Influencer marketing fraud will cost brands $1.3 billion in 2019

• At least 15% of advertisers' spending on influencer marketing is lost to fraud, costing them $1.3 billion annually.
• Mega influencers with a million or more followers can earn $250,000 per social media post, but nearly $38,000 of that money is wasted by brands on fake or inflated follower counts. 
• Experts say red flags for fraud include recently created accounts with many followers but little engagement: "If you see 1 million followers on Instagram but posts have 80 or 100 likes, that is immediately suspicious."

Influencer marketing through social media followings is attractive but increasingly perilous advertising terrain for corporate brands. Influencer fraud, including purchasing fake followers and creating fake personas, is expected to cost businesses $1.3 billion this year, according to new research from cybersecurity firm Cheq.

And those are just the calculable costs of fake influencer marketing. "The indirect costs are much harder to measure," said economist Roberto Cavazos, a professor at the University of Baltimore who conducted the analysis for Cheq.

Companies spend an estimated $8.5 billion annually to persuade influencers -- people with large social media followings whose tastes in consumer goods and services are held in high esteem by their fans -- to market their products, according to influencer marketing firm Mediakix. On a good day, roughly 15% of the corporate dollars spent are lost to fraud, Cavazos estimates, because influencers don't always have as many real followers as they claim.

"It's a huge waste," Cavazos said, noting his estimate is conservative.

Influencer marketing has become a key part of many consumer brands' promotional strategies as it is considered more appealing to digital audiences than traditional advertising. According to Edelman's 2019 Trust Barometer, 63% of consumers trust influencers more than brands' own advertising. 

"Influencers are much, much more powerful -- six times more powerful -- than celebrities,"  Richard Edelman, the president and CEO of the public relations firm, recently told CBSN.  "People are saying, 'I want to hear it from someone who I identify with, not somebody who is just famous.' "

Brands typically pay influencers based on their reach, as measured by their number of followers. The snag, however, is that influencers sometimes buy fake followers, or continue to count followers who no longer engage on a given platform, meaning brands pay for eyeballs that essentially don't exist. 

"The influencer marketing industry has grown and become a more complex ecosystem, and the more intrinsically complex an ecosystem becomes, the more opportunities for fraud arise," said Cheq's chief strategy officer, Daniel Avital. 

"It used to be that advertisers picked up the phone and called Kylie Jenner," he said. "Today, people are approaching influencers and buying followers through tech platforms. This is immediately an invitation to anyone in the ad-fraud business to create fake accounts and start meddling."

Mega-influencers, whose follower counts are in the millions, can earn up to $250,000 per social media post, about $37,500 of which is lost to fraud, according to Cavazos. 

"Many influencers have no access to 90% of their audience simply because it no longer uses the social network where they were followed. This doesn't stop them from touting millions of followers, who will, of course, never see your content," the Cheq report noted.

Rampant fraud can erode companies' trust in influencers -- and influencer marketing as practice, Cavazos said.

"Everybody does social media and you see the influencers and a person is saying this is a great product and you form an affinity. As this becomes more popular, and as fraud increases, you start to get a loss of trust," he said. 

Companies then have to devote more time and resources to vetting influencers before engaging them. 

"Once they understand that this is a problem, in terms of fake numbers of influencers, the monitoring costs are higher because you have to spend more time checking people out," Cavazos said.  

Companies also become more reticent to shell out for this kind of advertising. "Because of this perception, they won't pay as much for influencer marketing anymore because of the assumption of fraud," he said.

Red flags for fraud include recently created accounts with many followers but little engagement, Cheq's Avital said. "The easiest thing to do is look at discrepancies between how many followers the influencer has and how much engagement they get on the page, because followers are easy to generate, but creating engagement is harder," he said. "If you see 1 million followers on Instagram but posts have 80 or 100 likes, that is immediately suspicious."

Social media platforms need to automate their vetting processes, Avital added.

"For the Facebooks and Twitters of the world, they need to create technology that can automatically, autonomously find fake accounts and disable them," he said. "This process is primarily manual, and it's a game of whack-a-mole, where the moles are popping up at a much faster rate than anyone is able to whack them."