How to Prevent and Deal with Referral Marketing Fraud?

Aggressive market trends, overburdened paid media, and plummeting attention spans of consumers - the current business canvas shows no bright scope for traditional marketing, except for word of mouth.

Harnessing the social connections of existing customers to build up hype and raise brand awareness in new audiences - most businesses are adopting referral marketing programs to kick off their campaigns without spending exorbitant budgets.

Referral programs might be the most cost-effective customer acquisition channels, but they’re as much at risk for fraud. Being a campaign that runs on behalf of incentive-driven people, referral programs are a hitlist for fraudsters looking to win bucks without putting in the effort.

Statistics show that eCommerce retailers alone lost $41 billion in fraudulent activities - a figure that is suspected to grow up to $48 billion in 2023. In terms of referral programs, even a 1% referral abuse can cost your brand valuable time and resources.

If you’re expecting soaring growth through a referral program, make sure you set up the right infrastructure and take precautions for any referral marketing program fraud.

Introduction to Referral Program Fraud

With the remarkable growth opportunity that referral marketing brings, it holds quite as much potential for abuse. Unlike other online phishing scams that feed off of people’s personal information, referral scams target businesses.

Referral fraud underlines all malicious practices meant to hack a referral marketing program to gain various incentives and rewards. Instead of referring genuine customers, fraudsters create fake accounts, generate false referrals, or engage in other unethical tactics to exploit the program for personal gain.

Some customers self-refer to their personal accounts registered on different emails to increase their referral count, committing serious referral abuse. It does not only limit the reach of your campaign within the existing base but also causes high budget deficits.

4 Types of Referral Fraud

Before you think of a prevention strategy, you must understand the tactics people use to put your campaign at risk. Fraudsters usually come at you with one of the following types of fraud:

Fake/Self-Referrals

Often co-related, fake and self-referals are flipsides of the same coin - referring leads registered to flawed accounts. Self-referrals account for customers referring themselves using multiple accounts or personas, whereas fake referrals involve leads that do not connect to a legitimate email address or contact.

The goal is to trick the system into awarding incentives to leads that never actually translate to genuine customers. Some of the tactics they use are:

• Creating multiple accounts using different identities.
• Referring to oneself from different devices or IP addresses.

Collusion

Collusion refers to cooperation between multiple parties to generate referrals among themselves. Fraudsters collaborate to artificially boost their referral counts and collectively accrue rewards or incentives. Collusion can be challenging to detect because it involves a network of individuals who appear to be referring to real customers when in reality, they are simply referring to each other.

• Generating referrals in exchange for mutual benefits.
• Coordinating actions to ensure referrals appear genuine.

Incentive Abuse

Exploiting referral incentives without truly referring a business to new customers is termed as incentive abuse. Fraudsters find ways to manipulate the program's reward structure to their advantage, often by engaging in actions that do not contribute to the program's intended purpose.

• Exploiting loopholes in reward redemption processes.
• Limiting engagement with the program after receiving rewards.

Account Cycling

Commonly known as "churn and burn," Account Cycling involves creating a cycle of disposable accounts solely for the purpose of generating referrals. People create new accounts, generate referrals, and then abandon these accounts once rewards are received on the loop. It exploits the time lag between referral generation and reward distribution, making it challenging for businesses to catch up.

• Quickly churning through accounts before any suspicion is raised.
• Targeting referral rewards that are not instantly redeemable.

Broadcasting or Affiliate Fraud

People enrolled in a customer referral program often attempt to score big by acting as affiliates, which is labeled illegal. Customers broadcast their referral codes or links on social media platforms like Reddit, affiliate forums, and coupon websites to expand their reach, associate maximum leads, and win rewards.

• Utilizing fake or dormant accounts to amplify the reach of referral links.
• Creating posts or messages that promise quick rewards or incentives.

Consequences of Referral Fraud on Your Business

Cyber scams have been around as long as the internet, but with a referral program, the costs are ever higher. Statistics say that referral fraud accounts for 21% of all online scams on e-commerce sites in 2021.

Companies use referral marketing to bring high-quality leads, engage new audiences, and fulfill their business goals, but referral abuse can eat into your success metrics. As a marketer, you may have to deal with other more pressing issues than counting positive leads or improving retention rates. Here’s how referral fraud can impact your business:

Diminishing Brand Credibility

Referral programs thrive on trust and credibility. When genuine customers learn that the program has been exploited by fraudsters, it erodes the trust they have in the company's intentions. Seeing fraudsters exploiting programs for incentives, your loyal advocates might feel their word of mouth is worth the effort.

False Sense of Growth

Referral fraud artificially inflates the referral count, leading businesses to believe that their program is performing exceptionally well and attracting massive inflows. But the truth is, most of those referrals are flawed with no real customer to lean on.

If a company believes that its referral program is driving substantial growth, it might allocate more resources to the program, leading to an even greater loss.

Financial Losses

Fraudulent referrals result in unwarranted rewards, discounts, or incentives being distributed to fraudsters. These payouts deplete resources that could otherwise be invested in legitimate marketing efforts, product improvements, or customer engagement initiatives.

How to Detect Referral Marketing Fraud

Referral fraud is bad news for any business, especially if goes undetected. Most companies get wind of referral program exploitation by the time it has dealt significant damage to your business. We have summed up some effective ways to detect fraudulent activities:

• While it might seem counterintuitive, an abnormally high conversion rate (percentage of referrals that lead to conversions) could be a red flag - indicating fraud.
• If you observe users generating referrals at an unusually fast rate, it could indicate attempts to exploit referral quotas or rewards before being detected.
• Look for users who generate referrals but show minimal engagement with the platform afterward. Genuine referrals often come from loyal advocates who stay engaged with your business.
• If a significant portion of referrals come from unusual or unrelated sources, it could be a sign of fraudulent activity, especially if these sources are not aligned with your target audience.

7 Ways to Prevent Referral Fraud

Rather than waiting on fraudsters to scam your campaign, have the right structure and tools in place to detect, deal with, and prevent any chances of fraud.

One thing is for certain though, you cannot expect your referral campaign to function seamlessly without a referral program software in place - and Prefinery has got a perfect track record to be your primary. Implement the following methods to your referral strategy to make it foolproof.

Verify the Referral Source

Every referral campaign must follow a simple pre-requisite - acquire referrals from the audience the program is intended for. If you only want current customers to participate in your program, make sure to verify the leads are channeling in through your latest buyers.

Unless the campaign is free for all to participate, every incoming referral must be dealt with scrutiny to ensure no fake or self-referrals are accounted for. Cross-check their email addresses and social media handles to make sure the new referred-in leads do not belong to the existing customer pool.

Manually Approve Each Referral

While it may seem counter-productive, sometimes human supervision is necessary to keep things on track. Reviewers can spot instances of self-referrals or collusion, where users refer themselves or others for mutual gain, something software may leave unattended.

With the right program set in place, you can skip, flag, or block referral requests in case something smells fishy. Cloak it up with manual scrutiny, to weed out fake or fabricated leads from the referrals that are waiting for approval.

While manual approval is effective, it requires resources and time. It's ideal for programs with a manageable number of referrals or high-value rewards. For larger programs, consider a hybrid approach or focus on manual review for high-impact referrals.

Monitor the IP Addresses

Every device connected to the internet is assigned an IP address, akin to a digital fingerprint. Monitoring these addresses helps identify individual users and the devices they use, making it easier to spot anomalies or repeated patterns.

Fraudsters often create multiple accounts to generate fake referrals. Monitoring IP addresses allows you to identify accounts originating from the same address, indicating potential self-referrals or collusion. With the right supervision, you can also detect unusual behaviors like account cycling or collusion.

Setup Terms and Conditions for Your Campaign

Terms and conditions are the bedrock of any successful referral program, outlining the rules and expectations marketers have from the campaign. By explicitly outlining what qualifies as a successful referral and constitutes fraudulent behavior, marketers can set the framework to detect any deceptive practices. Signing up on the terms binds customers to a contract, allowing you to take legal action against them in case of fraudulent activities.

Delay the Reward Fulfillment

Of course, businesses are keen to reward advocates as soon as a lead channels in through their reference, to appreciate their participation and keep the morale high for further engagement. However, the hastiness may cost you a higher churn rate over time.

If you’re rewarding people in exchange for signing up, participants who are in it for the money will leave your platform soon after they receive it. To keep their interests high, delay the reward fulfillment process or award them bits at a time like segmented rewards or loyalty points.

Benefiting piece after piece will let them know they have skin in the game, and remain hooked till the end. With delayed fulfillment, fraudulent referrals are more likely to be identified and disqualified before rewards are distributed, keeping your financial losses to a minimum.

Limit the Number of Rewards per Referrer

Capping the rewards is a direct antidote for collusion and broadcasting referrals. When there’s a limit to the number of rewards one can win, fraudsters might lose any interest in exploiting the program beyond what it legally offers.

With a barrier in place, you not only save massively in terms of budget expenditure but also keep it off the radar of fraudsters looking to exploit the system. Even if someone has malicious intent toward your referral program, there’s only so much they can hack into preventing extreme losses.

Implement a Referral Program Software

Even though manual approval is important to designate referral rewards, you need smart tools to track, sort, and assign referrals to each referrer. Actively monitoring each referrer and compiling their data in real-time for approval, is only possible with referral program software. Here’s how it can help streamline your reward distribution process while keeping transparency intact:

• The software allows for real-time monitoring of referral activities. Any sudden spikes in referrals, unusual patterns, or excessive rewards can be easily detected to prevent potential fraud.
• Modern software often includes user authentication mechanisms like email or phone verification that only allow customers with genuine intent.
• It can track and verify IP addresses, helping to identify self-referrals, multiple accounts from the same IP, and potentially fake referrals generated from automated scripts or bots.

Closing Note

Develop a foolproof referral marketing program that is guarded against online fraud or take precautionary measures to limit your losses midway, either way, never let any fraud go unnoticed.

Whether it’s through manual supervision or program software, once you detect a false lead disqualify it from your referral count, ban the email address it’s signed from, and cancel or reverse any purchases made through the account. Dealing with referral fraud requires a preemptive strategy.

However, instead of waiting for the marketing campaign to take a hit, it’s better to be prepared in advance. Be proactive rather than reactive. Prefinery.com designs an impeccable referral fraud prevention ecosystem to safeguard businesses against any fraudulent activities.

FAQs

What is referral marketing fraud, and why is it a concern?

Referral fraud refers to all deceptive activities directed to exploit a referral program through fake referrals or engaging in unethical practices to gain rewards. It's a concern for companies because it compromises the integrity of the program, wastes resources, and damages trust among the audiences.

How can I prevent referral marketing fraud?

Preventing referral fraud involves implementing various strategies including; setting clear terms and conditions, using referral program software with fraud detection features, monitoring IP addresses, and delaying reward fulfillment processes. The key is to stay sharp and prepared to detect any deceptive activity on time.