Fraud prevention is a consideration for every company with a referral program. Inevitably, someone will test the system. Although you can’t change the intentions of bad actors, you can design your program to minimize fraudulent behavior.
A common form of referral program fraud is someone trying to refer themselves multiple times to get rewarded. Programs that offer rewards for both the customer advocate and the referred person are especially appealing for this type of fraud. Fortunately, with thoughtful design, you can minimize the impact of these attempts to game the system.
Choosing revenue-centric conversion goals makes exploiting your referral program harder, while still allowing you to achieve your business goals. Your conversion goals should encourage the referred person to experience your product, make a purchase, or sign up for a plan before they're rewarded. If you have a return or reward period, make sure that rewards are only paid out after it ends.
Potential conversion goals for the referred person include:
Making a purchase
Signing up for a subscription
Being a qualified sales opportunity
The best type of incentive to offer depends on your business model.
Legitimate B2C and D2C participants benefit from rewards like discounts, free time, free product, or limited-time access to an upgraded version of your product or service.
B2B participants are typically better served by rewards outside of your service model, with gift cards being a popular selection. Using these reward types reduces the financial risk of any potential fraud, and in some cases can ensure a positive ROI from every possible referral.
Existing customers who are looking to game the referral system can often be deterred by the threat of losing access to their account. This is particularly effective for SaaS, games, or marketplace companies because customers often have a vested interest in keeping their accounts active, and they fear losing access to a service they regularly use.
Reward limits are especially important if your rewards are cash-equivalent. Setting up your program rules to cap rewards at a certain value or quantity discourages participants from trying to disproportionately profit from your reward structure.
Your program may have some super users or microinfluencers who drive a lot of referrals or traffic to your program. Consider adding them to a user segment that allows higher rewards so they remain motivated to refer. These customer advocates also make for great affiliates in an affiliate program.
To see these tips in practice, review an example of a program with effective design that reduces the impact of fraud attempts. Then, take a look at the example of a poor design which fails to consider the need for fraud prevention.
What makes this an example of good design?
The credit can only be applied against future purchases, preventing people from exploiting the system for cash benefit.
The credit is associated with an account, so if someone is caught, the credit could be revoked, and the account canceled.
The friend is required to make a purchase, creating a paper trail of purchase information that can be used for fraud detection and response.
What makes this an example of poor design?
It is easy to exploit this type of program by providing fake email addresses, especially with unidentified users making referrals.
Bad actors can use fake email addresses and proxy systems to earn cash that's immediately redeemable.
Rewards tied to free actions leave you open to fraud.