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What Is Referral Fraud in Ecommerce? (And What You Can Do About It)

by Andrew Reed, on Aug 17, 2021 4:44:41 PM

Setting up a referral program is one of the best ways to grow your online business by word of mouth while also boosting your relationship with customers by offering them discounts and promotions.

But the digital nature of these programs leaves your strategy vulnerable to fraud. Users have a handful of options when it comes to disguising themselves as eligible for a referral, and familiarizing yourself with them is the first step in defending against them. 

 

Understanding Referral Fraud

The idea behind referral programs is to reward people for spreading the word about your business and, ultimately, driving sales. Typically, the person who makes the referral is compensated in some way - either via a payment, discount or some other reward.

When referral programs work well, they are win-win for the business and the referrer. When referral fraud comes into the picture, the business loses.

What is Referral Fraud?

Referral fraud is when a customer intentionally receives referral benefits through dishonest or wrongful means.

Once users see how easy it is to receive a promotion online, they may try their luck at making themselves eligible again, usually through a handful of dishonest strategies.  

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Blocking Coupon Extensions and the Impact on Merchant Revenue

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Types of Referral Fraud to Look Out For

There are several different types of referral fraud. Each is outlined in more detail below, along with tips on how to detect it.

Self Referrals

Self referrals occur when current customers create fake accounts with which to share referral links. This way, they’re able to benefit from promotions they otherwise would no longer qualify for.

How to Detect: Keep an eye out for suspicious email addresses gathered from referral campaigns, such as ones similar to that of a past customer or those that appear to have randomly generated addresses. 

Customers may also be redeeming codes from the same IP Address or have shared cookies with your web page in the past.

 

Repeat Referrals

Many shoppers may attempt to re-register for a referral program or redeem the same referral code more than once if they believe they can get away with it. And if your webpage is not set up to detect repeat redeemers, they will.

How to Detect: Keep an eye out for users that appear to be redeeming codes more than once by tracking their emails through checkout and a reliable CRM platform. 

 

Account/Return Abuse

Other customers may earn a referral promotion by referring your business to a friend who has no interest in becoming a customer and quickly deletes a new account or returns a recent purchase.

How to Detect: Keep a keen eye on your website metrics. If you notice users suspiciously canceling orders, see if they were brought in through a referral. If so, you can prevent the user who referred the customer from benefiting from your program.

 

Account Cycling

In the same vein as self referrals, this is a single customer continuously deleting and creating accounts in order to take advantage of new customer promotions and referrals.

How to Detect: If a customer is constantly creating new accounts, they will likely be doing it from the same device. Using cookies to track users, or keeping track of a user’s IP address, can help you discover existing customers posing as new customers and allow you to prevent them from abusing your referral programs.

 

Discount Sharing

One of the most common ways customers participate in referral fraud is through the improper distribution and redemption of coupon codes without the business’s consent.

This may be familiar to you in the form of discounting websites and forums where users share coupon codes they have encountered with other customers across the web.

Beyond this, users also now have access to coupon extensions like Honey and CapitalOne Shopping. These apps automatically scrape any codes that their users type into your fields and checkout and then share them with other users who have the app installed on their web browser. Given that these types of extensions are used by around 25% of online shoppers, discount sharing is a significant problem worth paying attention to.

How to Detect: Many of the codes that end up in the hands of discount sites and extensions are unintentionally left active by the business. If you are seeing a resurgence in codes from an old campaign, it's likely the code has leaked to one of these groups.

Another telltale sign of coupon leakage is when coupons meant to promote your newsletter or social media are being redeemed, without major change to your subscribers or followers. 

Keep an eye on your discount code redemption patterns. If you see a sudden spike in redemptions that does not correlate to a marketing activity that you or one of your influencers or affiliates has engaged in, that is typically a sign that your coupon codes have leaked.

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How Referral Fraud Impacts Your Business

Referral fraud may seem benign, but it has a real and very negative impact on ecommerce revenues and profits. It can also make your attribution reporting unreliable by falsely inflating results.

Here are some of the more common impacts that referral fraud has on ecommerce businesses.

 

Poor Attribution

The biggest challenge fraudulent referrals bring to your business are the inflated numbers and phony attribution.

If users are re-redeeming codes, creating fake personas to cash in on discounts, or inviting uninterested customers who will make a purchase only to turn around and return it, you may end up seeing what look like promising metrics that in reality are propped up by fraudulent behavior. 

This will make it appear as if you are growing your business by offering incentives for existing customers to bring in new ones, but in reality you may be handing out benefits to customers already patronizing your brand.

In this case, it will become difficult to discern which marketing channels are truly working for your business, and which are being taken advantage of.

 

Damaged Revenue

The bottom line of referral fraud is that fraudsters are taking a bite out of your overall revenue by getting paid for referring business that never materializes, and in some cases, receiving discounts on products/services they would have paid full price for.

Not only this, but you also may be investing in what appear to be successful marketing channels that are propped up by customers abusing your referral programs. 

This will bleed your revenue on both ends, as your ROI will not be what you anticipated as a result of phony personas purchasing discounted products from your store.

 

Lost Time

If your referral program is vulnerable to fraudulent behavior, your team will end up spending valuable time and resources tracking down errand discount codes and phony user accounts. 

To prevent this, you have to find ways to not only protect your referral program from fraudsters, but also ways to automatically track down any leaked discount codes and fake customer accounts.

 

Protecting Your Business From Referral Fraud

Given all of the negative effects that referral fraud can have on your ecommerce business, what steps can you take to identify when it is happening, and put a stop to it?

 

Verify Your Customers

If you aren’t having customers sign in using their emails or similarly unique information, this is your first step in preventing the most fraudulent referrals. 

Customers will on longer be able to earn referral rewards if their information shows that they have already redeemed them.

Users may create new accounts, but there is a way to defend against that as well. By utilizing cookies or tracking IP addresses, you’ll be able to defend against users attempting to redeem multiple rewards from the same device, regardless of which account they are on.

Verifying your customer’s information and blocking multiple accounts and redemptions will be your first line of defense against fraudulent redemptions.

 

Use Coupon Codes

While coupon misuse is a source of referral fraud, a properly managed coupon campaign can work to prevent fraud too.

Many coupon solutions offer ways for you to put limits on your codes (such as custom time limits, restricted number of coupons available, as well as unique codes that will invalidate once redeemed) that allow you to continue to discount while helping to maintain control over your discounting strategy.

Use unique coupon codes whenever possible, and when you must use a general code, track its usage carefully so that if there is a leakage issue, you spot it right away and can take action.

 

Threaten Account Cancellation

If your website requires an account in order to shop, deter users looking to game your referral system by threatening to prevent access to their current account.

This can be particularly effective if there is a rewards system that shoppers have a vested value in that would be irreplaceable if an account were to be deleted. 

 

Offer Reasonable Rewards

If the rewards offered through your referral program are overly generous, dishonest customers may try to take advantage of your program.

While it’s important to make sure your discounts are enticing enough to bring in new customers, they should also not be so promising that customers start looking for ways to keep on benefiting from your promotion even after they are no longer eligible.

If you’re offering loyalty points instead of discounts, make sure you set a limit on how many friends a customer can refer. Set it to a limit that seems reasonable for the casual browser, but prevents fraudsters from cashing out on your program.

 

Intervene Manually

Having a team member review referrals for legitimacy can be an extremely effective way of preventing fraud, but can also be time consuming. Having two well trained eyes looking out for anomalies and unusual behavior is preferable to trusting your customers to not take advantage of you.

Start by setting up a review period for customer referrals. Not only will this allow a human person to legitimize a referral, and block illegitimate ones, but the wait time is also likely to ward off fraudsters who may be looking for a quick payout.

The only challenge to the manual review process is that it is difficult to carry out at scale. If you are a larger business with  a high volume of referrals coming in, it may take some time to very each one. This could ultimately frustrate customers, deterring them from engaging with your brand.

 

Use Defensive Software

There are a variety of apps and software solutions that are able to automatically detect and prevent fraudulent referral activity. This will be your best bet when it comes to protecting your attribution, revenue, and time.

Check out Talkable, whose referral program software automatically detects phony accounts and fraudulent activity, freeing up your time and also protecting your referral program from phony data and lost revenue.

If your problem relates more to coupon fraud, cleanCART can protect your business from coupon scraping extensions like Honey and CapitalOne Shopping by blocking automatic injection.

Not only will this prevent users access to coupon codes they didn’t earn, but because the app returns scraped codes as invalid or expired, extensions will eventually stop targeting your site. As a result, you will see a vast decrease in the improper distribution of your coupon codes.

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Conclusion

Referrals are still an excellent way to grow your business, but familiarizing yourself with the risks and knowing how spot and defend against them will help the boost overall success of your strategy.

 

Topics:ecommerce

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