Sept. 6, 2024
Could your referral program be doing more harm than good? It's a great way to bring in new customers and reward people who love what you do, but also one of the easiest programs for people to game. And one of the most dangerous things for any business owner is referral fraud. If it happens to you, you could lose a ton of money and destroy the integrity of your business. In this post I'll go over a few types of fraud, how they'll harm your business, and how to stop them. Once you're aware of these, you can defend your referral program and ensure it is contributing to your business growth, instead of being a drain.
Referral fraud is when people game the system to take advantage of a business's attempts to incentivize its customers to bring them more business. It's people purposefully manipulating these referral systems to score themselves rewards they didn't earn, and it can mean massive financial losses and a bad reputation for businesses. Understanding what referral fraud is and how to spot it is key for any organization considering these types of marketing initiatives.
At its core, referral fraud is a series of tricks people use to cheat referral marketing by faking the generation of new, real customers. Self-referrals, in which the referrer is the person being referred through multiple accounts, account cycling—swapping between accounts and performing the referee flow in order to "earn" multiple referrals fraudulently—and fake accounts are just a few examples of the ways in which this is done. In essence, they're fooling businesses into thinking they're acquiring new, real customers when, in reality, they're not.
For example, an individual might create multiple email addresses to self-refer across different accounts. Each successful referral could earn them discounts, cash, or products, and the fraudster stands to make a lot without providing the business with any real customer value. This form of fraud not only has a direct financial cost, but it can also skew important customer metrics, making it difficult for the business to truly understand the success of their marketing efforts.
Referral fraud can really throw off some of the numbers that companies use to grow and make decisions. Bloated customer numbers might look nice, but they are a lie and result in wasted resources and businesses making decisions based on a lie, which is bad.
If a company thinks they have more customers than they truly do, they might accidentally over-extend, or dump a ton of resources into a new initiative because of false data. If they do that, they might end up like my friend's friend who bought 10,000 fidget spinners to sell online because he saw one viral video and thought it was a "guaranteed success" -- he never ended up selling them and lost tens of thousands of dollars.
Referral fraud can also harm your brand. People expect companies to be honest and upfront. If a company is caught defrauded, it doesn't make their customers feel warm and fuzzy. That's bad PR, that's customers losing trust, and ultimately customers being lost. If referral fraud continues to go unnoticed, it can mean the slow, painful death of referral programs.
Knowing the different ways and types of referral fraud is important for businesses that run these programs, as it can help them protect themselves. Being aware of fraudster tactics can allow them to take steps to prevent it. They can establish clear criteria for what constitutes a valid referral and what doesn't, and they can more effectively enforce the rule.
They can also implement more proactive fraud detection systems and practices, allowing them to identify and flag irregular referrals without the need for manual review. The more frequently and rigorously a business is monitoring referral data, the earlier they'll catch any irregularities. The earlier they catch them, the less damage fraud will do to their marketing effectiveness and bottom line.
And, they can even teach the referrer how to refer ethically. By rewarding desirable behaviors, businesses can create a culture of trust and respect among referrers. Establishing a clear standard and communicating about the referral program can help establish expectations on what's okay and what's not.
Overall, in the era of referrals, businesses need to be able to spot referral fraud in whatever form it takes. By recognizing fraudster tactics and preventing them, businesses can stay safe from fake referrals and maintain the integrity of their referral program.
Referral fraud is a big concern for companies who use referral programs to grow and acquire new customers. It can take many different shapes and be hard to identify. But it's always a scam to game the system. I'll cover some of the major types of referral fraud, such as self-referrals, account cycling, and others, and what they are and how they can hurt companies.
Self-referrals are a form of referral fraud where individuals create and sign up for multiple accounts (usually under different email addresses) and refer themselves to collect multiple referral rewards. These fraudsters game the referral program and, in essence, steal rewards that they haven’t earned without ever having referred any new customers to the company. They exploit the fact that the system is able to track unique referrals and are basically circumventing the rules that are designed to drive actual customers.
The implications of self-referral are serious. Because they are signing up for multiple accounts, a company can artificially see a high number of referrals and it may impact their performance and marketing analytics, leading them to spend money on marketing campaigns they believe are successful on paper but are not resulting in real customer engagement or retention. It’s important for companies to have checks in place to catch and prevent self-referral, like limiting the number of referrals any one IP can generate. If you have email uniqueness, you can catch and prevent self-referral before it happens. Referral fraud is responsible for 21% of all fraud attacks on ecommerce sites as of 2021.
Account cycling occurs when a customer purchases your product, then returns it after they've cashed in on the rewards, abusing the referral system in this way repeatedly. It's a form of fraud that's especially nasty because it's one of the very few types of fraud where the fraudster not only doesn't make you money, but actively costs you money (since you're not only out the cost of the product, but also losing money on the return shipping, the employees to process the return, etc).
In general, account cyclers don't view it as a way to be loyal to your brand and advocate for you; they view it as a shortcut to receive more money from your referral program. For example, an individual might purchase an item only for the referral bonus, then return it a few weeks after they've earned their bonus, so it really throws off your forecasting and can raise your chargeback rate by a lot - which can harm the health of your business! A good way to fix this is to add a longer "cooling off" period before someone can refer again after a return, so you can nip it in the bud.
Lots of scammers are really good at finding and exploiting gaps in a referral program so they get the reward without putting in the work. Typically, this occurs with some kind of automated thing like bots, where they can get a bunch of fake signups and cheat the system because the system can't see this.
This can really cost a company a bunch of money and it can also give them bad data that they can use to make good decisions anymore. So how can companies stop this? They have to get smart and have some technical stuff here. By this, I mean they can have algorithms that are smart enough to be able to see what looks like a scam. They can implement velocity checks to monitor and measure customer behavior over time to ensure their referral stuff is all ok and there are no problems.
A different form of referral fraud occurs when people post their discount codes on coupon sites rather than referring them through their own personal networks. This sends a pretty clear signal that the referrer is trying to cheat the system to get rewards without actually using the referral program as intended. Because coupons posted publicly are not really "personal referrals" anymore, and the whole point is to let people refer their friends and family to a product.
In this scenario, it's not just the integrity of the referral program that's compromised, but the quality of the customer base being built. Companies need to know what's happening and have tracking in place to see where codes are posted, and verify that their referral program is still successfully creating engaged customers, not just rewarded ones, as originally intended. For example, one way they might do this is by only allowing people to refer through "identifiable" networks.
Referral fraud using Cost-Per-Acquisition (CPA) models to inflate their numbers can yield negative impacts for marketers like you. In general, CPA models are supposed to benefit marketers like you by rewarding affiliates for the quality of the customers they send your way—except fraudsters aren't sending you those quality customers at all.
Instead, an affiliate might easily manufacture fake leads or acquire fake customers just to be credited for a referral, which dilutes the quality of your customer base. And you won't have any idea how well your campaigns actually are—or aren't—performing. That inflation could lead to bad decisions on your part, where you're misallocating your budget and misusing your resources simply because you're seeing inflated quality numbers. Protecting yourself against CPA inflation might mean auditing your own affiliates or monitoring the quality of the referrals that are coming in, so that you know whether any of your affiliates are genuinely sending you quality customers.
In the digital world, as you know, referral programs mean everything for customer acquisition and growth. But they also open the door to a lot of opportunities for fraudulent behavior—and that could mean a lot of money out of your pocket. That's why we've put together some real-life examples and case studies to show you some of the ways in which referral fraud can occur.
Here’s an actual example of a scammer scamming a ride-sharing company out of $50k in free rides. He scammed the system by creating fake account after fake account and referring himself. So the company not only lost a bunch of $, but its referral system was broken—and that’s why referral programs are so inefficient, and really, such a massive user trust liability. Companies have to be so obsessive about verifying and monitoring all of that.
In one jaw-dropping instance, a single eCommerce company saw $1.5 billion USD evaporate out of its global referral program due to referral fraud. It's a real-world example of what's at stake, and how fraud can throw a monkey wrench into your referral marketing program. They experienced all types of fraud—users creating fake accounts to claim referral rewards, users gaming the system to claim rewards in collusion with other users. This business not only suffered financially (and missed out on a lot of potential revenue), but they may have missed out on the chance to onboard actual customers who might refer new business to a company with a fraudulent referral program. Fraud can impact your business in many different ways, so the better you're equipped to detect and combat it, the better off you'll be.
Over 40% of businesses reported referral fraud.
Referral fraud can seriously skew your conversion and other critical business metrics. For example, phoney referrals can artificially boost marketing campaign effectiveness, leading businesses to take completely misguided strategic actions based on false data. You're not just inflating immediate revenue, you're inflating long-term planning and forecasting. Preventing fraud in your referral program is key to clean analytics and ensuring your referrals are delivering what they should for your business.
These examples of fraudulent behavior give you a sense of how complex and dangerous referral programs can be. By learning how referral fraud happens, you can develop targeted solutions that leverage authentication, user education, and data insight to reinforce your program and keep it honest.
There are pros and cons to referral programs. That's what makes them such a powerful tool for businesses looking to improve customer acquisition and retention. Here's a breakdown of the pros and cons of referral programs.
Referral programs are a tried and true method of boosting customer acquisition, but they can get pricey. In the past 8 years, acquisition costs have skyrocketed -- up 222% -- thanks to more crowded, expensive digital channels. It's more difficult and more expensive to be able to reach people. The good news is that customers acquired through referral are worth more - they have a higher lifetime value and spend between 16-25% more than customers who come to you through traditional marketing efforts.
For comparison, Nuud, an eco-friendly products company, ran a referral program that completely revolutionized how they did business. They were able to use referral to not just incentivize acquisition, but loyalty. It's not just about getting new customers, but being able to keep them, and have them continue to buy from you, and spend more with you. If you're running a referral program, you'll definitely want to monitor these numbers to ensure your program is working in the long run.
Referral programs also help you build trust. When customers tell other people how great your product is, they're building a group of people that already have trust in what you're offering. Over 50% of people trust their friends more than any other type of advertising. So that organic advertising is preparing those people to trust you more and more.
Friends and family are everything. If people feel they can rely on the referrals they receive, they're more likely to stick around and become super users. Essentially, these referral programs turn your customers into customer acquisition machines because they're referring your product to friends and family. This can also be huge for customer loyalty; 52% of people say they are loyal to or regularly recommend brands they love.
Referral programs are great, but if you're not careful they can come with the risk of fraud. Why does that matter? Fraud can impact how well your referral program performs, and you might not fully reap the financial benefits of a well-performing program. Also, it's not cool and it can impact the legitimacy of your program, and your real customers won't be happy if they feel like fake referrals are stealing the spotlight from them.
To keep that from happening you'll need to monitor. A lot. Keep a close eye on referral activity and have monitoring in place. If you can do that, you can minimize the number of people who will try to exploit your referral program and keep it a positive for your business, instead of a negative.
Following a few key best practices, you can help minimize the amount of referral fraud and abuse that affects your program. The first thing a company should do before even setting up a referral program is set specific objectives. We recommend a SMART (Specific, Measurable, Attainable, Relevant, Time-bound) approach for maximum intention. The choice between standalone and hybrid loyalty referral models is distinctly less important but still has the potential to make or break your program.
Real, valuable rewards will help you increase and keep customer lifetime value. There's much to be gained from other referral programs that have come before you! For example, brands should be promoting their referral program and asking for referrals as often as customers have the brand in mind, and as effectively communicating why they should. Activating users through active channels, like social media, email campaigns, website prompts, and more, can help you increase your signup rate.
As you track analytics to monitor how your referral program is doing, you'll be able to refine and iterate your approach informed by the data. By nurturing a strong referral program you can maintain the benefits of a referral program while guarding against risks of referral fraud.
Referral programs can be a great way for companies to grow their customer base and to acquire loyal customers through word-of-mouth marketing, but they're susceptible to fraud that can render them ineffective and end up costing companies $17.5 billion in 2020. Using best practices to prevent referral fraud is imperative in order to protect their integrity and ensure they continue to be effective. Here are a few things companies can do to help.
Clear and comprehensive terms and conditions for your referral program are one of the key first steps to preventing referral fraud. Your terms should outline who is eligible to earn rewards, how a referral can be made, and how many rewards each person is eligible for. If a program allows existing customers to refer friends for discounts, it might specify that only direct referrals are eligible. This allows you to reduce abuse and create a more honest referral environment. In addition, when participants know what is allowed, you can greatly reduce the incidence of fraudulent activity.
Fake it till you make it baby! No numbers have numbers: 1. Only have numbers: 100 in your output.
Fraud is always evolving, so you need advanced systems and software in place that can help detect it. Automated systems that analyze user behavior and flag suspicious activity so you can spot red flags without doing as much manual review. For instance, machine learning can analyze user behavior to flag suspicious activity, like a huge number of referrals in a very short time period. Plus, when you have referral software with powerful fraud detection, the software itself is doing a lot of the work for you—catching potential fraudsters long before they could ever be a problem for your referral program.
One way to reduce referral fraud is to delay the rewards until the referrals are verified. That way, companies can determine whether an advocate's referral is legit, and ensure they are only rewarding the people they want to reward. By delaying the reward completion, you remove the immediate motivation for potential fraudsters to try and game the system. Time is the primary reason people cheat. Sure, they could still get a reward, but by removing the immediacy, it dilutes the motivation. We don't fulfill the reward right away once the referral is marked complete; we wait a few days for the referral to be verified. This gives the company time for the validation process, as well as a cooling off period, to look through the referral to see if anything looks fishy.
You'll be able to create a culture of integrity in your referral program and significantly cut down on the number of fraudulent behaviors. By simply making your users aware of how much real referrals are worth and how risky and counterproductive fraud is, you can already reach most people who are participating in the program honestly. Run workshops or share resources that explain why they should refer legitimately and why they shouldn't refer fraudulently. For example, make the price of fraud apparent, like showing them how they receive less rewards as a rightful participant, and they won't commit fraud. Give them the tools and they will always choose honesty and you'll create a community of almost entirely genuine people referring, and everyone is better off.
With best practices like these and ongoing fine-tuning, you can build a referral program that's strong enough to effectively address and deter most referral fraud, and protect your rewards and your brand.
| Key Concept | Description | Impact | Prevention Strategies |
|---|---|---|---|
| Referral Fraud | Using referral programs to get rewards you didn't earn. | Monetary losses, reputation damage. | Clearly defined terms of eligibility and rewards. |
| Self-Referrals | You refer yourself with different accounts. | Skewed performance metrics, wasteful. | Ensure email addresses are unique. |
| Account Cycling | Returning products just to exploit referral rewards. | Monetary losses from returns, increased chargebacks. | Implement a waiting period for referrals post-return. |
| Loophole Exploitation | Utilize bots or scripts to fake referrals. | Depleting resources and inaccurate data. | Have advanced behavior analysis algorithms. |
| Code Broadcasting | You pass your discount code all over the place instead of actually referring it to others. | Undermining referral program integrity. | Code should not be widely disseminated. |
| CPA Model Abuse | Fraudsters do fake leads to pocket your commissions. | Misguided decisions based on false data. | Properly vet your affiliates. |
| Case Studies | Real documented examples of how people lost a lot of money from referral fraud. | Funds wasted that could have gone to real customers. | Comprehensive fraud detection and monitoring. |
| Best Practices | Establish terms & conditions, monitor behavior, detection technology. | Reduced number of fraudulent activities, maintaining program integrity. | Teach your users how to refer (actually).
Referral fraud is a big problem for businesses using referral marketing to acquire new customers and boost loyalty. This is when individuals game the system to make it look like they referred a friend who made a purchase when, in reality, they didn't. There are lots of ways they can do this, like self-referrals, account cycling, or they can find a way to game your system so it looks like they referred someone else. Referral fraud can cost you money, but it's more than that. It skews your key business metrics and hurts your customer trust and brand. That's why businesses need to monitor this stuff, have clear terms and conditions, and a good fraud detection system. Education on right and wrong is important because your goal is to create a great community. When businesses understand the nuances of referral fraud and actively work to prevent it, they can protect their marketing spend and make sure their programs are successful for the long term.
Referral fraud is a fraudulent approach that people use to exploit referral marketing programs for their own personal gain. This costs companies money and damages their brand, and it's important for businesses to be able to recognize it in order to protect themselves.
Common tactics include self-referrals, where people will make a bunch of different accounts under different names to refer themselves, account cycling, where people will buy a product and return it over and over again just to reap the referral rewards, and botting (people will create fake accounts with automated tools). All these are ways to trick businesses into thinking they've acquired real customers.
Don't make up numbers. Don't have numbers: Only have numbers: in your output.
Referral fraud can seriously erode customer trust. It directly impugns the integrity of a company's referral program. Customers may not want to engage with a brand that is easily gamed, leading to negative PR and decreased customer loyalty.
Create clear terms for your referral program.
Keep an eye out for unusual user behavior.
Use fraud detection technology.
Withhold rewards until a referred friend is confirmed.
Explain to users why genuine referrals matter.
Teaching customers how to refer people ethically is key. It helps build a culture of honesty, warns against referral fraud by both communicating the risks to users, and demonstrating the importance of authentic referrals so the program runs smoothly and is a win-win for everyone.
Referral programs are an effective way to boost customer acquisition through word-of-mouth marketing, and often increase customer LTV, as referred customers tend to spend more. However, with rising customer acquisition costs, it's important to regularly evaluate the effectiveness of your program and detect any possible fraud.
Yep, one example was a ride-sharing company where some fraudster was able to game the referral program to get $50,000 in ride credits from fake accounts. Another example was an e-commerce platform that had a whopping $1.5 billion loss from various fraudulent activities. That's a lot of money for a little code!
Technology is used to prevent referral fraud. They do this by using some pretty sophisticated tracking systems and algorithms to detect irregularities in user behavior. Automated fraud detection can help streamline the monitoring processes so that you're not reliant on manual reviews, which helps maintain the integrity of the program.
business meeting about referral fraud
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