The Merchant Risk Council’s 2017 Global Fraud Survey showed that the average online store declined 2.6% of all incoming orders due to fear of fraud, including 3.1% of all orders worth over $100. For a $25 million business, this means rejecting orders worth more than $600,000 annually. But the true cost of declines is actually far higher than just the lost sales revenue. To understand the full cost of declines, one must consider all the factors involved in a holistic risk management approach - which includes the sales and marketing investment that goes to waste when a good order is declined. Whether online media, SEM, or social media campaigns, eCommerce companies invest considerable funds and energy in customer acquisition and retention - bringing users to the website, bringing them to checkout, and trying to ensure they become repeat customers. Expedia Inc, for example, invested $5.3 billion in marketing in 2017, equatable to more than 50% of the entire group's annual revenue. If their decline rate was average, one could say 2.6% of that marketing budget, or ~$140 million was lost due to fear of fraud. Add the lost lifetime revenue from good customers whose order was wrongly rejected, and you start getting an idea of how costly declines can be. In this post, we share our approach to calculating the true impact of declines on your business. To fully understand the impact and cost of declines for your business, the following factors should be considered:
- Customer Acquisition Cost (CAC) - What is the cost of bringing users to your site and converting them into customers?
- Customer Lifetime Value (LTV) - How much revenue does the average customer generate for your company over time?
- Impact of Falsely Declined Orders - What is the financial impact of false positive declines on your business?
- Impact of Wrongly Blocked Orders - What is the financial impact of blocking orders before they reach your fraud team?