon with ghost inventory. An example of this would be where an Amazon store would put an Ultimate pump on Amazon for $300 just to see if they can sell it, then it sells and they have to buy it and then ship it from the distributor, then repack it, and ship from the shop. This could take a week or more and suddenly our brand has negative reviews, our products have negative reviews, and we weren’t even involved!

We also had many trademark issues where these direct-from-Asia brands were selling some $40 plastic pump from China as a ‘SLICA PISTA’ and similar things. We even had some instances where people were selling pumps using our product images and descriptions, but the product being delivered was just some random junk. We tried to engage Amazon but they wouldn’t even talk to us because we weren’t doing business with them.

Amazon is very clear. If you want trademark control, or counterfeit control, or pricing control, you have to be a seller in good standing who has all intellectual property registered and such. Otherwise, they won’t even engage with you. So for us, it was either watch our brand get dragged through the mud on the world’s largest retailer, or engage and get it under control.

I will say that once we were on board and working with them, all of those other issues were cleared up very quickly. If you buy Silca on Amazon today, we know that the product is legitimate and if you search for Silca, you aren’t bombarded with near-knockoff versions of our brand and product range.

What benefits have you seen by being on Amazon?

The real benefit to us and the consumer of Amazon is that they are just the most efficient way to purchase smaller dollar items.

If a rider needs a single gasket for $9 then it’s hard to motivate them to go to our website. Maybe they don’t have an account, which means entering details. And then they’ll need to pay $3 in shipping. Meanwhile it will cost me $4-7 to ship it plus $0.50-0.75 for the packaging to ship it in. 

Whereas with Amazon you can add that gasket to your cart with the toothpaste and toilet paper, shipping for the customer (assuming they’re a Prime member) is free and our cost of shipping to Amazon might be $0.75 or $1 total since their rates are so low. So in that instance we might actually be more profitable through Amazon while the customer experiences lower costs and greater convenience. So I’d say for single item orders under $25, Amazon can be a win-win.

It can also be a place for brand discovery by cyclists who aren’t familiar with our brand. Like I said above, 60% of product searches now originate on Amazon so lots of maybe non-hardcore cyclists who aren’t familiar with us but are searching for ‘best chain lube’ might now be exposed to our brand through that channel.

Some businesses have been vocal about Amazon’s pricing policies leading to profit losses, but as you say, you almost need to be present on the platform just to protect your brand. Is Amazon profitable for you?

We work hard to sell on Amazon in the best possible way. Part of that means ensuring we keep tight control on the price, which then provides space for our bike shops and retailers around the country to be competitive. From my experience, a brand can (with effort) enforce their pricing policies on Amazon. You might not like the sales numbers, but you can hold firm on price. 

Some automated algorithms continually suggest that you drive prices down, and if you check the right box, they will do it for you. As far as I’m concerned, the key is to have the conviction to not chase sales volume. I know that for one of our products, the Amazon portal is always suggesting a price where we would double sales but lose $2 per sale. So I always laugh at the thought of our worst nightmare being selling 10x more of something at 10x the loss!

For us, now that Amazon is required to charge sales tax, a very good thing, we are able to create a pricing policy that guarantees a customer on Amazon will pay the same total price as they pay at their local shop. In my ideal world, we are able to meet the customer where they want to be met, and in many cases, that’s still at a bike shop, which in my opinion, is the best possible experience because I’m a huge believer in the communities and experiences and such surrounding the local bike shop. 

Or there are a lot of customers who love to geek out on the Silca website and read all the tech and the blogs and listen to the podcast and such, and they buy from Silca.cc. Or there are customers who go to Amazon because it’s fast and easy and they’ve got an Amazon cash back credit card. Or in some cases, customers use Amazon to kind of bury purchases in amongst the day to day. We have customers tell us about that all the time, sort of hiding bike parts in amongst the toilet paper and other daily necessities. It’s quite funny.

And one last question, one that perhaps hurts the soul to answer. Do these fraudulent returns and credit card scams result in more expensive products? 

Ouch, but yes, certainly! 

I’m sure most companies aren’t drawing a direct line between those two, but it’s an undeniable pressure inside of a business that compounds alongside all the other pressures being faced. 

Let’s look at the last two years. Demand goes up, driving raw material prices up, while factories are being closed due to Covid, driving supply down. This drives prices up more. All the while, shipping and logistics get tight and things like freight of raw materials increase in cost by as much as ten times over pre-pandemic levels. Many suppliers begin to short-ship raw materials due to supply constraints, so end manufacturers like us can’t make as much as we want because we can’t get the parts, and the parts we do get now cost more to buy and more to ship.

It’s been an insane inflation spiral, and every step of the way you are trying to figure out if you can absorb this next thing without increasing price to the customer. We’ve seen price inflation on components of 20-30%, we’ve absorbed freight cost rates that are unprecedented, labor is tightened, and wages have jumped so the labor cost per item produced is much higher.

And then, we have 100 pumps to sell and lose one to fraud, which means the next four we sell will just cover the revenue loss of that one. Plus we need to sell one more to get back to where we would have been had that first sale been legit. That means the 100 we had is now the equivalent of 95 units on hand starting all over. 

While nobody is sitting around saying ‘we’ve got to raise prices X-percent to cover the fraud situation’, it still hits the company all throughout the financials as both a revenue loss, an inventory loss, an opportunity loss, a labour loss. Eventually, something has to cover all of that and the only money coming in is from sales revenue and the only way to raise that in situations of limited supply is to raise prices. 

Thanks for your time Josh. Always insightful.