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4 Ways False Positives Hurt Financial Performance

posted on: Fri Jan 12 2018

What you don’t know can and will hurt your bottom line.

False positives, also known as “false declines” or “sales insults,” occur when merchants or financial institutions decline legitimate orders. Often, the underlying cause of a false positive is the suspicion of fraud AND the inability of the merchant or financial institution to properly quantify the level of risk. In the event of uncertainty, the default action is to decline or cancel the transaction.

The true impact of false positives can be tough to measure, since it’s hard to prove a negative. But based on research by Javelin, it appears that businesses are unnecessarily losing as much as $118 billion every year by turning down legitimate orders. And that amount covers only one of the four ways that false positives hurt financial performance:  

  1. Immediate revenue loss. Every order wrongly turned down is revenue not realized. Industry statistics indicate that approximately 1% of US online orders are fraudulent, although that percentage appears to be increasing due to fraud shifting to card-not-present (CNP) channels due to the EMV mandate. You can do this quick calculation to get a ballpark estimate of what false positives might be costing you in immediate revenue loss:

Your current decline percentage minus 1% = approximate false positive percentage. Multiply this percentage by the total number of orders you process annually = potential number of false positives. Multiply this number by average order value = potential revenue lost to false positives.

For an online business declining 5% of orders with $35 million in annual sales and an average order value of $35, that calculation would look like this:

5% - 1% = 4% approximate false positive percentage. 4% x 368,421 orders = 14,736 potential false positive orders. 14,736 x $95 average order value = $1,399,920 potential revenue lost to false positives.

  1. Lost customer lifetime value. Lifetime customer value is the total profit anticipated from all future purchases by a customer. Legitimate customers who are wrongly rejected will often stop buying from that merchant permanently. Once again, you can do a quick calculation to get a ballpark estimate of what false positives might be costing you in lost customer lifetime value:

Potential false positive orders multiplied by average lifetime customer value = potential lost customer lifetime value. Multiply this by the percentage of customers who will permanently abandon your site due to the incorrect decline/cancellation. Depending on the product, channel, and customer history, this percentage may range from as low as 15% to as high as 60%.

Using the online business from the example above and assuming a $330 average customer lifetime value, that calculation would look like this:

14,736 potential false positive orders x $330 average lifetime customer value = $4,862,880 lost customer lifetime value. $4,862,880 x 60% (high end) = potential $2,917,728 lost customer lifetime value or $4,862,880 x 15% (low end) = $729,432 potential lost customer lifetime value.

  1. Wasted acquisition spend. Acquisition spend refers to all the costs associated with convincing a consumer to place an order (e.g., research, marketing, advertising, promotions, etc.). If you spend $10 to convince a customer to buy but mistakenly decline his order (i.e., false positive), you’ve wasted that $10 acquisition cost on top of the lost revenue. Again, it’s possible to do a rough calculation to get a ballpark estimate of what false positives might be costing you in wasted acquisition spend:

Potential false positive orders multiplied by average acquisition spend = potential wasted acquisition spend.

Using the online business from the example above and assuming a $60 average acquisition spend, that calculation would look like this:

14,736 potential false positive orders x $60 average acquisition cost = $884,160 potential wasted acquisition spend.

  1. Degraded brand image. In today’s connected world of social media and viral posts, one shopper’s bad experience with a false positive can suddenly reach thousands and thousands of customers and potential customers. While difficult to quantify, the impact of negative publicity is nonetheless real.

If you’re not using an enterprise-class fraud prevention solution, your lack of certainty about transaction risk could be costing you millions in lost revenue and profits. Download the eBook “The Silent Sales Killer: False Positives” to discover the eight strategies for reducing false positives and growing sales and profits, while still reducing fraud losses.

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