Travel Merchant? False Declines Are Inflating Your Customer Acquisition Costs
Any good captain will tell you it’s impossible to acquire customers in a turbulent industry like travel without a good flight plan. For airlines and online travel agencies (OTAs), that’s where loyalty and frequent flyer programs, alliances and partnerships, fare sales and social outreach all come into play.
But Facebook posts, low fares, and pretzel-filled lounges can only do so much to make thin margins work against sky-high acquisition costs. To be a truly efficient travel business, the hard work isn’t just about identifying, attracting and converting the right shoppers into paying customers. It’s also about having a reliable, scalable way to quickly tell the difference between a valid shopper and a bad actor. After all, what good is a forecast of clear skies if the right people can’t come along for the ride?
Making the connection between fraud and marketing ROI
While the digital world has its share of bandits and fraudsters, merchants lose more money each year to fraud management expenses and false declines than they lose to actual fraud. A travel industry report that we published with Skift earlier this year found that eCommerce fraud costs the industry $21 billion per year. Of that total, $15 billion is lost to false declines, inefficiencies and customer friction — resulting in good customers who never come back and in reputational damage.
For example, Statista reports that a major airline invested $218 million in US advertising in 2015. The following year, the airline carried 124 million passengers. Reduced to a simple acquisition cost, that airline spent around $1.75 per passenger on advertising.
Though that may seem like a solid return on investment, according to a recent survey by the Merchant Risk Council, the average business declines 3% of online orders worth over $100 due to suspected fraud. Riskified data shows that 40-70% of orders declined by merchants have been misidentified as fraud, and were actually placed by legitimate customers.
At that rate, the airline unnecessarily declined between 1.56 million and 2.75 million customers in 2017! With an average ticket price of $147, the airline lost $229 million to $404 million in revenue to false declines. And that’s just one piece of the fraud puzzle.
In this post, we’ll be looking at 3 of the biggest trends that are expected to shape the future of travel, with tips on how merchants can ride the coming tailwinds of eCommerce without losing precious altitude to fraud and inefficiency.
Get your wings (and optimize them)
The number of travelers will surge in the coming years. And, as client bases expand, so will the opportunities for scammers to strike. The airline industry, for example, already faces global fraud expenses of $858 million per year. OTAs fare even worse, with one recent analysis by eNett predicting a 24% increase in fraud losses, from $8.8 billion in 2017 to $10.9 billion by 2020.
As the online travel market grows, so will fraud attempts. If airlines and OTAs fail to change their fraud prevention strategies, they’ll be hit not only with massive revenue losses due to false declines, but also with mounting operational costs. Ultimately, the revenue lost by airlines and OTAs to false declines and heavier workloads alone will have cost accountants running for exit rows.
According to a study by LexisNexis Risk Solutions, nearly half of all transactions flagged as potentially fraudulent are ultimately decided by human beings. For a small merchant that can mean six reviews per day, but a larger business may route over 100 order to manual review every day. With the average merchant devoting 25% of fraud-management budgets to manual review, these interruptions add up. And, the more crowded the digital runways get, the higher the internal costs will be, as millions upon millions of new transactions require manual review. Businesses relying on processes that cannot scale with business growth risk getting grounded by heavy operational costs.
As a recent IATA study predicts, a large segment of growth in travel is expected to happen in the Asia-Pacific region. By 2035, upwards of 40% of the world’s flights could take place between or among a handful of countries in Asia. For many travel merchants, this means expanding markets, new highly trafficked flight routes, and new strategic outreach efforts as the middle classes expand in places like China and India. But, for example, if an airline launches a $10 million advertising campaign to encourage new flyers in Asia and Europe, how efficient can their marketing spend be if they—like many merchants—overzealously block or blacklist shoppers from certain countries?
As Riskified reported earlier this year, no cross-border eCommerce plan of action is complete without taking the specter of fraud into account. For some businesses, that means changing fraud review processes that rely on overly restrictive rules about international credit cards. For others, it means that analysts should be less jittery about the rates of fraud in certain markets in order to make savvier decisions. Vigilance is important. But that shouldn’t come at the expense of valid orders and good customers. And it shouldn’t have to involve lengthy manual reviews, costly false declines, or chargebacks. A savvy fraud prevention strategy will make sure that the future flow of transactions doesn’t stall — regardless of whether a flight is being booked in Beijing, Bangalore, or Baltimore.
Putting phones in airplane mode
Customers of a certain age might remember how strange it felt to buy a plane ticket on a computer after years of calling into travel agencies or buying at airports. Now it turns out that the dominance of desktop ordering is already being challenged by mobile phones and tablets. In 2017, mobile sales accounted for 40% of all US digital travel sales and analysts even predict that mobile purchases will overtake desktop sales by 2022. Meanwhile, in Asian markets, the transition to mobile commerce is already old news. (“OMG!” as the kids say.)
As more consumers move to use their phones to make travel purchases, the fittest to survive will evolve to accommodate these new kinds of travelers. That means marketing to them, but also knowing how to manage orders differently without falling into a trap of higher declines.
All of this circles around the importance of future-proofing the travel business to remain competitive and relevant. Imagine the number of lost clients had a travel agency decided not to invest in fax machines, e-tickets, or a web presence. Adapting and optimizing a business for new technological innovations has always been the most certain way to survive, and catering to mobile shoppers is part of the evolution. Travel is no different, and merchants have to adapt their systems to make mobile a strength and not a weakness. By turning analysis toward consumer behavior and technology that uses machine learning, the rise of the mobile segment can be a source of growth instead of anxiety.
Winning the future of travel
Travel is a difficult business. Commoditization and the availability of information means that travel merchants compete almost entirely on price, and their margins are razor thin. Smart marketing can help differentiate offerings, but all too often travel merchants then send customers packing through ineffective fraud prevention.
With the friendly skies getting crowded and more competitive, the future of travel will be won by merchants that can engage new and different customers — whether that includes outreach into emerging markets or across new channels. But success also requires an investment in technology and in partners who can help businesses scale smartly without the baggage of lost revenue and customers. Get ready for take-off today.