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How to stop loyalty program fraud in 8 simple steps

by 
 
February 17, 2020

8 anti-fraud practices for loyalty program fraud detection and prevention you should start using today. Protect your incentives and get the desired ROI from your loyalty scheme.

In this post you will learn the top 8 tips on securing your loyalty program from fraud.

You will also get:

  • examples of top loyalty programs (e.g. Sephora) and how they fight against fraud.
  • definition and examples of loyalty fraud.

If you want to launch a new loyalty program or improve the one that your business is already running, this article is for you.

Let's go.

How to stop loyalty program fraud in 8 simple steps

Running a loyalty scheme is an appealing way to improve customer relationships and to boost sales. Though most customers who subscribe to your loyalty program participate as you expect, there are some who join only to get the benefits of the program.

Loyalty program fraud happens when a customer is abusing a loyalty program’s processes or terms and conditions to get financial gains. Fraud can be committed in several ways, for example by signing up multiple times, manipulating orders, etc.

Fighting loyalty fraud - title image
Photo by freestocks.org on Unsplash

Customers who commit fraud are called fraudsters. Fraudsters cannot only undermine your desired ROI but also can endanger your whole loyalty program. Therefore, fraud prevention needs to be a part of your loyalty marketing strategy. Continue reading and find out how to implement anti-fraud practices and make your loyalty program a success story!

Fraudsters cannot only undermine your desired ROI but also can endanger your whole loyalty program.

How to stop loyalty program fraud in 8 simple steps:

  1. Re-think your rewards
  2. Create customer segments
  3. Reward engagement and purchases, not invites
  4. Verify email addresses
  5. Offer non-monetary rewards
  6. Limit redemptions
  7. Define upper discount value
  8. Implement monitoring tools
Preventing loyalty fraud

1. Re-think your rewards

Analyze the costs of your products and margins, define a budget for your loyalty program and offer reasonable incentives that create value for the loyal customers and for your business. Step by step, you will get closer to a fraud-free loyalty scheme.

Fraudsters are looking to pick the low-hanging-fruit. If it is effortless to get the rewards or the reward is too valuable, fraud might appear soon. If it is too challenging to get the rewards or the value of the rewards is too low, no one will take part in your loyalty program.

To know whether you got the reward value right, ask yourself the following questions:

  • Is the value of your discount rational to the value of an average order? Irrational discounts attract fraudsters.
  • Does the margin on every product cover this offer? If not, customers might find a product that has a lower price than the market price, and take advantage of it.
  • What are the terms and conditions? Can the discount be redeemed once or multiple times?

Read more about how to create a great loyalty program here.

2. Create customer segments

Customer segments are specific groups of customers defined by buying profile, location or interactions (e.g. new customers, customers already signed up for newsletter, customers who have already spent €100, customers from the EU or the US), etc.

Create customer segments (also called customer tiers) for your program to make sure that redemptions will be invoked only by customers from a certain group. It costs more time, money and effort to become a top tier customer. By using customer segments, you can offer higher discounts to the experienced customers, who are less likely to commit fraud.

Besides protecting your budget from fraudsters, you can offer more personalized customer experiences with targeted coupons for different customer tiers.

Beauty Insider program

Sephora’s Beauty Insider program is a great example of managing customer tiers. Members of the program receive 1 point for each $ spent. These points are redeemable for gift cards, exclusive products (limited edition products, products that are not available to the public) or in-store beauty tutorials.

The Beauty Insider program became extremely popular. The program counts more than 17 million loyal members (data from 2019) that make up 80% of the company’s annual sales.

Check out our blog post on rewards programs to find out how to set up a loyalty program identical to Sephora’s with the use of Voucherify platform.

3. Reward engagement and purchases, not invites

If a referral program is part of your loyalty program, you need to be cautious. Referral fraud is common and prevention is essential. For fraudsters, inviting themselves multiple times to a loyalty program is almost effortless. Do you want to reward it? Of course not.

Email anti-fraud tools offered by Voucherify
Source: Voucherify

In order to avoid referral fraud, you need to define clear rules for a successful referral. For example, the referee can only receive his or her reward,  after the new customer makes a minimal purchase. You can find more information about how to build a fraud-free referral program here.

4. Verify email addresses

Loyalty program fraud happens when one customer signs up multiple times.

How?

  • By using  the same email address again and again.
  • By using mixed-case characters (JeNNa@rspective.pl and JENNa@rspective.pl).
  • By creating email aliases.

*An email alias is a way to create an additional name for an email account. Fraudsters often use aliases to sign up for loyalty or referral programs to use your incentives multiple times.

Avoid these fraud attempts by limiting, lowercasing and filtering email addresses and by implementing a double opt-in feature (the double opt-in feature verifies the existence of the email address before finishing registration). Find out how Voucherify can help you with email verification.

5. Offer non-monetary rewards

Fraudsters prefer receiving cash, therefore it's less likely that they will tap your loyalty program if you offer non-monetary rewards. Non-monetary rewards can be points, products for the customer or products for a charity organisation.

Developing a pointing system is safe, and it will bring you a small sum of profit back via bonus purchases triggered by discounts and free points, increasing the overall referral ROI. Redeemable points increase the average order value of the customers and in the meantime, encourage customers to stay with your brand.

Additionally, a pointing system opens up new opportunities for both parties. You can offer points to your customers for their purchases, for their reviews on products, for social media sharing or for referring their friends. Then, the customers can make their own choices when it comes to choosing a specific reward. They can exchange points for products, discount coupons, or even charity vouchers.

ClubBebe loyalty program

ClubBebe is the loyalty program of Bebe, an American boutique chain. Customers are rewarded 1 point for each $ spent, 15 points for product reviews, 20 points for social media connection and 200 points for each successful referral. ClubBebe is a diverse loyalty program that enables their customers to interact with the brand in more ways.

Club Bebe - example of a loyalty program rewarding customer actions fighting fraud
Source: ClubBebe

Charity loyalty programs offer free products or financial help for charity organizations. This non-monetary incentive works great for customers who are more engaged in the issues of social justice and equality.

TOMS One for One Program

TOMS One for One Program is a great example of a charity loyalty programs. TOMS is an American company designing shoes, eyewear and other apparel. TOMS offers shoes, glasses, water and education in regions in need. To learn more about how to set up a charity loyalty program with Voucherify, read this article.

TOMS charity loyalty program - yet another way to fight against fraud
Source: Ivey Business Review

6. Limit redemptions

A big discount might be attractive for new customers to join the program, but it is also an invitation to fraud. Whenever you offer a voucher for loyalty program members, make sure that you limit voucher redemptions*. 

*Redemption of a voucher: exchanging a voucher for goods. A customer can redeem a voucher once or multiple times depending on the selected limit (quantity). 

Check out how Voucherify’s promotion engine enables you to set up redemption rules.

7. Define upper discount value

Upper discount value is the maximum value of a discount that customers can get while redeeming codes. To protect your ROI and marketing budget, it is advisable to set the maximum discount that your customers can get.

An example of an upper discount value:

Let’s assume you run a campaign with 10% discount coupons and the upper discount value is $100. Every order of $1000 or less gets 10% off the price depending on the value. The upper discount value will be used at orders that are worth more than $1000. These orders will get a maximum of $100 discount (which is eventually less than 10%).

The benefits of API-first approach for promotions and loyalty programs

Download free ebook

Learn more in our short guide to headless promotions.

8. Implement monitoring tools

Make sure you can monitor your customers to filter suspicious activities. Look for the red flags like orders with extremely low or high values, cancelled orders, failed referrals or customers with many unused points.

Redemption moniotoring tools offered by Voucherify
Source: Voucherify

If you want to create a fraud-proof loyalty program that fits your marketing budget and your target market, you will need a promotional system that gives you a great variety of anti-fraud tools. It is worth investing in a system that has strong fraud detection and prevention features, like Voucherify. By following these steps you can make sure that you have done everything to reduce risks of loyalty program fraud.

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