What Referral Fraud Means For Your E-commerce Business

Referral marketing provides the unique opportunity for businesses to tap into their existing community to gain new customers. By using incentives for referrals, loyal customers and potential consumers win by getting a limited time offer that provides them with a new item, a percent off, or a dollar amount reduction.

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However, one thing to be aware of is referral marketing fraud. Everyone loves a deal, and sometimes people will exploit refer-a-friend campaigns to save money or get free items. Find out what referral marketing fraud is, learn the different types of fraud you could encounter, and how you can be prepared.

What is Referral Fraud?

You may naturally connect fraud with phishing scams that try to obtain people’s personal information. However, referral marketing fraud is something different. Referral fraud is when a buyer attempts to leverage the current offering by trying to hack the process or terms and condition to get numerous incentives.

For a formal definition, here’s how Investopedia defines it, “any false or unscrupulous activity conducted to generate commissions from an referral marketing program.” Referral fraud also includes activities that are not allowed under the terms and conditions of the refer-a-friend campaign. This is why reading the fine print is important!

For example, trying to self-refer yourself by providing one of your other emails is considered referral marketing fraud. Self-referrals are a common type of referral marketing fraud because one person gets the rewards an advocate would receive and the rewards of a referred customer.

Referral fraud is the one downside of the awesome effects that referral marketing can bring to your e-commerce businesses. In our opinion, the benefits of referral marketing far outweigh the downside of referral marketing fraud.

4 Different Types of Referral Fraud

People who are trying to game the system can do multiple things to get a deal. Referral fraud is not just limited to someone referring themselves. Here are multiple different types of fraud:

  • Self-referral: When advocates refer themselves by creating fake accounts to take advantage of the referral incentive
  • Exploitation: unknown internet users that develop referrals for personal monetary gains.
  • Account Cycling: users sign-up for reward and then cancel their account
  • Broadcasting: when advocates share their referral coupons on websites (like Reddit) that are not approved by the e-commerce business offering the rewards

These are some of the most common types of referral marketing fraud behaviors that buyers do. You can’t say people aren’t creative when it comes to trying to get a deal. However, it’s essential for a retailer to reduce referral marketing fraud because it can impact your business.

Why You Need to Look Out For Referral Fraud

Obviously, you want your referral marketing campaign to do its job and grow your new customers and generate revenue. When fraud occurs, this can eat into your success metrics. Three of the most common ways that fraud can hurt your business is seeing false numbers, losing profits, and losing time.

Inflated Numbers:

When more transactions are occurring and you’re seeing more referrals but not seeing new accurate and unique customer information, this is a sign that people may be referring themselves. Inflated numbers affect how exact your numbers are and the ROI of your campaign.

Lost Profits:

If fake accounts are able to redeem refer-a-friend offers, this can really cut into your profits. For example, every incentive for referring a friend to get $5 off their next purchase, that's $5 less your business is receiving.

Lost Time:

Once, your business notices potential fraud occurring, your team has to look through the new users and look for fake accounts. Time is one of those resources you can’t get back. The more you can reduce referral marketing fraud means your team is able to spend their time on more significant tasks.

How You Can Prevent Referral Fraud

Now that you know what referral marketing fraud is, how do you prevent it? Manually reviewing each new user won’t work. One of the easiest ways to prevent fraud is by using a referral marketing platform that has a system that deters fraudulent behaviors. When you’re picking a referral marketing program make sure that it has fraud prevention. Here are a couple of ways how Talkable detects and prevents referral fraud:

  • Cross-reference your existing customer base
  • Delay offers to your community until a new buyer makes a purchase
  • Take a look at IP addresses

Don’t let the scammers scare you from running a referral marketing campaign. Refer-a-friend can provide impressive results and help companies generate highly qualified new customers and more revenue. Now, that know what referral fraud is you know to look for a software that can help deter fraudulent buy behaviors. Check out how Talkable’s platform can help stop referral marketing fraud. 

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Talkable is a SaaS platform that allows companies to profit from the science behind referrals, while increasing sales revenue and preventing fraud.

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