How Digital Multi-Level Marketing Is Fuelling Ad Fraud

Lloyd Mathias Jul 15, 2022

Most of us have heard of a pyramid scheme. People, including government entities, were deceived into believing this was a legitimate marketing strategy because of the scheme's significance. Multi-Level Marketing, or MLM, is structured such that it is mostly going to benefit the promoters at the top. At the same time, their distributors (network) at the following chain are only focused on expanding the network. Instances of the pyramid scheme can be traced back to the mid-1800s, followed by the ponzi scheme in the 1920s.

And yet, this issue exists in modern-day society. It took decades for us to recognise this problem, and still, there are debates surrounding the credibility of this marketing practice. And evidently, we are now witnessing an online form of MLM, which is, to some extent, more harmful to marketers and publishers, and people aren't even aware of this.

Traditional MLM

Multi-Level Marketing, also known as network marketing or pyramid selling, is a monetary model and strategy companies use to encourage existing users to recruit new customers. Existing users are encouraged to promote and sell the company's offerings to other individuals and bring new customers into the business. The motivation to do is that they are paid a percentage of their new customer’s sales. The system functions sensibly when a product is involved, and items are sold to consumers.

However, in a pyramid scheme, the distributor is more concerned with getting new customers with the only goal of scamming them. In traditional MLM, distributors charge outrageous prices for a substandard product. The customer eventually becomes a distributor, with the sole purpose of onboarding new networks and recovering their money.

MLM is occurring in the digital ecosystem on a larger scale

Fraudsters are extremely skilled at tricking marketing efforts and can effectively skew the results, even for cost per click (CPC), or Cost per Impression (CPI) campaigns planned for mobile applications. The marketing representatives of mobile-based applications are responsible for getting the increased number of downloads or installs. However, getting the intended downloads or installs does not necessarily indicate a successful outcome.

What if your 1 million downloads were not real but a bot attack? Or worse, what if those downloads by an actual human do not translate into regular users? It would be disheartening for a marketing manager if their successful initiatives could be deemed failures, courtesy of online fraudsters. The fraudsters understand the campaign models and could easily trick marketers by crediting them with fake installs. They rely on a number of fraudulent techniques, among which the digital MLM channel is one of the key ones.

How is Digital MLM defrauding Marketers and Advertisers?

At the top of the chain is a publisher tasked with getting the installs for a mobile app. Naturally, they are compensated for each installation. The right method, the difficult one, is to advertise the product to the right audience by studying demographics, determining the suitable target, and so on. Getting a large number of downloads would require additional efforts in reaching out to the larger market sections, promoting the app, and familiarising the users with the product. In return, the users who find the application beneficial will use it frequently. This, in theory, is how a product should be marketed.

However, with most digital media buying going programmatic, advertisers don’t really know the authenticity of all publishers. Dodgy publishers tend to engage in fraudulent activities unbeknownst to buyers or even media agencies. They can contact agents, fake ones who are paid a commission for installing an app. And they are not necessarily the targeted audience for the app. Just hired agents with the goal of installing the app. The result is an additional download to show to the app owner. And when we talk about marketing to a broader audience, let's say 1 million downloads, we are talking about a chain of fake agents that grows exponentially.

Organisations and their promotional strategies are believed to have initiated MLM scams. Many mobile applications, to acquire more users, offer cashback on the first "n" number of purchases or refer and earn for sharing the app with new users. These cost incurred for acquiring every new customer often backfires, as it benefits the user rather than the promoter. The fraudsters have further exploited these promotional antics to ensure that they continue to cost the business more and more while earning their share with each new install.

It has been noted that these fraudsters and agents connect with one another through online modes of communication. For example, these agents and fraudsters are part of online chat rooms, forums, and groups. They communicate and interact through these channels, recruiting new individuals (just like in a pyramid scheme) to get a download. Further, these individuals will then recruit more individuals, instructing them to complete the installation process, and the network keeps on expanding. This forms a loop wherein the downloads keep on coming, with everyone on this scheme looking to get their commission. Eventually, it is the marketers' ad spending that is being wasted to pay for these bad installs.

How is it done?

Suppose you are a marketer and your organisation recently launched a new mobile app featuring all of its flagship services. Now let's look at how the digital MLM works while promoting the new app.

Imagine paying INR 2 crore to an ad network and asking for 10 lakh downloads.
The publisher will happily agree to this deal and would then transit to chatrooms and online groups.
Fraudsters (in this case, the publishers) are part of several online chatrooms and chat groups, etc., where they are running their version of campaigns and engaging in digital MLM.
They operate schemes like refer and earn INR 100 or get cashback worth INR 50 for the first 5 transactions.
The members of the groups are people looking to make quick money and are thus interested in installing apps following the instructions of the publishers.
These group members are also part of several other groups, chatrooms, and forums, and they also look forward to making additional commissions by sharing the same schemes in those groups.
In the above chart, the users in white are simply installing the application to earn their cashback.
Over the course of time, these schemes are shared further in other chatrooms, and the MLM fraud will grow exponentially, draining the ad spending of the advertisers.
The users in blue, apart from installing, are also forwarding the scheme to other groups, earning their commission, thus becoming a part of a larger community who are engaged in fuelling the fraud to a larger extent.
Within a week, your app will boast of good download numbers. But in reality, their in-app engagement will be less than what was initially expected.

How does it affect a marketing campaign?

The real challenge a marketer or even business faces is detecting what section of their mobile users is legitimate. Malicious activities as such can drastically affect the marketing strategies of the brands

While publishers and ad networks keep fulfilling their promise of more and more downloads for advertisers, they engage in attribution fraud by stealing credit for app installs while reporting fake downloads.
Brands invest a good portion of their budget in promoting their product, and they can also get the intended numbers with aggressive campaigns. But when your users are inactive and downloads are counterfeit, all your ad spends have been for naught.
Above all, the main irreparable damage to a brand and marketers in this competitive environment, when surrounded by skewed figures and reports, is the loss of time.

Businesses have sought various strategies to combat digital ad fraud since its prominence became public knowledge. According to projections, advertising fraud is expected to cost $68 billion in losses. Furthermore, whenever businesses find a way to overcome these malicious practices, the individuals behind the screen always come up with a new way to frighten them.

*The author is Lloyd Mathias, Business Strategist and Angel Investor. He was earlier a senior marketer with PepsiCo, Motorola and HP