Referral Marketing vs Referral Selling

Refer-a-friend incentives are a common, and powerful, marketing tool. However, there are quite serious legal risks involved, that are often overlooked.

The first hurdle is whether your program will be considered ‘referral marketing’, a perfectly legal and effective form of marketing, or referral selling, something in direct contravention of Australian law that could leave you open to millions of dollars in fines.

Referral selling is akin to Pyramid Schemes. Section 49 of the Australian Consumer Law (ACL) prohibits the sale of goods or services by representing to customers that, if they buy your product, they will receive a discount, commission or other benefit after the purchase has been made and only if they refer someone who actually buys the product or service. An often-cited example of this is ACCC v Giraffe World Australia Pty Ltd (No 2) [1999]. Purchasers of mattresses were told that they would receive a commission from referring only if:

* The parties they referred also made purchases; and

* The referred parties joined a ‘club’ that the purchaser had also already joined.

Joining the club was sold as a ‘benefit’ of the mattress, however their commission was dependent on their purchase, and the purchase of another, and was therefore illegal under the ACL.

Therefore, to avoid ‘referral selling’, the incentive cannot be reliant on purchasers buying a product based on promises of commissions or other benefits.

Compliance with Legislation

Once you are confident that your program is not ‘referral selling’, you must then be aware how the product is being referred. Specifically, that the person being referred has given their consent to receive marketing information from you. A few different pieces of legislation apply to this area, and you must ensure that your program is compliant with all of them. Besides the already discussed ACL, the following Acts must be adhered to:

* The Spam Act 2003 (Cth)

* The Privacy Act 1988 (Cth)

* The Do Not Call Register Act 2006 (Cth)

Spam Act

The Spam Act requires that any commercial marketing must:

1. Be sent, or caused to be sent, with the consent of the recipient;

2. Identify the sender; and

3. Include a functional unsubscribe button.

This presents difficulty for refer-a-friend campaigns as simply being friends or family with someone, does not adduce their consent. Asking customers to refer people they think would enjoy or utilise the service, is not enough to garner consent from the referred party. In 2012, McDonald’s Australia received a warning from the ‘Australian Communications and Media Authority’ (ACMA) over a website-marketing campaign. The website asked users to send requests to their friends who would want to play the game. The messages also lacked any form of unsubscribe button. The ACMA decided this was wholly in contravention of the Spam Act and that McDonald’s had caused those messages to be sent without consent.

Whilst warnings are common, repeat offences can receive penalties of up to nearly $2 million.

Privacy Act

These referral programs also tend to gather information about the referred person, raising concerns under the Privacy Act. Australian Privacy Principal 7 of this Act requires a business collecting information about an individual, from a third party, to only use that information where:

* They have express consent from the individual, or where consent is impracticable to obtain;

* There is a functioning opt-out or unsubscribe facility;

* Each form of marketing communication includes clear and easily-detectable information regarding the individual’s ability to opt-out or unsubscribe; and

* The individual has not already expressed their wish to opt-out or unsubscribe.

Breaches of this Act carry severe civil penalties. Furthermore, a company known to breach the Privacy Act can suffer severe reputational damage, as consumers generally only engage with companies they trust.

Do Not Call Register

Simply, to avoid breaching this Act, you must ensure any numbers you call are not in the ‘Do Not Call Registry’.

How you should proceed

The above difficulties do not mean you should not utilise referral marketing. There are a few different methods to ensure you are meeting the Legislative expectations. The ACMA have suggested the use of a ‘tick box’ on a referral form, ensuring that that the referring party has the consent of the person they intend to refer. Something explicit like “I have asked the named referral and confirm they consent to receiving marketing information”, would show your awareness and implementation of the legislative requirements.

However, even this method is not ‘air-tight’. Taking this confirmation at its face-value, when the friend or referring party may not have actually gained the consent, may leave your business open to liability.

Another option that offers further protection to the business, would be utilising a ‘code’. This is seen quite frequently with businesses like Uber and Menulog. Here, the referring party has used the service before and they are given a code specific to them. They can then send this code on to people they think would use it. The referred person must enter the code themselves. When they do so, the referred person receives a discount or other benefit, and the referring party receives a future benefit. This guarantees the referred party’s consent.

It is also advisable to only accept references from pre-existing customers or colleagues, to ensure avoidance of referral selling.

As long as your direct marketing includes clear and functioning unsubscribe facilities, accurate information regarding the person who referred them (so that they know how and where you got your information) and has only been sent with the consent of the party, your program should be legal and effective.

If you require assistance or advice in drafting terms and conditions for your business, contact Rich Stanley of Stanley & Co Lawyers today on (08) 7001 6135.

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