Manage Order Rejection Rates to Optimize Profits

After completing automated and manual screening of your orders, they either move into the fulfillment process or are declined.  Our 11th Annual Fraud Report tells us that over the past two years, many merchants have reduced the number of orders they decline due to suspicion of fraud with no overall increase in the average fraud loss rate.  Declining valid orders from good customers is sometimes referred to as “customer insults” and is also known as “false positives,” where an initial determination of high fraud risk turned out to be false.   Since many customers will either try to re-submit their order or place it with a different merchant, it is difficult to know how many false positives / customer insults your fraud process is generating – or how many customers you are losing.

Depending on what goods are being sold and the costs of goods sold as compared to their gross margins, different levels of order rejection are appropriate for different merchants.  High-risk goods with high costs and low gross margins typically have higher order rejection rates.  This can be attributed to higher fraud attempts for these types of goods as well as lower merchant tolerance for risk because  more additional “good” sales are needed to make up the loss on a single fraudulent order.  Alternatively, merchants with relatively high gross margins, a high cost of customer acquisition, or larger lifetime customer value tend to employ the lowest rejection rates.

We believe it is important to set targets based on risk tolerance and potential fraud cost, and manage the trade-off between rejecting valid orders and controlling fraud losses.  For merchants selling a wide range of goods with different costs and margins, we recommend setting order rejection thresholds, or other screening criteria such as velocity of purchase attempt for the top selling products that comprise the bulk of online revenues or losses due to fraud.