BlogApril 9, 2024

The Dark Side of Product Drops: How Buzz Turns Into a Fraud Target

Product drops have become a cornerstone strategy for brands looking to generate excitement and exclusivity around their products. By releasing limited quantities of new or special-edition items, companies can create a fervent buzz, driving consumers to act quickly to secure their purchase. However, the dark side of high-profile product drops is that they can open up a floodgate of opportunity for organized fraud rings. Fraudsters target product drops to exploit the high demand, often reselling the limited supply at a much higher price. A recent case uncovered how an automated bot attack targeted a sneaker company and turned a $2M profit just from a single shoe drop.

In this article, we’ll further define product drops, the threats they pose to eCommerce, and how to reap the benefits while protecting your business from attacks.

What Are Product Drops?

Product drops are a marketing and sales strategy where companies release a limited quantity of a product for a short period, often with little to no warning. This tactic is commonly used in the fashion industry, especially with sneakers, streetwear, and luxury goods, but has also been adopted by beauty, tech, and lifestyle brands. The allure of product drops lies in their exclusivity and the hype generated around them, encouraging immediate purchase decisions due to the limited availability and the perceived value of owning something rare or unique.

Product drops create a sense of urgency and exclusivity, often leading to a frenzy of consumer interest. To maximize reach and engagement, they are typically promoted through social media, brand websites, and influencer partnerships. The limited nature of these releases can lead to products selling out within minutes, driving up demand and often resulting in items being resold on secondary markets at much higher prices.

This strategy benefits brands by boosting brand visibility and engagement, creating a direct connection with consumers who are eager to participate in the drop culture. It also allows companies to gauge product demand and adjust future production and marketing strategies accordingly.

Product Drops: A Spinoff of an Older Practice

The concept of product drops, which became prominent in retail towards the end of the 20th century, has its roots in a much older practice. This strategy borrows heavily from the principles of ticket sales, where events are accessible for a limited duration and attendance is capped by the venue’s capacity. The ticketing sector was the first to experience phenomena like hype-driven demand and extensive queues, largely due to the supply-demand imbalance. This imbalance also led to scalping and reselling on a significant scale, and the ticket scam problem continues to soar.

Similarly, product drops are usually one-time events offering goods in limited quantities. This method mirrors the ticketing system’s ability to generate scarcity, competition, and a sense of urgency among consumers. If customers aren’t quick to act — ready to wait in line or navigate the buying process — they’re likely to miss out on the purchase. Retailers employing the product drop model are witnessing similar outcomes but with added technology challenges posed by bots and resellers.

How Product Drops Are Exploited by Fraudsters

The hype and limited availability inherent to product drops make them particularly attractive targets for fraud. Here are a few ways that fraudsters will exploit product drops.

Use Bots to Automate Purchases and Resell at an Unfair Markup

Fraudsters use sophisticated software bots to bypass retailer safeguards and purchase large quantities of limited edition items the moment they drop. These bots can simulate multiple users, allowing fraudsters to acquire products en masse before genuine customers have a chance. The items are then often resold at inflated prices to genuine fans who missed out on the original sale due to the artificially created scarcity. 

Create Phishing Websites With Fake Listings

Scammers may create fake listings or entire websites mimicking legitimate retail platforms. These fraudulent listings often advertise highly sought-after products from recent drops to lure unsuspecting buyers. Consumers who attempt to purchase through these sites may have their payment information stolen and receive nothing in return. The Federal Trade Commission reported that online shopping scams were the most reported type of fraud by consumers last year, with 44% of social media scams tied to fake storefronts or reseller fraud.

Sell Counterfeit Goods

Following successful product drops, there is often an influx of counterfeit versions of the limited edition items. Fraudsters take advantage of the high demand and limited supply by producing and selling knock-offs. Sometimes, they even prey on those who missed out on the original drop by offering the counterfeits at slightly lower prices, misleading consumers into thinking they’re getting a genuine product for a bargain.

Disguise Fraudulent Purchases Through Account Takeovers

Fraudsters may also engage in account takeover (ATO) attacks, where they gain unauthorized access to legitimate customer accounts on eCommerce sites. During product drops, these compromised accounts can be used to make purchases, leveraging stored payment information and shipping addresses. Victims may not realize their accounts have been compromised until unauthorized transactions appear on their credit card statement or they miss out on a product drop because someone else used their account.

How the Fraudulent Exploitation of Product Drops Impacts the eCommerce Ecosystem

Challenges for Retailers

1. An increase in added costs and lost revenue

Fraud can lead to direct financial losses for retailers, from chargebacks related to fraudulent transactions to the costs associated with implementing additional security measures. Research shows that more eCommerce businesses are investing in fraud prevention measures to mitigate the growing impact of fraud, with forecasts predicting a 75% increase in investment in these types of technologies over the next three years.

2. Breaking the hearts of returning customers

Fraud incidents, especially if they become public, can tarnish a brand’s reputation, leading to a loss of consumer trust and loyalty. This can be particularly damaging for brands that rely on the exclusivity and hype of product drops. Nearly one in five customers will lose trust in a merchant if their shop becomes the victim of a data breach. And according to PwC, customers are becoming more selective with 32% reporting that they would stop shopping at a store they loved after just one bad experience.

3. An overstretched team and maxed-out resources

Dealing with fraud requires resources. Your customer service team needs to handle complaints and returns, and the IT department needs to implement anti-fraud measures — which they continue to refine and optimize based on emerging fraud threats. This operational strain can divert resources from other areas of the business. Chargebacks alone take retailers an average of 1.8 hours per dispute to resolve! Add all the types of fraud to that and it starts to hinder business momentum.

Challenges for Consumers

1. Missing out on the hype

The allure of scarcity significantly drives consumer behavior. FOMO (Fear of Missing Out) prompts 60% of shoppers to make impulsive purchases, often within 24 hours of learning about them. This purchasing trend is amplified by social media’s influence, the collector’s ethos, and a deep-seated need to align with brands or products that resonate with their identity. Unfortunately, when bots are involved in scooping up all the inventory in a product drop, genuine consumers often miss the opportunity to purchase limited edition items. If this happens enough, shoppers may feel discouraged and stop following or engaging with your brand.

2. Getting scammed

Consumers are already experiencing a rise in scams and feeling the impact of fraud on their finances. As of last year, 85% of adults in the United States felt scams were a real threat. When it comes to product drops, shoppers may fall victim to scams, such as counterfeit products or fake sales websites designed to steal personal and financial information. Negative experiences can leave shoppers cautious about doing business with you in the future or even prompt them to find a new brand they trust.

3. Dealing with price gouging

When consumers miss a product drop and are confronted with the option of paying inflated prices on the reseller market, their experience is often marred by a complex mix of frustration, resentment, and financial stress. They’re frustrated that they were unable to purchase the product at its original, more affordable price, despite anticipation and efforts to participate in the drop. This feeling is compounded by resentment towards resellers who capitalize on the scarcity by marking up prices significantly, as well as towards brands that fail to prevent such exploitative practices. For those who decide to pursue the product despite the higher cost, financial stress becomes a palpable concern, particularly if the item in question represents a significant investment beyond their budget for non-essential goods. This amalgamation of emotions not only taints the immediate purchasing experience but can also have long-lasting impacts on consumer perceptions of and loyalty to a brand.

How to Prevent Fraud When Launching Product Drops

To prevent fraud during product drops, merchants can adopt several strategies to ensure that limited edition products reach true customers. Here are some effective measures:

  • Use advanced bot detection and management. Advanced bot detection software can identify and block automated scripts from purchasing products. This technology often uses machine learning algorithms to analyze behavioral patterns to distinguish between human and bot traffic. Additionally, integrate CAPTCHA challenges at checkout to verify that the user is human. Modern CAPTCHAs are designed to be less intrusive while still effective at deterring automated bots.
  • Limit purchase amounts per customer. Product drops are exclusive and not designed for bulk purchases. To prevent bulk buying, require that purchases be made through the customer’s account so that purchase history is tracked. When accounts are created or used to make purchases, be sure to require two-factor (2FA) or multi-factor authentication (MFA) to ensure account owners are verifying. This can also help limit the number of accounts each person can create.
  • Implement a virtual queue system. By assigning buyers a place in line, virtual queues can help manage traffic and ensure a fair purchasing process. This system can also reduce the website’s load and deter bots that may not be able to navigate the queue effectively.
  • Encrypt or randomize URLs on the product drop page. These URLs are challenging for bots to predict or find, ensuring that only genuine consumers who have received the URL directly from the brand can access the drop. 
  • Don’t list product drops on third-party marketplaces. Stick to keeping product drops listed on your owned channels (social or website). This helps you have more control over the customer experience and enables you to better monitor purchase history.
  • Work with a fraud prevention partner that helps you make customizations to prevent reseller fraud. Fraud prevention should never take a one-size-fits-all approach, and being able to configure additional safeguards that address patterns of unusual behavior unique to your business — for example adding suspicious email domains to a block list — provides additional protection.

Fraud Prevention Best Practices That Keep Product Drops a Safe Shopping Experience

Product drops are a fun, unique experience for customers and an effective way for brands to generate buzz and sales. However, while delivering this experience to your customers, it’s important to also maintain standard fraud prevention best practices. To keep customers confident in your brand, educate them on the measures you are actively taking to combat fraud and encourage them to purchase only from official channels. This transparency can build trust and discourage customers from turning to the resale market. 

Continuously monitor and analyze purchase data for signs of bot activity or fraud. Over time, this data can help improve your fraud detection algorithms and strategies. Leverage your fraud detection solution to flag high-risk orders for manual review. Enabling triggers for orders that exhibit specific characteristics (or are outliers to standard criteria) helps your team analyze and identify emerging fraud threats. This data can also improve your technologies’ learning capabilities so that you’re staying ahead of broad-scale attacks.

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Ready to learn more?

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