Referral programs incentivise loyalty program members to invite family and friends to join. This can be an effective method for brands to acquire new customers, but it can also expose the brand to referral program fraud.

Referral program fraud is a cunning tactic that exploits the goodwill of member-get-member initiatives, potentially flooding programs with fake accounts, increasing costs, and skewing analytics.

Referral program incentives that are overly generous can attract abuse of the program terms and conditions which may result in companies having to review and evolve their referral strategy, as seen with Tesla.  

Loyalty program consultants and operators need to be diligent in planning for referral program fraud, which can generally be addressed via sound mitigation strategies.

Loyalty fraud is defined as the use of deception to intentionally secure unfair financial, personal, or third-party gains from loyalty programs.

Referral program fraud: The deliberate manipulation or abuse of a company’s referral system to gain unearned rewards or benefits.

Risks of referral program fraud

Referral program fraud can involve creating fake accounts, self-referrals, or exploiting loopholes in the program’s terms and conditions, ultimately undermining the integrity and financial viability of the referral program.

Referral program fraud can pose a significant threat to brands:

1. Bot-generated accounts: Fraudsters can utilise automated systems to create multiple fake accounts, earning large amounts of bonus points without genuine new member acquisition.
2. Analytics distortion: The influx of fake member accounts skews program analytics, leading to misguided strategic decisions based on inaccurate data.
3. Financial loss: Each fraudulent referral represents a direct financial loss to the program, as bonus points or goods awarded translate to redeemable value.
4. Reputation damage: If widespread, referral fraud can undermine member trust in the program and damage the brand’s reputation, particularly if the brand dramatically claws back generous referral bonuses.
5. Resource drain: Investigating and managing fraudulent accounts can consume significant time and resources from the program’s operational team.

Mitigations to referral program fraud

To address referral program fraud, loyalty program operators should implement the following strategies:

1. Transaction requirement: Implement a system where the referral bonus is only released after the new member makes at least one legitimate transaction (do not give enough points that can be redeemed for opening an account – ensure they need to complete at least one legitimate transaction).
2. Referral tracking: Utilise robust reporting systems to identify accounts showing an unusually large number of referral activations, with automated alerts to trigger investigations. Automatise these reports and adjust levels if required.
3. Referral limits: Set a cap on the number of referrals an individual member can be rewarded for, reducing the potential scale of fraud. This could be a yearly cap.
4. Enhanced verification: Implement stringent verification processes for new accounts to deter the creation of fake profiles. Multi-factor authentication has become a popular option.
5. Monitoring systems: Deploy advanced analytics to detect unusual patterns in referral activity and new account creation.
6. Gradual reward release: Consider releasing referral bonuses in stages over time, rather than all at once, to discourage large-scale fraud attempts.
7. Education: Inform members about proper referral practices and the consequences of fraudulent activity.
8. Terms and conditions: Ensure terms and conditions for referral limitations are clearly seen and understood by members. This will allow the loyalty program to take any actions that are required for abuse such as removing points or closing accounts due to fraudulent activities.

Tesla’s referral strategy and how they tried to mitigate fraud

Tesla’s referral program has been a cornerstone of their marketing strategy since its inception. The program has gone through several iterations, each designed to incentivise existing customers to promote the brand while adapting to referral program fraud, changing market conditions and company goals.

Tesla’s referral program evolution

Tesla has enjoyed significant success with their referral programs which have played a key role in customer acquisition.

In 2015, the program featured experience-based rewards, such as six months of free Supercharging, VIP event invitations, and unique prizes like launching photos into space or even free Roadsters for top referrers.

By 2019, Tesla shifted to more tangible rewards, such as 1,000 miles of free Supercharging and chances to win exclusive vehicles.

In 2023, Tesla integrated its “Lootbox” system, which gamified rewards but also required vigilance against exploitation.

Finally, in 2024, the program was relaunched with simpler financial incentives, such as $1,000 discounts for new customers and $500 credits for referrers, maintaining fraud risks but improving monitoring capabilities.

Tesla’s referral program fraud and mitigations

Tesla has had to continually adapt its referral program to balance customer engagement and fraud prevention by varying between experience-based and more tangible rewards.

During the free Roadster referral program era, one Tesla enthusiast, Andy Slye, generated 295 successful referrals which entitled him to two free Roadsters. Andy achieved his by sharing his referral link on his YouTube series, which was technically a breach of the program rules as the buyers utilising his link were not family or friends. Luckily for Andy, Tesla honoured the two Roadsters (valued at $500,000). It wasn’t all bad for Telsa, which enjoyed over $44 million in sales from Andy’s promotion.

Telsa have also combatted fraud perpetrated by Tesla sales advisors who have substituted customer-provided referral codes with their own or their associates’ codes so that they receive the benefit instead.

The following Reddit snippet details one such example:

Source: Reddit thread

Lessons learned

Tesla’s referral program have proven to be highly effective due to its use of unique, experience-based rewards, while the prestige of exclusive Tesla merchandise and experiences further enhanced its appeal. By integrating the program into their app and website, Tesla have ensured easy participation and referral tracking. Their adaptability allowed them to continuously update the program, ensuring long-term success.

However, the program also revealed the need for robust fraud prevention measures and careful balancing of incentives to avoid abuse. Regular monitoring, updates to terms and conditions, and leveraging technology have been essential in maintaining its effectiveness.

Tesla‘s referral program serves as a case study in innovative marketing, showcasing both the potential benefits and challenges of a well-executed referral strategy in the automotive industry.

Other industries where referral program fraud is prevalent

While specific case studies for referral program fraud are not often publicised, this type of fraud is particularly prevalent in certain industries:

1. E-commerce platforms: Online marketplaces often offer referral bonuses to drive user growth, making them attractive targets for fraudsters using automated account creation.
2. Financial services: Banks and fintech companies frequently use referral programs to acquire new customers but must be vigilant against coordinated fraud attempts.
3. Subscription services: Streaming platforms and other subscription-based services may face referral fraud as users attempt to create multiple accounts for extended free trials or bonuses.

As referral program fraud evolves, exemplified by the Tesla case, staying vigilant is crucial. Loyalty and Reward Co offers insights on various fraud types, including referral abuse. For tailored strategies to protect your program from referral fraud and other threats, connect with our experts. Safeguard your loyalty initiative’s integrity – contact Loyalty and Reward Co today for a more secure and resilient program.

Acknowledgement

Thank you to Michael Smith, co-founder of the Loyalty Security Alliance and contributor to ‘Loyalty Programs: The Complete Guide’, whose expertise helped inform insights presented in this article.

References

1. Loyalty Security Association. (2023). Best Practices for Loyalty Program Security.
2. Shelper, P (2023). Loyalty Programs: The Complete guide (Edition 2)
3. Referral Factory (Accessed Oct 2024) The Tesla Referral Program Story
4. Reddit (Accessed Oct 2024) Discussion on Referral Link Fraud by Tesla Sales
5. Mikhael, G (Accessed Oct 2024) Tesla’s Supercharged Loyalty Program
6. Mikhael, G (Accessed Oct 2024) Tesla Referral Program: Advocacy vs Advertising

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