Most of us have heard of a pyramid scheme. People, including government entities, have been tricked into thinking that this is a legit marketing strategy due to the prominence of the ploy. Multi-level marketing, or MLM, is structured such that it primarily benefits promoters at the top. At the same time, their distributors (network) of the next chain only focus on expanding the network. Examples of the pyramid scheme date back to the mid-1800s, followed by the Ponzi scheme in the 1920s.

And yet, this problem exists in modern society. It took us decades to recognize this problem, and there are still debates surrounding the credibility of this marketing practice. And obviously, we are now seeing an online form of MLM, which is, to some degree, more harmful to marketers and publishers, and people aren’t even aware of it.

Traditional MLM

Multilevel 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 others and attract new customers to the Company. The motivation to do is that they receive a percentage of their new customer’s sales. The system works reasonably when a product is involved and items are sold to consumers.

However, in a pyramid scheme, the distributor is more concerned with attracting new customers for the sole purpose of scamming them. In traditional MLM, distributors charge exorbitant prices for an inferior product. The customer eventually becomes a distributor, with the sole purpose of integrating new networks and recovering his money.

MLM happens in the larger digital ecosystem

Fraudsters are extremely adept at deceiving marketing efforts and can effectively skew results, even for cost-per-click (CPC) or cost-per-impression (CPI) campaigns intended for mobile apps. Mobile app marketers are responsible for increasing the number of downloads or installs. However, achieving the expected downloads or installations does not necessarily indicate a successful outcome.

What if your 1 million downloads weren’t real but a bot attack? Or worse, what if those actual human uploads don’t translate to regular users? It would be disheartening for a marketing manager if their successful initiatives could be seen as failures, thanks to online scammers. Fraudsters understand campaign patterns and could easily trick marketers into crediting them with fake installs. They rely on a number of fraudulent techniques, among which the digital MLM channel is one of the main ones.

How Does Digital MLM Scam Marketers and Advertisers?

At the top of the chain is a publisher responsible for getting installs of a mobile app. Naturally, they are compensated for each installation. The right method, the most difficult, is to advertise the product to the right audience by studying the demographics, determining the appropriate target, etc. Obtaining a large number of downloads would require extra efforts to reach the larger sections of the market, promote the application and familiarize users with the product. In turn, users who find the app beneficial will use it frequently. This is how, in theory, a product should be marketed.

However, since most digital media buying is programmatic, advertisers don’t really know the authenticity of all publishers. Dubious publishers tend to engage in fraudulent activities without the knowledge of buyers or even news agencies. They can contact agents, fakes who receive a commission for installing an application. And they are not necessarily the app’s target audience. I just hired agents for the purpose of installing the app. The result is an additional download to show the app owner. And when we’re talking about marketing to a larger audience, say 1 million downloads, we’re talking about a chain of fake agents growing exponentially.

The organizations and their promotional strategies are believed to have launched MLM scams. Many mobile apps, 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 costs incurred to acquire each new customer often backfire, as they benefit the user rather than the promoter. Fraudsters have further exploited these promotional antics to ensure that they continue to cost the company more and more while earning their share with each new installation.

It has been noted that these scammers and agents connect with each other through online modes of communication. For example, these agents and scammers are part of chat rooms, forums and online groups. They communicate and interact through these channels, recruiting new individuals (as in a pyramid scheme) to obtain a download. Moreover, these people will then recruit more people, asking them to complete the installation process, and the network continues to expand. This forms a loop in which downloads keep coming in, with everyone on this scheme looking to get their commission. Ultimately, it is the marketers’ ad spend that is wasted to pay for these bad installs.

How is it made?

Let’s say you are a marketer and your organization has recently launched a new mobile app featuring all of its flagship services. Now let’s see 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 accept this agreement and then transition to chat rooms and online groups.
• Fraudsters (in this case publishers) are part of several online chat rooms and discussion groups etc. where they run their version of campaigns and engage in digital MLM.
• They operate programs 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 a quick buck and are therefore interested in installing apps by following the instructions of the publishers.
• These group members are also part of several other groups, chat rooms and forums, and they also look forward to making additional commissions by sharing the same patterns in these groups.
• In the table above, users in white simply install the app to earn their cashback.
• Over time, these schemes are shared more in other chat rooms, and MLM fraud will grow exponentially, draining ad spend from advertisers.
• Users in blue, in addition to installation, also pass the system on to other groups, earning their commission, thereby becoming part of a larger community that works to fuel fraud to a greater extent.
• Within a week, your app will show good download numbers. But in reality, their engagement in the app will be less than originally expected.

How does this affect a marketing campaign?

The real challenge that a marketer or even a business faces is to detect which part of their mobile users are legitimate. Malicious activities as such can significantly affect brand marketing strategies

• As publishers and ad networks continue to deliver on their promise of more and more downloads for advertisers, they engage in attribution fraud by stealing credit for app installs while flagging fake downloads.
• Brands invest a good part of their budget in promoting their product, and they can also achieve the expected numbers with aggressive campaigns. But when your users are inactive and the downloads are counterfeit, all your ad spend has been wasted.
• Above all, the primary irreparable harm to a brand and marketers in this competitive environment, surrounded by biased numbers and reports, is wasted time.

Companies have researched various strategies to combat digital ad fraud ever since its importance became public knowledge. Ad fraud is projected to cost $68 billion in losses. Moreover, whenever companies find a way to overcome these malicious practices, the individuals behind the screen always find a new way to scare them away.

*The author is Lloyd Mathias, business strategist and angel investor. He was previously head of marketing at PepsiCo, Motorola and HP