Black Hat PPC: How Does Referral Code Fraud Work?

Referral schemes. We all know what they are, we've all seen them before. "Refer a friend and get $20 off your next order".

Sites that have referral schemes tend to all work in the same way. If you're a customer of that site, you can generate a referral link. You share this with your friends, your family, or whoever else, and if they sign up to the service using your referral link, you get an incentive.

As hard as it is to turn down what is basically free money, very few of us can actually be bothered to go through the hassle of referring friends to the services we use. Sure, you might get some free cash, but most of us don't want our friends to see us as that person.

Given the reluctance most people have towards using referral schemes, who actually uses them?

Digital advertisers, for one

Digital advertising is typically thought of as a way to get people to sign up for, or to purchase, a particular product or service. In reality though, this is too restrictive of a definition.

Digital advertising is all about getting people to do things. Yes, the things that an advertiser wants people to do may include signing up or purchasing a particular product or service, but there are many things that digital advertising can be used for on top of that.

One of these things is getting people to use referral codes, or to sign up to services using your referral link.

This might seems strange; the idea of using digital marketing to advertise your referral link. But if you think of using digital marketing as a way to get people to do things rather than purchase your own products, it makes sense.

Let's say you have a referral code for a product, and you're paid $20 in credit each time somebody uses it. So long as the amount you pay in ads to get one person to use your code is below $20, you'll generate a positive return on investment.

The return on investment for each person that uses your code is the incentive you receive ($20), minus the cost of the ads it took to get that person to use your code.

Is the incentive valuable to you?

The above of course assumes that the credit you receive is for something which you would've purchased anyway.

If you're planning on buying a new bike, and you're able to pay less for that bike by advertising a referral code for the retailer, then you'll save money as long as you're able to bring in code users at a cost cheaper than the amount you're paid for each use of the code.

If your referral code is for a perfume retailer, and you never buy perfume, then it doesn't make sense for you to spend money advertising your referral code.

Sure, you may be able to get a positive return on investment when advertising your code, but if you're not going to buy perfume in the first place then what's the point? You're getting no value from the perfume credit, but you're having to pay for the ads that generate that credit.

So, how do digital advertisers target these referral ads?

Digital advertising is an extremely broad term, encompassing a variety of techniques.

Often it's used to refer to paid social advertising, where a brand markets their product using paid posts on platforms like Facebook, or paid display, where a brand buys banner ads on third party sites to promote their products.

The problem with both of these methods is that it's difficult to target them to people who actually have any intent on using your referral code.

Let's say you're trying to advertise your referral code for a online cycling shop, in order to help finance that dream bike you've been saving for. In order for you to get credit, someone else has to make a purchase using your referral code.

While Facebook will let you serve ads for your referral code to people interested in cycling, these people won't necessarily be interested in purchasing cycling products in the moment that they see your ad.

The same is true for display ads; while display ad platforms might like you show your ads to people as they browse cycling websites, this doesn't mean that these people are ready to purchase a cycling product using your referral link.

In advertising, we describe this by saying that paid social and display are low-intent channels. They let you serve to lots of users on the cheap, but these users won't necessarily be in a purchase mindset, and so likely won't want to use your referral code.

Given that it costs you money to serve ads to users, and you ideally only want to serve ads to high-intent users who might actually use your referral code, it becomes natural to ask: how do you actually find high-intent users?

Imagine buying a product

Think back to the last time you bought something online. You browsed a particular site, and found something that you wanted to purchase. You likely added it to your basket, and then hit the checkout button.

During the checkout process, there's a good chance that you saw a box titled something like Promo code. This of course is the box that you use to enter any promo codes that you have, in exchange for a discount.

Most shoppers when they see this have the same thought; I don't have a promo code but there must be one floating around somewhere.

In order to try and find a promo code, it's typical to search for [brand name] promo code. For example, if you're shopping at Calvin Klein and wanted to find a promo code, chances are that you'd search for calvin klein promo code, or similar.

Why is this relevant?

Think what's happening when you search for calvin klein promo code. You're in the middle of checking out on the Calvin Klein site. You're just about to complete your purchase. You're about as high-intent as you could possibly be.

If you manage to find a promo code then you'll surely use it. If not, no worries, you were going to make that purchase anyway. You were just hoping you might be able to save a few bucks by finding a promo code in the search results.

When you make this search, you are the ideal target for someone who is advertising their own referral code. If they could show you their referral code in this moment, and it's able to get you money off your purchase, it's hard to believe that you wouldn't use this code.

So, how can advertisers target you in this moment?

The best way for someone advertising their own referral code to find you in this moment is buy buying search ads. Specifically, by buying search ads for terms like calvin klein promo code.

By buying ads on this search term, the advertiser can ensure that they appear at the top of the results page for your search, and thus that they're the first thing you see.

The advertiser can customise the appearance of the listing to match the incentive behind the referral code. For example, if Calvin Klein's referral scheme offered the referrer and the referee $10 off each of their next purchases, the advertiser could serve ads which say Get $10 off your next Calvin Klein purchase.

If users click on the ad, the advertiser gets a choice of where to take the user. The advertiser could take the user to a site that they own, and which says little other than here is my code, this is what it gets you, please use it.

Alternatively, if the advertiser has a referral link (something that looked like calvinklein.com/referral/[myname]) then the advertiser could take people who click on their ads to that page.

This latter option is always preferable. This is because Google rewards ads whose domains and landing pages most closely match users queries. Google believes that an ad pointing to a page on calvinklein.com is likely to be very relevant to searches like calvin klein promo code, and so it charges advertisers less to serve ads which point to pages on calvinklein.com.

Someone with a referral link to a page on the brand's site can exploit this. If you have a referral link to calvinklein.com/referral/mackgrenfell, then by serving ads pointing to that page you can effectively fool Google into thinking that you are Calvin Klein. Google rewards you with cheaper ads, just because you've served ads pointing to a landing page which appears more relevant to user searches.

In this way, you could buy ads at around $0.10 per click, rather than the $0.50 per click you might have to pay if you took users to a site that didn't appear relevant to Calvin Klein searches.

Does this actually work?

In short, yes. It's a fairly large issue for companies that offer referral schemes, and is why you'll often (but not always) find the marketing of referral codes prohibited by the referral scheme's terms and conditions.

It's important to note that the return on investment that the referrer gets is likely to differ drastically depending on the site. In particular, it depends on the incentive for the referral scheme (how much you get paid for each person that uses your code or link), and how expensive it is to buy ads on search terms that reference that site's brand.

How do referrers avoid detection?

One of the troubles with running a scheme like this is that anyone can see the ads which you buy, including people from the brand whose referral scheme you're promoting.

Brands that operate referral schemes like this tend to look down on the strategies that I've outlined above. As such, referral fraudsters will take steps to make sure that employees from these brands can't see their ads.

One strategy to avoid detection is to only buy ads at certain times of the day. If an employee from Calvin Klein happens to search something like calvin klein promo code, then chance are it'll be during working hours. I can't see why an employee would search something like this while they're out of the office.

You can capitalise on this by only buying ads outside of working hours. For example, if you're buying ads on anyone who searches calvin klein promo code in the US, you could make sure that you're only buying ads in the late evening or early morning.

Sure, volumes are likely to be lower if you restrict yourself to these times, but that's a price worth paying for the referrer if it means that they're likely to be caught.

Another strategy is to use negative geo-targeting to avoid employees from the brand in question seeing your ads.

If you're advertising a referral code for a particular brand, and you know that that brand is headquartered in San Francisco with a secondary office in New York, you can set up your ads so that they don't show to anyone in either of these cities.

Again, this will stop your ads from showing to potential referees in these cities, but this is a price that's likely worth paying if it cuts the risk of being found out.

This doesn't sound legal. Is this legal?

The answer to this depends largely on the terms & conditions which govern the referral scheme that you're promoting. If you were to consider doing this, I'd highly advise reading through each line of these terms.

Many referral schemes don't prohibit anything which I've described above. Some will word their terms and conditions in a way which makes implicit that you should only share your code with friends, and thus buying ads to show your code to strangers would appear to violated these terms. This is a grey area, and it's up to you whether you think that promoting your code via digital ads is a violation of such terms.

It's worth noting that sometimes the terms and conditions of a referral scheme do explicitly prevent advertising your code or link. I would highly advise leaving these schemes alone. At best, the brand is likely to wipe out any credit you've accumulated by advertising your code, leaving you out of pocket for your ad spend. At worst, the brand may pursue legal action against you.

Okay, so this might be legal, but is it ethical?

The answer to this isn't clear-cut, but it's probably a no. Personally I believe that whether it's ethical to use the tactics above depends partially on whether advertising your code brings in any incremental revenue for the brand in question. That is, have people who've seen your code been more likely to go on and purchase from the site whose referral scheme you're promoting?

In most cases, I think users who see a discount code are more likely to go on and purchase from the site where they can redeem that discount code. In this sense, I think that if I run ads promoting my Calvin Klein discount code, I'm likely to generate more sales for Calvin Klein.

The most important question though is whether the incremental sales is worth more than the drop in revenue the site would experience from more users using discount codes.

You can't work out the answer to this question just by thinking about it; you need to see the data in order to decide. I'm not aware of any sites running studies like this, and so I don't know whether promoting referral codes actually helps or harms these sites. For this reason, I think the ethics of promoting referral codes is very unclear.

Thanks for reading

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