What makes promo abuse a major problem for ecommerce?

Who doesn’t love a great deal? Promotions are persuasive and lucrative sales tactics. Customers save money, and businesses can boost sales, spread brand awareness and build customer loyalty.

The downside? Promotions often leave sellers vulnerable to abuse.

Call it promo abuse, promotion abuse, voucher abuse or any other variation, this is a type of policy fraud that involves customers taking advantage of a merchant's promotional offers. While a few customers getting better discounts than they should doesn’t sound too bad, the long-term and cumulative effects can leave businesses with eye-watering hidden costs.

Online promotions are vulnerable to abuse

Per the findings of Ravelin's latest Fraud & Payments Survey, 53% of merchants experienced increased promo abuse activity in the past year. This was most prominent in the Digital Goods sector, which reached 56.5%. Meanwhile, 51.1% of merchants expect promo abuse to increase in the next 12 months. This is much more prominent for the Travel sector, where 31.3% gave htis answer

Here are three common promotions that are vulnerable to abuse:

• Sign-up bonuses offer discounts to new customers to thank them for their commerce, encouraging them to become repeat users.

• Referral bonuses offer customers incentives to introduce friends and family, increasing customer acquisition.

• Vouchers, often in the form of codes, offer customers exciting deals to convince them to make purchases.

How does promo abuse work?

Fraudsters, as well as opportunistic first-parties, abuse promotions in different ways. Here are just a few:

1. Sign-up bonus abuse and multi accounting

Sign-up bonus abuse occurs when a customer uses multi accounting to benefit from a merchant’s sign-up deal multiple times. Multi accounting is the creation of multiple accounts for fraudulent purposes. It ranges from something as basic as a customer logging out of one account and signing into another, to fraudsters creating fresh IP addresses or synthetic IDs.

2. Free-trial schemes and gifts

An easy example of sign-up bonus abuse is a customer using a company’s free trial scheme repeatedly and never paying. Or, if a merchant offers free gifts for signing up, a customer can sign up from multiple accounts and amass loads of free gifts to resell.

3. Referral bonus abuse and prolific abusers

Referral bonus abuse takes place when a customer uses multi accounting to receive rewards for referring "friends" (who are all in reality the customer themselves). Organized fraudsters can drain a lot of money from businesses by publicly releasing their customer referral promo codes and accumulating benefits.

A cautionary promo abuse tale: Uber’s notorious referral fraudster

Uber experienced prolific promo abuse, as one determined user racked up £50,000 in future ride credits by posting his Uber referral code on a Reddit site. Luckily, Uber noticed and dealt with the fraudster, but they learned first-hand that promo abuse can be an expensive issue.

Voucher abuse and predictable codes

Voucher abuse happens when businesses send out discount codes that are too simple and become predictable. Fraudsters can guess future codes and receive multiple discounts. Genuine customers can’t redeem codes that have already been used fraudulently, so the merchant has to give out more discounts or freebies to maintain customer loyalty.

Why it’s so difficult to monitor voucher abuse

Voucher abuse is hard to track because vouchers need to reach a large audience to be effective.

The sheer number of codes merchants have to release makes it difficult to spot fraudulent activity. And voucher abuse happens so often that it’s difficult for businesses to accurately estimate how much it costs them in the long run.

Promo abuse carries consequences

Promotion abuse can become costly. Your company could fall into the trap of giving away too much for free. And, since anyone with a smart device looking for a saving can easily become a promotions fraudster, the numbers can quickly add up (remember the Uber cautionary tale?).

Promo abuse can also damage brand identity and customer loyalty. If a customer’s voucher is faulty, they’ll spread the word. Or, if your company makes it too easy to take advantage of promos, loyal customers could feel betrayed that they are getting less for following the rules.

Don’t write off promotions just yet

Promotion abuse can be difficult to handle. If merchant responses are too harsh, genuine customers may lose interest in the brand. And realistically, it doesn’t matter if someone completes two consecutive free trials of a service if they add lifetime customer value.

Merchants need to balance discouraging loyal users from opportunistic promo abuse and effectively tackling prolific fraudsters.

With plenty of quantitative and qualitative evidence of growth in promotion abuse activity, merchants need to act now. Getting a better understanding of your company’s promo abuse will ultimately prevent damage to your business.

Learn how to better analyze your promotion risks with network link analysis by watching the Network Analysis for Fraud Detection webinar.

Also make sure to read up on Ravelin's Promo Abuse and Refund Abuse products.