Thwarting theft: the dark side of the friendly discount

But the discount has a dark side.

“One of the key reasons I encourage clients to have a friends-and-family discount is to stop stealing,” says James Sinclair, a principal at OnSite Consulting Inc., a Los Angeles-based firm that works with several Chicago restaurants and hotels.

“When family comes in, they are getting either free food, a free item or a discount — it’s a fact. No employee is having their family come in and not treating them special. No employee is having their roommate come in and not hooking them up in some form,” Mr. Sinclair says. “You cannot fight human nature.”

To be sure, employee theft is a big problem. The Austin, Texas-based Assn. of Certified Fraud Examiners estimates the typical company loses 5% of its annual revenue to theft. The National Retail Federation, in Washington, D.C., pegs 43.7% of theft loss to employees. And small businesses of every kind are disproportionately affected because they lack the security measures of bigger operations.

Then there’s “sweethearting,” a theft subset in which employees give unsanctioned discounts or freebies to friends and family. One Australian study, conducted by Boca Raton, Fla.-based security firm ADT Worldwide, found that 43% of small-business employees say they or co-workers engage in this practice. U.S. estimates are at least that high.

Rather than having to fire or punish employees who do this, Mr. Sinclair says it’s better to expect it and control it by offering a friends-and-family discount that’s generous enough to feel like a deal (if not a steal).

Companies that don’t build in a discount have higher theft, he says. Plus, “the hope, in addition to control, is that friends and family will talk about the brand in a positive light, and the organic customers that come from that are worth money.”

© 2011 by Crain Communications Inc.