How do experts measure fraud? A recurring theme in any fraud-centric conversation is how to comprehend its total costs. Throughout my 12 years in e-Commerce, I’ve worked with countless merchants and their many partners in finance, operations, and marketing. Too often, businesses push fraud to the back-burner, not realizing its true costs. The reality is that the impact of e-Commerce fraud on a merchant’s bottom line is deeply damaging. In this post, I’ll share a real-world example to better illustrate the true cost of fraud.
Meet Jennifer
Jennifer is a store owner who sells jeans through Shopify, an e-Commerce platform. She buys her most popular product – the Boyfriend Jeans – from her local wholesale vendor at $20 a pair. Jennifer uses keystone markup (twice the wholesale cost) to price her item at $40 and offers free shipping on all purchases.
At first glance, a simple calculation shows a 50% profit ($20 profit from a $40 sale) for her Boyfriend Jeans. Although a 50% profit on every sale sounds appealing to many merchants, there are many more costs that haven’t been accounted for.
Below is a more realistic breakdown of the costs associated with selling a single pair of the Boyfriend Jeans [1]:
Jennifer’s Boyfriend Jeans
After accounting for variable costs, the contribution margin is only $4, or 10%. Said in another way, for every $40 pair of jeans sold Jennifer has $4 left to pay towards fixed costs such as rent, utilities, and payroll – margins that are tighter than a hipster’s skinny jeans!
The True Pain Of Chargebacks
Merchants feel the pinch in these slim margins when purchases don’t go according to plan. What happens when Jennifer becomes a victim of payment fraud and is hit with a chargeback?
Not only does Jennifer lose the merchandise ($36 at cost), she also suffers a chargeback fee [2]. In total, Jennifer will lose $56 ($36 jeans + estimated $20 chargeback fee).
How many pairs of Boyfriend Jeans does she need to sell in order to make up for this loss?
Since she makes $4 per unit in the above scenario, it will take Jennifer at least 14 new orders to break-even after a single chargeback.
Cost of a Chargeback
That’s a lot of Boyfriend Jeans!
At Sift Science, we believe that shop owners like Jennifer should be focused on selling jeans, not dealing with fraud. Store owners need information right at their fingertips to make confident business decisions and don’t have time to perform manual order reviews. That’s why we offer our fraud detection product on merchant platforms such as Shopify.
If you want to reduce chargebacks and maximize your bottom line, get the Sift Science app in the Shopify store (if you use Shopify for your merchant platform) or get in touch with us at [email protected] for a custom integration.
[1] Hypothetical Scenario:
E-commerce Margins
[2] The actual chargeback fee can vary by Credit Card Processors