Winning the Zero-Sum Game of Digital Goods
Anyone who has ever played or watched a poker game knows that any money one side wins is money that their opponents lose (trust me when I say from experience that when losing money playing poker the same concept applies, only in reverse). This is a classic example of a “zero-sum” game, in which one player’s loss is another player’s gain.
In this post, I use poker as an analogy to explain why false positive declines – the unfortunate mistake of rejecting legitimate orders due to suspected fraud – are especially devastating for merchants selling digital goods such as gift cards and in the ticket industry selling e-tickets.
What Makes Digital Goods Sales a Zero-Sum Game?
In business, and especially in sales, it can often feel like you are locked into a zero-sum battle with your competition. However, the reality is in fact far more complex; a higher degree of similarity between the products or goods offered by businesses increases the competition between them.
Name-brand fashion items have no true substitute. For example, there’s only one place a customer can purchase a brand new Burberry coat. If their order is rejected, it’s very likely they will simply try placing another order for that coat with burberry.com.
Digital goods like tickets and giftcards, however, are often interchangeable, more similar to a commodity than to a good. If a fan looking to buy a Taylor Swift concert ticket is declined on one site, they can easily purchase a ticket with a different ticketing merchant. The ticket isn’t the good – access to the concert is what the consumer is really after – and more often than not multiple sites sell access to the same events.
In this type of commoditized market, merchants find themselves in a zero-sum game with their competitors. This makes every opportunity to sell even more critical, because every falsely rejected order results not only in lost revenue for the merchant but also in more income for the merchant’s direct competitors.
You Don’t Fold A Winning Hand
So what does any of this have to do with poker, or any card game for that matter? To throw this concept into vivid relief, let’s consider a hypothetical zero-sum game of poker:
“You sit down at the poker table and are dealt a hand; there are four other players. The game begins. You expend resources – betting, calling bets – to compete with your opponents.
Two of the players fold their hand and drop out of the game entirely. By the time the end of the hand is reached, only you and one other player remain.
Your competitor shows her hand first; your hand is better. All you have to do now in order to win and take home the money is to show your hand.
But you make a strange decision instead.
Even though you spent time and energy to get this far, you now decide that you don’t want the money you’ve won.
You throw away the winning hand, and your opponent collects the money you left on the table.”
Does this sound insane? Unbelieveable? Who would throw away a winning hand and give the pot to an opponent? Unfortunately, if you are a digital goods merchant, you are engaging in this exact behavior pattern every time you turn away a good order due to fear of fraud.
The opponents are your business competition that have now gained from your loss. The resources expended playing are your wasted marketing and sales budget. The money left on the table is, well, the money you are leaving on the table.
False Declines – The Silent Revenue Killer
And at this point you might be thinking, “I don’t turn away nearly enough customers for this to matter.” But if you are like the average merchant, then the odds are you are grossly underestimating the amount of orders you are falsely declining. False positive declines are created in ways you might not even realize – rigid rules-based systems, inaccurate negative lists, the application of filters that lack contextual understanding of an order – the list goes on and on.
Consider this: in the MRC’s 2015 Global Fraud Survey, 57% of eCommerce merchants assessed that only 5% or less of their declines were false positives. In other words, the majority of merchants believe that 95% or more of the orders they decline are most definitely fraud attempts. Riskified, however, manages to approve 66% of orders that merchants had planned to decline. A whopping two-thirds of the transactions that merchants were confident about rejecting are actually placed by good customers. That’s a massive gap between perception and reality, between what merchants think is happening and what customers are actually experiencing.
In this context, it’s no surprise that a 2014 report by the Javelin Strategy found that while $118 million was lost to falsely declined transactions in the US, only $9 million was lost to credit card fraud (chargebacks). False declines are even more devastating for digital goods merchants, because every wrongly rejected sale is revenue gained by the competition.
Stop Sending Your Customers to Competitors
Ultimately, for digital goods merchants the false declines issue is a story of compounding loss in a zero-sum game. The lost value of a sale. The lost lifetime value of a customer. The lost positive branding differentiation. The value of a sale – and potentially the lifetime value of a customer – lost to a competitor.
Given these realities, digital goods merchants need to do everything in their power to make sure they are declining as few legitimate orders as possible. If you are interested in making sure fraud prevention measures aren’t giving an edge to your competition, download our free guide explaining how to reduce false declines.