How 5% of online revenues are tossed away

Posted by Rurik Bradbury on April 22, 2015

According to Marketing Land, most retailers saw double-digit sales growth in 2014. In addition, 52 percent reported higher repeat customer rates and 46 percent raised their average order value (AOV), which now averages $171.

But revenues could have been much higher still. Around 2% of legitimate customers are rejected, because of overly-aggressive fraud blocking. This is because credit card companies place all responsibility for accepting fraudulent online orders on merchants, and their loss prevention teams cannot easily tell fraudsters from real customers.

2% is worse than it sounds. There are extra "hidden" losses. Online customer acquisition cost is now at an average of $51 per customer. You block a real customer? That $51 is gone as well. And when you factor in the lost customer lifetime value (CLV) the damage looks more like 5% of all revenues lost. Blocked customers are unlikely to return and (try to) spend more.

Even with a conservative CLV factor of 2.5x the first purchase, it's clear how expensive this “defensive anti-fraud” is for an e-commerce company. Imagine, you block a first online purchase of $171. Disgruntled, that potential customer never returns, costing you a total of $427.50 of lifetime sales (based on 2.5 x $171).

Real-cost-of-fraud---dollar-losses---April-22

 

Add together the dollar value of sales blocked directly, the wasted CAC dollars and the lost CLV, and the net toll of all wasted revenues is over 5%:

Real-cost-of-fraud---percent-losses---April-22

 

This is just the pure financial effect. There’s also the reputational damage of declining good customers. According to Dimensional Research, 86 percent of buying decisions were influenced by negative online reviews, and those 2% of declined buyers will not be complimenting you.

This is horrifying! What can we do?

We created a new software platform that detects fraud online without blocking real customers. It looks at thousands of data points in real time and tells you if a buyer is genuine or not, immediately.

Take a look at this case study where a company boosted online sales by 11%. 

 

 

Topics: fraud, advice