This is especially a concern for popular brands because even a tiny 1% of customers abusing the referral program can lead to sizeable losses and wasted time.
The way to tackle referral fraud and abuse is to first set up preventive measures, then deal with any that slips through the cracks.
3 types of referral fraud and abuse
Before we look at preventing and dealing with referral fraud, it helps to first understand the types of referral fraud and abuse. There are generally three types:
Self-referrals: Some customers would refer themselves to get both a discount for a new purchase and a reward for referring someone. They do this by using different email addresses or creating new accounts at your ecommerce store.
Sharing on coupon sites: Instead of sharing their referral link and code with their friends, some would post them on coupon sites, discount sites, or forums. This allows them to get more people to use their referral link or code so that they can earn more rewards. But they are not genuinely referring their friends.
Return abuse: Some people would get their friends to use their referral link and code. Once they get the reward for “referring”, their friends would return the product and get a refund.
If these issues are not prevented or dealt with quickly, brands would risk losing money from giving out rewards unnecessarily. Furthermore, when their discount codes are shared widely online, it can affect their brand image.
Let’s look at how we can prevent them.
How to prevent referral fraud
The best way to prevent referral fraud is to use a referral program software that helps you automatically prevent fraudulent referrals. And, of course, ReferralCandy is built to do that.
It is almost impossible to prevent such fraud if you are manually handling and checking your referrals. While it might be feasible if you have a small order volume, it will become too much work as your business and referral sales grow.
When you are picking a referral program software, it should have these fraud prevention mechanisms:
1. Advocates should not be able to earn rewards for referring themselves
Most referral program software can prevent such referrals.
Because ill-intentioned advocates would try to use multiple email addresses, ReferralCandy’s referral detection system looks at more than just the email address to check whether someone is trying to refer himself or herself.
I will not share the details to prevent ill-intentioned people from gaming the system. ;)
2. Advocates should not be able to earn rewards for referring existing customers to your store
Let’s say your customer, John, referred his friend, Mary, to buy from your store for the first time. Our system will detect this and reward John for his referral. Win-win!
If another customer, Tim, sends Mary his referral link and Mary makes a purchase through Tim’s referral link, our system will not consider this a referral.
Why? That is because Mary is already your customer while your referral program is supposed to help you get new customers. You should not have to spend money to reward someone for “referring” an existing customer to buy your products.
That said, our system would not know about your customers who bought before you installed ReferralCandy and will consider them as first-time customers.
3. You should be able to set the conditions for getting a reward
Generally speaking, referred friends should have to spend more than the reward you are giving your advocates. You do not want to give your advocates $10 when their friend only spent $1 at your store. They could repeatedly buy something for a dollar to get the $10 reward.
For example, Rothy’s referral program requires referred friends to spend more than $50. The advocate and referred friend would then get $20 off each. If the friend only spends $40, no reward will be given.
In ReferralCandy, you can set the minimum eligible spending. This is the amount a referred friend has to spend for the advocate to qualify for the reward. One strategy is to set the minimum amount just above the price of your main product so that referred friends will spend more and you will not lose too much profit margin when referred friends use the friend offer discount.
An exception is if you are willing to spend the money to get your brand out there. In that case, you might want to only reward your advocates for each friend’s first purchase instead of for every purchase.
On top of these conditions, we recommend you state the terms and conditions for your referral program. This allows you to take necessary actions if or when someone abuses your referral program.
It can be as simple as how cryptocurrency wallet brand Ledger states on its referral page, “Note: Sharing your codes or referral link on coupon/discount websites or Reddit forums is prohibited.”
4. You should be able to set a referral review period
A review period gives you the time to “catch” suspicious referrals such as when you see a spike in referrals. You can then disqualify the fraudulent referred purchases and not have to pay out the referral reward.
Generally speaking, you would want to set a review period according to your return policy and pattern. If your return policy is seven days, you could set your review period as seven days. If it is much longer like 30 days, we usually recommend picking a duration according to when most of your returns (70-80%) happen. This is so that your advocates do not have to wait too long for their reward.
5. You could allow only customers to refer and earn
By default, ReferralCandy allows anyone—including people who have not bought your products—to join your referral program. This helps ensure you get more word-of-mouth referrals.
But some popular brands are already getting sufficient referrals from their customers. They are worried that letting non-customers earn from their referral program will encourage more spam and abuse. So, they would choose to limit their referral program to only customers who have bought their products.
If you wish to allow only customers to refer and earn, you can contact us and we will set it up for you.
Finally, independent of your referral program software, you want to set up your coupon codes to prevent misuse:
Set the discount amount such that you will benefit from every purchase made.
Give advocates, for each referral, a coupon code that can only be used once. This prevents them from using the coupon code multiple times for just one referral.
Set an expiration date for your coupon codes. This reduces the chances of abuse.
Periodically change your coupon code. This also reduces the chances of abuse.
Even with these fraud prevention mechanisms, it is not possible to prevent all referral fraud. That is because you do not want to make your referral program so strict that it deters actual advocates from referring their friends.
So, on top of prevention, you would also want to be able to deal with referral fraud easily when it happens.
How to deal with referral fraud when it happens
ReferralCandy will automatically detect fraudulent activities and flag them to you in the Fraud Center of your account. For example, a customer might have gotten a high volume of referrals within a short period of time. Or they shared their referral code on a coupon-sharing site.
You will also receive a weekly email about such activities.
When you click on a suspicious customer, you will see more information about the customer and his or her referrals.
Their referral link will stop working. If you are using Shopify or BigCommerce, their referral codes will also automatically stop working. ReferralCandy will automatically disqualify any future referrals.
They will not be eligible to earn any rewards even if they make legitimate referrals (unless you manually indicate they have made a referral).
All referred purchases within the review period will be disqualified. This means ReferralCandy will not send advocates any rewards for those (or future) referrals. And you will not need to pay commissions for those (or subsequent) referred purchases.
Advocates who are banned might ask you why their referral link has stopped working or why they are not receiving their rewards. You can look at their profile in ReferralCandy (under Manage Customers > Existing Customers) to see when they were banned and what happened to their referral links and referred purchases.
We provide this information so that you can swiftly get back to your banned advocates and resolve the tricky situation.
3. Delete a canceled or returned purchase
In the event that a referred friend cancels or returns his purchase, you would not want to consider that as a successful referral and give out a reward to the advocate.
If you are using Shopify and a purchase is canceled, ReferralCandy will automatically delete the associated referred purchase. Job done!
If you are using other platforms, you can delete the referred purchase in ReferralCandy under My Store > Purchases & Referrals. The respective advocate will then receive an email to let them know they are no longer eligible for the reward.
We are here to help
With the combination of fraud prevention mechanisms and proactive fraud management, you should be able to keep referral fraud and abuse at a minimum.
If referral fraud remains an issue for you, feel free to reach out at email@example.com and we would love to see how we can help. We know losing money and time to referral fraud and abuse is no fun at all.
The previous version of this article was written by Visakan Veerasamy, a former marketer at ReferralCandy. We updated this article to keep it relevant and useful to ecommerce merchants.
A referral program is a deliberate, systematic way of getting people to make referrals to your business. Referral programs are often called word-of-mouth marketing, because they reward existing customers for sharing and incentivize new customers to try out your brand.