Understanding and preventing promo code abuse - Ekata, a Mastercard company

The dark side of discounts: understanding and preventing promo code abuse

Promo codes can be a powerful tool for businesses, but they can unfortunately come with their own set of risks. Promo code abuse is a common issue and concern for e-commerce businesses. It results in financial losses and reduced profitability, strains customer relationships, devalues promotional campaigns and increases operational complexity. However, there are strategies to detect and prevent promo code abuse effectively.

What is promo code abuse? Simply put, promo code abuse or promo fraud refers to the unauthorized or unethical use of promotional codes. The abuse involves customers exploiting the promo codes. There are many ways abusers manipulate the setup promo code system to gain deeper discounts or unearned money-off offers, including:

  • Sharing the codes publicly on social media, coupon websites or forums. This sharing allows anyone to use a code instead of just the specific customer being given the code for particular circumstances.
  • Stacking or using multiple codes in a single transaction. The stacking of discounts and benefits goes against the intention of the business’s promotion, thus giving more discounts than intended.
  • Exploiting loopholes in the coupon or promo code system. Customers may exploit vulnerabilities in the code redemption process to gain additional benefits. These vulnerabilities may include using an expired code, manipulating code usage limits or circumventing eligibility criteria.
  • Manipulating promos by reselling or trading codes, turning them into a commodity for personal gain.
  • Using automated tools or techniques to generate or duplicate promo codes and bypass restrictions. They then obtain discounts or benefits without meeting the intended requirements.

Abuse of promo codes is a rampant problem for any marketing team attempting to gain a specific customer base or reward loyalty. This blog will explain the impact of promo code abuse, how to detect such abuse and strategies to prevent abuse and fraud.

The impact of promo code abuse

The business’s financial loss is the most apparent impact of promo code abuse. When customers exploit promo codes in unauthorized ways, it reduces the revenue generated from sales and erodes profit margins. Of course, this reduces profitability for the business engaging in a promotion. Excessive promo code usage or abuse erodes the profitability of the promotion. If companies heavily rely on promotional campaigns to attract customers and drive sales, the abuse of promotions disrupts pricing strategies and undermines the effectiveness of these usually powerful campaigns.

Monetary and profitability loss is not the only impact. A more nuanced issue is that promo code fraud also strains customer relationships. Customers who play by the rules and notice the exploitation of promo codes may feel unfairly treated. This dissatisfaction can lead to loss of trust and potential resentment among loyal customers.

The devaluation of promotional campaigns is another issue with coupon fraud. Promo code abuse devalues the purpose of promotional campaigns. Abuse of codes dilutes the incentivization of a particular customer to behave expectedly. It makes it challenging for businesses to create promotional campaigns for a specific purpose directed at certain customers. Promo codes are regularly part of broader marketing strategies to attract new customers, reward loyalty and increase brand awareness. When abuse occurs, it disrupts these strategies, making it challenging for businesses to accurately measure the effectiveness of their marketing efforts.

Finally, promo code fraud increases operational complexity. When marketing proposes a promotional campaign, the team usually needs sign-off from other departments and shows the benefit of past campaigns and the intended use of the current campaign. When fraud takes over the campaign, the data gets convoluted. It also requires resources and time to detect, investigate and address incidents of abuse. This time-consuming practice diverts attention and resources from core business activities, ultimately increasing overhead costs.

To give a recent example, Paypal had to shut down 4.5 million accounts last year upon discovering “bad actors” had hacked their incentive and rewards program. As reported by Bloomberg, the fallout was significant, with revenue loss that not only negatively impacted business but also saw shares plummet.

How to detect promo code abuse

 Customers adopt various strategies to abuse promo codes, which harms your business. Yet, a lot of the time, online companies do not even recognize that fraud is occurring. We’ll provide a few key ways to detect promo code abuse.

Code tracking

The first step is implementing a code tracking system that includes the times a code is used, by whom and what transactions. This data helps identify unusual or excessive code use and suggests abuse. We also recommend monitoring the velocity of promo code redemption.

Customer behavior

Unusually high redemption rates by specific customers often indicate abuse. The code tracking system goes hand-in-hand with customer behavior analysis. By analyzing customer behavior associated with promo code usage, it’s essential to look for patterns. Patterns of abuse are often a customer consistently using multiple codes, making large purchases with heavy discounts or exploiting loopholes in the code redemption process.

Location analysis

Just like analyzing customer behavior, it’s essential to do a geographic and IP address analysis. Unusual patterns can indicate fraud, such as multiple redemptions from the same IP address or a concentration of redemptions from a specific location. It’s also important to monitor user accounts. If one user has multiple accounts or suspicious account creation patterns, this is a flag for potential abuse.

Machine learning

Another important detection tool is employing machine learning or statistical analysis techniques to identify anomalies in code usage data. Irregularities such as sudden spikes in redemptions or deviations from standard code usage patterns may point to abuse.

Third-party monitoring

Look beyond your site and monitor social media or coupon websites to see if your promotion is shared in a way other than what is intended in the campaign. Monitor for instances of unauthorized sharing or distribution of codes that could lead to abuse.

Manual review

Although time-consuming and tedious, nothing replaces manual review and investigation. For high-value or high-risk promotions, it’s essential to investigate transactions or customer accounts that raise suspicion. While doing these manual reviews, pay attention to customer complaints or reports related to promo codes. You may discover abuse or misuse by actively addressing customer concerns about the promotion. Fortunately, there are ways to make this process more efficient, such as using our Pro Insight tool.

Strategies to prevent promo code abuse

 Rather than just fighting promo code abuse as it rolls in, there are a number of things that your company can do to prevent it from happening in the first place.

Terms and conditions

The first step to avoiding abuse is to make your terms and conditions for promo code usage clear; making sure to state restrictions, limitations and expiration dates. Share the terms and conditions through multiple channels, including the website, promotional materials and emails. Providing clear rules and regulations for the promotion makes it easier to enforce boundaries when abusers attempt to test them. Education is a crucial aspect of this communication. Educating customers on the consequences of promo code abuse emphasizes the importance of fair usage and adherence to precise terms and conditions.

Unique codes

Another key to avoiding or dissuading promo abuse is creating personalized or unique codes tied to specific customers or accounts. By stipulating these codes as one-time-use, it’s much harder to share or to engage in unauthorized usage. An additional layer to this strategy is customer segmentation. Ensure the intended use of the promo by segmenting customers based on specific criteria and providing unique codes to each segmented customer. Examples of popular segmentation are loyal customers, a particular demographic, and customers that last purchased a while ago.

Validation processes

Another defense mechanism is to use code validation and verification at checkout or redemption. This validation includes verifying the code’s authenticity, eligibility or usage history before applying for the associated discount or benefit.

Auditing

Delve into your promo code software and utilize the monitoring tools and analytics available. You’ll be able to detect suspicious activities by tracking code usage patterns. Aim to monitor factors such as code redemption velocity and usage frequency. These audits will assist in identifying any potential vulnerabilities of abuse patterns and encourage updated code usage policies.

Handling

Have clear protocols for your customer service team on handling promo code abuse incidents when discovered. Investigate instances of abuse thoroughly and take appropriate action (such as code deactivation or account suspension). Communicate with the affected customer to resolve any issues or misunderstandings.

Streamline onboarding

Because the most common form of promo abuse fraud is the creation of fictitious accounts, the ability to identify new accounts whilst weeding out fraudulent ones is important. Ekata’s Account Opening API gives you access to the right data to quickly distinguish good customers from fraudulent ones. Better still, because only limited inputs are required, you are able to maintain low-friction sign-up flows for consumers who are eligible for a promotion.

Summary

All of these strategies can be a lot of work for your team. Implementing a fraud detection system or other services that leverage machine learning and data analysis is a great option. These programs can identify patterns of abuse and fraudulent activity without someone in your business having to search out patterns and suspicious activity manually. Programs with machine learning and automated data analysis help automatically flag and prevent promo code abuse and save the business a lot of time and tedious work.

Detecting promo code abuse requires implementing a code tracking system, monitoring customer behavior and usage patterns, analyzing geographic and IP address data and utilizing machine learning or statistical analysis techniques. Additionally, monitoring social media and coupon websites can help identify unauthorized sharing or distribution of codes.

Businesses should communicate terms and conditions, educate customers on the consequences of abuse and create personalized or unique codes tied to specific customers or accounts. Employing code validation and verification at checkout or redemption ensures the authenticity and eligibility of codes. Regular code audits and updates are crucial to identifying vulnerabilities and updating code usage policies.

While implementing these strategies may be labor-intensive, utilizing fraud detection systems that leverage machine learning, dynamic risk signals and data analysis can streamline the process and save valuable time.

By understanding and actively addressing promo code abuse, businesses can safeguard their financial interests, maintain customer trust, preserve the effectiveness of their marketing efforts and reduce operational complexities. Taking proactive measures to prevent promo code abuse will contribute to a more secure and sustainable promotional environment in the e-commerce industry.

To read more in-depth analysis of promo abuse and steps to reign it in, access our eBook here.

 

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