Sept. 11, 2024
Ever wondered if that too-good-to-be-true referral program is a scam? With businesses increasingly turning to referral marketing to grow their customer base, the dark side of these programs is becoming more apparent as people try to take advantage of others. In this article, we take a look at the world of referral scams, what scammers are up to, and what it all means for you and your business. We look at the most common scams, what to watch out for, and what you can do to protect yourself and your business. By the end of this article, you'll be better prepared to participate in referral programs with confidence!
Referral scams are bad news. They are a type of marketing fraud that capitalize on the systems designed to reward customer acquisition in the first place. The fraudsters promise rewards for people who refer new customers, which, on the surface, seems fine. But in reality, they're recruiting people to participate in a system that is fraudulent. They're gaming the system, and the people who don't deserve it get the reward for doing nothing.
Referral scams are basically a way to try and game real marketing. Instead of truly driving new business to a company, they aim to drive what is essentially fake new business to whatever you're signing up for. A scam might pay you for getting your friends to sign up, even if your friend doesn't buy anything or use the company's service. So people are doing the work for you, but are you actually bringing value to the real customer? Nah.
That's the hook that gets people to fall for referral scams.
And as if that's not bad enough, a lot of the time these scammy programs get really slick about their scamming. Almost all of them rely on fake accounts and automation (like bots) to generate the fake referrals. That means that not only are you getting fake data on the performance of your campaign, but you're also spending real money to acquire the fake customers. So you could be pouring buckets of money into what appears to be a successful marketing effort, when actually you're just being scammed.
Referral scams aren't just untruthful--they're an unfair distortion of genuine marketing numbers and can cause significant financial harm to legitimate businesses. When companies are analyzing false data from scams, they may be misdirecting resources to entirely ineffective marketing channels. For instance, if a business believes that a referral program is driving legitimate customer engagement, they may continue to invest in a channel that is only--or largely--benefiting scammers.
But the impacts can be longer lasting too. Your brand will continue to lose value as more and more people realize that your referral program is simply a means for scammers to make money. That could be through negative PR, loss of customer trust, potential legal penalties as you try to fight back against scammers. Recovering from the effects of referral scams will demand a huge amount of resources, effort, and time, slowing down overall business progress.
A common type of referral scam is when people use stolen identities or fake information to exploit referral programs, using someone else's personal info to create fake accounts, and then take part in the referral program under a false name. Not only is this unethical; it could be illegal because it's an invasion of the other person's privacy whose name and personal information is being used.
Essentially, people create lots of different referral accounts with different identities, and produce fake referrals so they can earn money. The scammer earns cash, while the business loses out because they have to clean up their data and recuperate from the scam. It's just another way of the scammer stealing money that's not theirs, but that's being taken directly from the business's pocket. And like any theft, it's the honest customers who ultimately pay because the business will have to raise prices for everyone to recover the stolen money. That's why implementation of a strong verification process for your referral program is so important so you can confirm that identity theft isn't happening, and your engagement from real customers. Just like scams in general, by understanding what referral scams are and how they work, businesses and consumers are better equipped to tackle the wild west of referral marketing and avoid getting caught in a scammy program. By being diligent and having a strong verification process in place, businesses can arm themselves against becoming victims of these criminal scams.
Referral programs are a common way for businesses to expand their customer base and increase sales, and because everyone benefits, they're a ripe target for fraud. With that in mind, it pays to know what different kinds of scammers are out there and prepare yourself to defend against them. Here are a few of the more typical referral scams.
Self-referral scams are a type of referral scam where people sign up for multiple fake accounts to claim the referral bonuses a company is offering. It's a little bit lame and it's easy, because you can just keep doing it. For example, I can sign up and refer myself using another email, and I get a bonus. I can refer myself again using another email, and I get another bonus.
But the worst part is the financial cost of self-referral scams. Companies think they're acquiring a new customer, but really they're paying the same person over and over again. This corrupts their marketing data, and artificially increases their CAC (customer acquisition cost) which means they're inefficiently deploying marketing dollars. Catching self-referral scams necessitates a watchful and holistic tracking strategy that examines account creation patterns.
Account looping is another type of referral scam where people make and delete accounts very rapidly in order to claim the reward multiple times. A person might make an account, cash in the reward for a referral, then drop that account in favor of the next referral. This can help people take advantage of a referral program to get rewards—but without actually using the product or service.
Creating and deleting accounts can occur in the background without the company even noticing, unless they have a good system for tracking it. Scammers typically target referral programs that are easy to sign up for. This means companies need to have tighter account verification, and should also be able to track account creation as it happens, so that they can watch out for—and respond to—any unusual patterns in activity.
Discount Sharing is when people share their referral codes publicly in a way that violates the terms of the referral programs. When people share their codes on Reddit, or in Facebook groups, or in other forums where the codes can be easily accessed, they're essentially giving away the reward to people that would not have received the referral the normal way, which costs the business a boatload of money. This obviously abusing programs costs the business potential profit and burns their promo budget that could have gone to actual customers.
Businesses can prevent discount sharing by having very clear rules around how their referral codes can be used, they can actively police these forums and social media for people that are passing around their codes, and they can run awareness campaigns that remind people to use their referral codes for good.
Referral programs are everywhere, and they can be a legitimate way to earn rewards. But often they're scams, and it's difficult to tell what's real and what's a scam. Here are true stories of how referral scams can play out, and the real-world consequences for those who fall for them.
Another example is from a post in the Coinbase subreddit, where a user complained that they never received the bonus even though they completed all the instructions. It just makes referral bonus systems look bad, especially when someone does something positive and still doesn't receive a reward or benefit. In this case, the person joined through a referral link, made 3 transactions thinking that was enough to qualify for the bonus, and every transaction had enormous fees. They were getting angrier and angrier because they were getting taken advantage of.
When the bonus didn't show up, the person made many support tickets, which were ignored or received canned responses. Eventually, it all became too much, and they made a complaint on the website. They did end up receiving the bonus but felt like the whole thing was scammy to begin with, for a lot of people, and possibly just wrong. It was the principle of the thing, even for such a small amount of money ($10). They felt scammed and felt like the company was misleading them the whole time.
This is just one example of many where people have the same experience with referral bonuses through many different platforms and have even implied that legal action may be the only option to receive support, that the company needs to be knocked down a peg. These are all reasons why referral programs are only worthwhile to risk for rare exceptions and makes you wonder about the rest of the companies that use the same thing.
Globe Life, an insurance provider, is sparking concern for appearing to use a recruitment structure that critics argue acts as a pyramid. Programs like this can be a warning sign to both potential recruits and to authorities because a structure that appears to commodify recruitment efforts over actual sales of the product. In a pyramid scheme, new recruits are rewarded for bringing more people into the system rather than for the sale of real services or products. This can trap those involved in a cycle where the emphasis is on recruitment, and not much else.
This brings to light the dangers that can accompany programs that not only reward the referrer, but also offer monetary rewards for aggressive recruitment. While referral programs can drive new business for a company, they can also result in more instances of dissatisfaction and allegations of fraud that ultimately harm a business's reputation. The Globe Life situation shows that attention can be drawn to a company's practices when they come into question in terms of legality or morality, especially if referral incentives are involved.
Over 23 Michigan residents have been charged for allegedly defrauding Medicare of over $61.5 million through illegal kickbacks and billing for unnecessary medical services. The schemes involved the submission of fraudulent claims for home health services that were not provided, with key players including the Jamil brothers, who misappropriated $43 million from Medicare. Approximately $50 million was submitted in fraudulent claims by the Jamil brothers, revealing the severe impact that referral schemes can have when they are tied to illegal practices.
Scams rely on knowing human psychology really well. By playing with your feelings, abusing your trust, and creating a false sense of urgency, they can easily and effectively take advantage of you. When you take a closer look at their techniques, you'll see how easy they are to fall for, and how they can include really ordinary-seeming things. Here are a few psychological tricks scammers use in their scams to get what they want.
Scams thrive on trust. Scammers are good at looking like brands or people you're familiar with, to make you feel confident and let your guard down. They use the same logos, the same emails, the same tone to make you feel comfortable.
So if a scammer pretends they are a bank, and emails you an email that looks exactly like what a bank would email you, they will ask for your personal information, and make you feel comfortable, and you will give it to them because it looks like a real email. This is how people get taken in, and it's why you should always check who you're talking to. An email scam like this is just the tip of the iceberg.
Don't make up numbers. Don't add numbers where there aren't any. Only add numbers to your response if they appear in the original text.
Scammers also use social proof—the principle that we tend to think something is good if lots of other people think it's good too—to make their scams seem more credible. They make up satisfied customers, or even pay people to write fake reviews to make it seem like their scam is the real deal.
Potential victims are more likely to fall for elaborate websites with lots of rave reviews, or with impressive endorsements from people who seem "successful." This faked social proof can be really convincing and may influence people to sign up for an offer that looks like an obvious scam just because they see lots of others doing it. That's why you should approach user-generated content online with caution. Not everything you see online is as amazing as it looks!
That's because scammers use emotions to make people believe that they're doing a good thing by bringing other people in--even if those recruits don't realize they're being brought in. Emotions are at the crux of creating a bond of loyalty and friendship that leads to a sense of responsibility to bring others in.
So, when someone learns about an incredible opportunity that they're convinced will change their life, they'll tell their friends--because they think they're doing them a favor. When really, they're falling for a scam. Because scammers take advantage of that sense of responsibility and trust to spread their scam further than the person they originally targeted, and into the cheated individual's network. Recognizing these emotions can help protect people from scams.
Referral programs are a great way for businesses to grow their customer base and reward existing customers, but they can also be a breeding ground for people trying to cheat the system. Knowing what to look for in a referral scam can help you protect your business and your customers.
The main thing to watch out for in referral programs are high rewards for little or no work. If a program offers the chance to make a lot of money, or earn a lot of rewards for little work, you should be very skeptical. Real referral programs involve actual customer engagement and don't offer huge incentives to work with them. When evaluating a program, consider whether the rewards are appropriate for the industry. If the offer seems too good to be true, it probably is—and it may be a scam. Practice critical thinking and request transparency in their reward structure before participating.
Another way to spot them is when you can't make heads or tails of the referral program, or how it's supposed to work. When the company isn't transparent about the mechanics, how they determine the rewards, and what the criteria are, then it's usually a scam. Any legitimate business will tell you all this information and more, no problem. If it's buried in the fine print, or difficult to extract -- or worse, if they object when you ask them to explain it -- chances are it's not real. And you should always understand what you're vouching for before you vouch for it!
Avoid High-Pressure Situations
Never get involved in anything that makes you feel rushed to sign up before you really understand what you're getting into. Scammers use high-pressure tactics to force people into making hasty decisions. If you're receiving really pushy messages telling you that you need to act right now, or that the offer is time-sensitive for no reason, those are big red flags that you should probably steer clear. Real referral programs will allow people to read the terms and make an informed decision. Take the time to think about and do research before participating in any of these programs. Your result will be much less likely to get scammed. ECommerce retailers lost $17.5 billion in 2020 due to fraud.
Don't make up numbers. Use only the numbers provided in the text: in your output.
Referral programs are all around us. They're a tool that businesses use to lure new customers. But these systems can also be used to take advantage of people who don't realize what's happening. Here's how to play without putting yourself at risk, plus some advice to help keep yourself safe, and what to do in case you do get scammed.
How do you avoid referral scams? What should you watch out for? Well, you should've noticed that we never used the word "scam." But while we don't want to scare you, the truth is, not all companies offering referral programs are trustworthy. That's why we're going to tell you how to protect yourself from referral scams and what to look for!
When you do referrals, be super wary of giving your personal info. Scammers might try to get things like your social, bank info or passwords. If a referral program is asking for your personal info that seems unnecessary, be super cautious. Most of the time, legit companies shouldn't need much of your info to do referral stuff.
You should also look into how secure the website is before giving them anything. Watch for signs of a secure transaction, like 'https://' in the URL and security badges, meaning they're dedicated to keeping your data safe. And use unique passwords and 2-factor authentication where you can to protect yourself from potential identity theft.
If you see something suspicious, or if you think you've been scammed, report it—you might be able to get your money back. Keep a record of the details, like email and messages, and what the referral program promised. Then, report it to the appropriate authorities or consumer groups. If you're in the US, you can report it to the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB)—they're supposed to take action against fraud and help protect consumers.
When you report it, the authorities can keep an eye on the scam, and maybe catch the people behind it. This can help make it harder for scammers to scam others in the future. Plus, your reports can help raise awareness so people are less likely to be scammed by the same kind of scam.
Once you know what to look out for and can spot a referral scam, there are a few things you can do to cover your bases. For instance, you might be less inclined to take a particular action if there's nothing in it for you. Referral scams rely on that skepticism and use the lure of a reward to motivate you to act.
The most common form of a referral scam is a bogus promise of rewards. To cover yourself, always be sure that any rewards you're due come as a result of a verifiable transaction. For example, if you're referred to a service and offered a cash back reward after your first purchase, don't wait for the reward to show up—make sure it's in your account before you count on it.
If you do find yourself in a situation where you've been promised a reward that you realize you never received, contact the business involved. More often than not, you can resolve things amicably between yourselves simply by communicating, or the business will decide to honor its agreement to avoid any negative consequences. If you're still not satisfied, or if something seems off, take action and report your complaint as I've described before.
| Section | Points |
|---|---|
| Definition | Referral scams are scams that exploit marketing to entice people to take action by offering apparently attainable rewards, which aren't actually attainable. |
| Marketing Exploitation | Scammers use referral programs to get people to take action for rewards they'll never receive; the scammers are gaming the system to generate false numbers that deceive companies. |
| Business Impact | Referral scams manipulate marketing and cost businesses; campaigns become unsafe and harmful to company image. |
| Examples | Scammers can use stolen user profiles to create fake accounts; certain types of validation can help identify and stop referral fraud. |
| Self-referral Fraud | Individuals generate bonuses without actually creating referrals; marketing decisions are made using incorrect reporting. |
| Account Cycling | Criminals open and close accounts rapidly in order to receive rewards; it throws off program numbers and trashes brand reputation. |
| Discount Sharing | Making referral codes publicly available; businesses need to be able to take action against this. |
| Return Abuse | Users take advantage of return policies after they've received bonuses; businesses should be linking referral rewards to purchase, not acquisition. |
| Real-World Scams | These real examples of referral scams highlight how prevalent they are; Cox, Globe Life, and Medicare have been victims of referral scams. |
| Psychological Techniques | Scammers use trust, urgency, social proof, and emotion to sway victims. |
| Warning Signs | Obvious warning signs of a referral scam are the program seeming to have really good rewards, unfair terms, feeling like you're being pushed into a decision, and that the rules keep changing. |
| Avoiding Scams | Spend time on verification, safeguard personal data, have the right people alerted, and always earn rewards legitimately.
Referral fraud is a significant issue in marketing that exploits the growth mechanisms built into referral programs. It can be as simple as self-referral fraud, where people create fake accounts to refer themselves, collecting rewards all the while, to complex entanglements like account cycling and discount sharing. The end result for legitimate businesses is that they're working with bad data and spending money on something they believe is working, when really, they're just paying fraudsters. There are real-life examples of people being emotionally manipulated, eventually unknowingly recruiting others into a scam, and this cycle continues to perpetuate itself. By recognizing the signs and leveraging a robust verification and reporting system, businesses and consumers alike can protect themselves from these deceptive practices and keep referral marketing honest.
Referral scams are like a bad apple in the bunch. Referrals are a legitimate marketing technique that involve you getting rewarded for helping a company gain new customers. Only in a referral scam, there's no customer delight and scammers are tricking innocent people into thinking they're getting a reward for nothing—when in reality they're using tactics like creating fake accounts to make their own referrals. Which means they get all of the rewards, while the company gets none of the benefit.
Referral scams can result in inaccurate marketing metrics, actual lost revenue, and a damaged brand. As a business operating under a false perception of reality, you could be throwing money away on marketing that isn't really working, which will erode consumer trust in the long run, and get you in regulatory hot water. Dealing with referral scams is expensive, because you have to spend a lot of money to make it stop.
Self-referral fraud is when people make a bunch of fake accounts to cash in on referral bonuses. It's really bad because it can artificially inflate customer acquisition costs and skew marketing data. Basically, companies end up thinking they're acquiring new customers when they're really just paying the same person over and over.
Businesses should watch for warning signs like promises of high rewards that sound too good to be true, lack of transparency in the referral terms, high-pressure tactics to join, and constantly changing rules—all indications that a referral program might not be legitimate and should be cause for concern.
Scammers use psychological tactics around trust, urgency, and social proof. By appearing less trustworthy and giving you a false sense of security, they can deceive you into giving them your information. They may also create urgency -- the time-sensitive offers -- and use fake testimonials to fool potential victims into believing the scams are more legitimate.
To avoid referral scams, people need to research the company and read reviews, be wary of giving out personal information, and make sure they actually earn any rewards they're promised. Keeping an eye on privacy policies and being aware of red flags will also help you minimize your risks.
If you suspect you're onto a referral scam, take note of as many details as you can and report it to the relevant authorities and consumer protection bodies. In the US, the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) are your go-to agencies for investigations and protection from scams.
One was a crypto platform user who felt scammed when they didn't receive a promised bonus, despite fulfilling all program requirements. The other was a Medicare fraud case in Michigan − $61 million in the bank after submitting fake claims for home health services. It's a great example of just how diverse scams can be and how damaging.
A computer screen showing warning signs of referral scams.
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