Imagine this scenario. You’ve set up a shiny new referral program for all of your customers to participate in. It has a great uptake and referrals start flooding in, people are claiming rewards and everything seems golden. But something isn’t right. You’re noticing that in some instances your referral return on investment isn’t adding up. Unfortunately, you might be the victim of referral fraud, and left unchecked this can have devastating consequences.
What is referral marketing fraud?
Referral marketing fraud happens when some participants in your referral program create referrals that aren’t legitimate. They tend to do this to gather a higher percentage of rewards or discounts by playing the system. Typically, you can always expect someone to try and circumvent your honor system for their own personal gain. The issue is that when you’re dealing with expensive referral rewards, say for instance actual cash reward card-based rewards, the losses mount up. And they mount up fast.
The 4 Types of Referral Fraud
There are four main types of referral fraud. These methods of abuse vary in approach but are all equally damaging for your business. Stay vigilant and, where possible, make use of referral software that includes referral fraud protection. The four methods are:
Account Cycling
Typically used on physical purchases but also possible for digital purchases, this form of referral marketing fraud has the referral participant get people to sign up using their link or code, then return the product once the reward has been fulfilled. Hard to spot amongst general referrals until a pattern emerges. This could be perpetrated by an individual self-referring or within a group.
Exploitation
An unknown user somehow manages to find an exploit within your system and is able to receive rewards without completing the referral process.
Self-referrals
As the name suggests, in this form of referral abuse, the participant simply refers themselves rather than a genuine network of friends and family. They typically do this by using a series of fake email addresses. This form is at its most popular when single-sided referrals are used as only the referrer gets a reward and there is minimal incentive to keep subscriptions going after the initial referral.
Broadcasting
When your referral participants attempt to become affiliates. Rather than sharing their invite link or code with their personal network, they share it on coupon sites. This has a far wider reach, they could receive far more rewards, but this isn’t the type of referral that you are necessarily looking for. Furthermore, this might not be the look and feel that your business is going for, and if you are fine with using coupon sites, then you might as well be doing so yourself.
How to Prevent Referral Fraud
There is a combination of methods that you can use to help prevent referral fraud. Some of the following will be more relevant to your referral marketing program than others, it all depends on what you’re offering and how you’re offering it. One thing is for certain, the best way to prevent referral fraud is to have barriers in place from the start in a proactive way, rather than waiting for the worst case scenario to happen, and then reacting to it. By then, it’s often too late.
There are certain methods that are included in many types of referral software. We’ve marked those in the titles.
Don’t go over the top with the rewards
Your customers are great, no doubt, and therefore you want to give them the best rewards that you can. You want them to really appreciate and want to participate in the referral scheme that you’ve put together. That’s very nice of you. The downside is that you’ll attract the attention of people who are only interested in the rewards or scammers. By offering a reward that’s too good to resist you’re setting yourself up for a fall. The best option is to find a reward that will still be beneficial to your genuine customers, but not so amazing that it attracts unwanted attention.
Don’t immediately fulfill rewards
Of course, you want to be prompt when giving out rewards, doing so breeds a strong sense of trust. But when you immediately fulfill rewards as soon as they are earnt you leave your business open to canceled orders. This means that the referrer gets their reward (points, cash, or otherwise) but you receive nothing, in fact, you lose revenue. The best way to combat this type of fraud is to simply have a delay between the referral happening and the reward is given (perhaps once the item has shipped or been received). As long as you’re clear with your participants that these are your terms, there can be no argument.
Keep an eye on account activity
Once someone has successfully completed fraudulent activity against your referral platform, chances are that they will try again. One way to combat this is to track referrals on an individual level and see if there is regular, unusual activity. If there is, in the first instance you can reach out and see if they can justify it. If the activity continues, then you’re able to suspend the account.
Points win prizes
You might be tempted to offer cash or cash cards as an incentive, but these naturally attract the highest number of fraudulent activities. An easy way to reduce these numbers is to use a form of point system internally to reward customers instead. Customers who are genuinely loyal won’t mind this approach as they will still want to spend them with you. Those that are put off aren’t likely the right people for your scheme anyway.
Limit the rewards you offer
It might seem like the wrong approach for you at first, limiting the number of referrals someone can make, after all, you want to maximize the number of leads coming your way, but by setting a limit you know that you can only face so much fraudulent activity before it comes to an end. Open-ended referral schemes are far more interesting to scammers, if a loyal customer is regularly maxing out there’s no reason you can’t create a special case for them.
Ensure rewards are cookie tracked - Referral Software
Tracking your participants by cookie ensures that rewards can only be fulfilled once and also referrals are happening in a normal, acceptable way. When a user visits a landing page they’ll receive a unique identifier, this means that if they revisit another time they can’t gain the reward again.
Manually Approve
It’s not a great solution in a world of automation, especially not when you’re looking to grow at scale, but adding in some human oversight will significantly reduce referral fraud. This should only be implemented if the cost of having your team manually approve referrals is negated by the revenue generated by referrals. Otherwise you might simply accept the loss, or look at other methods of fraud prevention.
Set Referral Rules - Referral Software
Within referral software, you’re able to set a number of different must-match criteria as rules. An example could be that you can only receive one referral sign up per address or email address. The software then blocks additional referrals to that address, and can even block similar email addresses.
Take some of the guesswork out by using referral software
You’ll note that some of the more effective and complicated ways of preventing referral fraud require referral software. If you’re already looking to launch a fast growing, automated referral program then you’re likely already using a referral software tool, such as GrowSurf. The best of these will have referral fraud built in, be sure to keep this in mind when shopping around for your tool of choice.
What to do when you suspect referral fraud
There are a few steps once you have detected referral fraud so that you can protect yourself and your business.
We would suggest that you always let the customer know that you enacting this process so that if somehow, it is actually a legitimate referral, it can be disputed with you.
The first step would be to disqualify any fraudulent referrals, this might mean pausing a particular purchase, suspending an account, or another method, whichever works best for you and works within the software that you are using.
If you find that the referrals are genuinely fraudulent, you’ll likely need to permanently ban the account from interacting with you and your business. The best referral software will make this simple by banning the account, the IP address, physical address, and also close matches. The only way for them to purchase or refer through your business again would be to reach out to you and appeal. Their referral link will be disbarred and stop working, they won’t receive any further rewards, and any pending rewards will likely be canceled.
If you’re in the position where a referral has been successful but the purchaser cancels their order subsequently, you’ll want to have a policy to know whether that still counts as a successful referral. Many referral software tools can automate the cancellation process based on a set of conditional rules that you set.
The Impact of Referral Marketing Fraud
Inflated Numbers
When fraudulent referrals are coming through your system your numbers can become massively inflated. The real, unique, and genuine customer information gets lost within this data and, in bad news for your analytics and metrics, your data is wrong. This means that your conversion statistics, your ROI, even your estimated lifetime value per customer is wrong. This makes it increasingly difficult to forecast and even harder to understand just how profitable your business is.
Inflated Referral Reward Costs
Your referral program costs, as an overall picture, are inflated simply because you’re paying out more referrals. In theory, without fraud, this inflated cost is a good thing as your costs should rise in line with the number of successful referrals coming through. When, however, there are fraudulent referrals that don’t bring in revenue to the business, you’re looking at an increased cost that then doesn’t balance out with long term profits.
Waste of Time
When you’re having to deal with referral fraud it can take valuable time to resolve. Usually through a long system of manual checks and investigations. This drags your team away from their usual jobs and leads to increased costs. Furthermore, once bitten, twice shy, means that once you have been the victim of fraudulent activity you’ll likely end up implementing a manual check to prevent it from happening again. This means more time, more costs, and an unhappy business owner.
Key Takeaways
Nobody wants to be in a position where they’re having to deal with referral fraud. It is a stressful, unpleasant, and potentially financially difficult situation to be in. As we mentioned earlier in this article, the best action is proactive, protect yourself from the worst by planning in advance and having active anti-fraud measures in place from the start. Don’t wait to be a victim.
- Be vigilant, referral fraud can happen to anyone running a referral program.
- Have a standard procedure in place to determine what you’ll do when referral fraud is suspected.
- Consider the potential fraud risk when creating your offer.
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