Ordering products online feels about as natural to most Americans as popping over to the grocery store. However, despite the maturation of eCommerce, the market still has plenty of room to grow.
According to the Census Bureau, total US retail eCommerce spend hit a record high of $127.3 billion in Q2 2018. Projections for the upcoming holiday season anticipate shoppers will nearly match that total just in the last two months of the year.
If we just take that news at face value, it looks like things are only getting better and better for online retailers. However, strong sales are not a very accurate predictor of profitability, and top-line growth is not a reliable reflection of how well the eCommerce market is doing. The figure mentioned above does not account for other, less-obvious losses or costs.
For example, the average eCommerce retailer contends with:
- Returns: Customers can’t just bring items back to the store. Goods need to be shipped back, and most customers expect retailers to cover return shipping.
- False Positives: Retailers decline a staggering $118 billion annually in good transactions that are mistaken for fraud.
- Chargebacks: Chargebacks, or forced payment reversals, are much more common in the card-not-present environment than in brick-and-mortar.
Mistaking Preventable Losses for Basic Costs
If merchants operating in the eCommerce market, these costs are like parasites, siphoning-off profitability. Unfortunately, many businesses count these and other avoidable expenses as a portion of the cost of goods sold (or COGS).
Not only is this misleading, it can cause serious long-term damage to your organization. For example, regarding these parasitic costs as unavoidable makes it difficult to recognize genuine trends and patterns in sales and other customer data. This leads to deploying improperly-targeted tools and solutions, making it harder to prevent future losses. Individual problems ripple outwards as a result, causing broader economic problems, and our understanding of fraud, chargebacks, and other drains on eCommerce profitability diverges further from reality.
As if that’s not bad enough, the confusion is made worse by the fact that it may not be consistent from month to month. The result: what amounts to “fake” revenue that creates a false sense of security. If a business can’t track these areas separately and work on improving them, they will continue to erode profits, eventually leading to total financial collapse.
Costs in Online Retail and Reality
Survey results suggest retailers “get” that this is a problem. For example, 62% of eCommerce retailers consider their chargeback rate the most important key performance indicator for fraud management. At the same time, 13% of merchants don’t know their current chargeback rate.
Even more worrying, almost one in four have a chargeback rate at or above 1% of transactions. This puts roughly a quarter of eCommerce merchants over the acceptable chargeback-to-transaction ratio established by the card schemes. If this is a persistent problem, they could be placed on the MATCH List and forced to work with a high-risk payment processor, or even blacklisted by processors entirely. For an online retailer, losing the ability to process card payments means almost-certain doom.
There’s a clear disconnect between how we think about costs in online retail and reality. The problem is not going to go away, though, and the consequences of continuing to ignore the issue will be devastating. For example, we’ve had merchants come to us at Chargebacks911® who were seeing their chargebacks grow at a rate that was exponentially higher than their sales!
Fortunately, it doesn’t have to be that way. Chargebacks, returns, and other drains on retailers’ profitability tend to be persistent, yet correctable problems.
Many of them have the same triggers and warning signs, including issues with quality-control, inaccurate or incomplete product descriptions with missing details, and other simple merchant-side errors. At the same time, retailers whose fraud filters are too tight could end up generating false positives and turning away legitimate customers. These problems are two sides of the same coin, and they need a coordinated response.
A Coordinated Response is Needed
There are a few key points that can help online merchants kick these profit-leeches to the curb. These include:
- Detailed Recordkeeping: Merchants should keep track of all returns, chargebacks, and transactions flagged as fraud. That data should be analyzed on a regular basis to review and identify potential problems, then plan and adjust accordingly.
- Ensure Compliance: This means reviewing every facet of the customer experience, supply chain, and fulfillment process for potential risks and warning signs. Compliance with business best practices minimizes exposure to risk.
- Dispute When Appropriate: Merchants should submit cases for representment whenever they suspect friendly fraud. This can help recover revenue and retrain customer behavior away from fraud in the long term.
These are all vital and useful practices solely on their own merits. However, each strategy has limited use individually. That’s why the most important facet of fighting these profitability parasites is to embrace a multilayer solution for fraud.
For example, a successful strategy will incorporate all the above, along with responsive fraud scoring. Then there’s chargebacks, which tend to operate on a seasonal cycle, with the highest spikes in late January and into February. For more info on that, Chargebacks911 recently put out a new guide about the holiday season and chargebacks, which is available here.
Remember: protecting merchant profitability is not a static or atomized process. Antifraud tools and practices work best when reinforcing the vulnerabilities and strengths of one another as part of a responsive, interwoven strategy.
Monica Eaton-Cardone is an entrepreneur and business leader with expertise in technology, e-Commerce, risk relativity and payment-processing solutions. She is COO of Chargebacks911 and CIO of its parent company Global Risk Technologies.
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