Is It Real Growth or Referral Fraud?

As an online business, nothing’s better than watching your customer base grow. Savvy and proactive companies offer various incentives to entice new users, ranging from referral credits and promotional codes to limited-time deals and new customer coupons. Whether measured by the number of transactions, social media followers, or accounts, growth metrics are usually linked to success. But what happens when a growing number of “users” instead correlates to an increase in overhead costs?

There are plenty of stories about enterprising customers that game the referral or promotional credit system. In fact, take a straw poll of your friends and chances are good that someone has innocently created an extra email address with the intention of getting a few “free” bucks for referring a “friend” to a site. The casual user thinks that this kind of lighthearted trickery is no big deal, but there are serious consequences to referral fraud for businesses.

How promotional fraud hurts merchants

Inflated numbers. Marketing and Sales teams work hard to encourage new customers to try out their businesses and services, or persuade existing customers to return. Essential to any business operations strategy is understanding the ROI of these efforts, and fraud throws off those statistics.

Lost profits. When a customer creates fake accounts and illegitimately redeems promotional credits that represent potential sales, they’re cutting into real profits. For every “refer a friend for $10 toward your next purchase” redemption, that’s $10 less going toward your business.

Customer friction. Suspicious new accounts and purchases using hundreds of dollars in referral credits should raise a red flag. What’s a business to do but take the time to cross-reference verify new users? But as companies move toward on-demand delivery of goods and services, every extra minute delaying order fulfillment or additional hurdle at check-out is a potential customer lost.

Lost time dealing with fraud. Ask any business owner or fraud manager, and they’ll agree that the old idiom Time is money remain pertinent in any situation. The time wasted combing through new users in an effort to manage increases in fraudulent accounts not only slows down business, but is also time that could be better spent growing sales.

How to keep the referrals going while reducing fraud

What’s a business to do when faced with growing promo code abuse and fake account referrals? Manually reviewing each new user doesn’t scale, and hard-and-fast rules-based systems often lead to high false fraud positive rates. Adding fields to verify that new users are real users only adds more friction and slows down the acquisition of new, legitimate customers.

In order to stay ahead of fraudsters but keep your Marketing and Sales team from totally forgoing promotional codes or new-customer referral programs, you need a system that works proactively and can sort the truly suspicious users from the more-likely-than-not good. Too often, fraud teams get a bad rap for blocking too many good transactions, but you can actually effectively work together with a smarter solution – machine learning.

Sift Science has a free 36-page ebook, Kickstart Your Fraud-fighting Strategy, that can help you balance referral programs with customer friction. Keep growing your user base but keep promotional code abuse down with a real-time and effective system.