How I Cut E-Commerce Fraud Prevention Costs in Half

By Allan Phillips, CFP®

All e-commerce businesses need processes for preventing fraud. When I opened my store in 2017, I signed up with a service that screened all orders. If an order was approved by the company and it turned out to be fraudulent, the fraud prevention company was on the hook for the chargeback.

This allowed me to process orders confidently and quickly. They charge a percentage of each order. In my case the cost was .71% of each transaction.

A few months ago, I ended this relationship and went to a flat fee service for $200 per month. I get access to powerful tools to screen each order, but I don’t get any protection if I make a mistake. If I approve an order and it turns out to be fraudulent, my business alone bears the cost.

Why I Made the Switch

Of course I was looking for ways to lower the cost of operating my business, but I wanted to be sure I was making the right decision from a risk/reward perspective. The following factors led to my decision.

1. My Business Has Long Lead Times

This is normally a bad thing, right? Not so from the fraud perspective. Since our products are made to order, it might take at least 3-4 weeks to ship. In this amount of time, the card owner would likely discover the charge and notify the card company. In most cases, our manufacturer probably wouldn’t have even started making the product.

2. My Products Are Hard to Resell

My business sells pergolas. Many are made in custom sizes and colors. Unlike something like jewelry, which has a very large market. A 23’ x 17.5’ mocha-colored attached pergola has a far more limited market for resale. These kinds of orders don’t present as much of a risk.

Keeping with the contrast with jewelry, a pergola of any size is hard to deal with from a logistics perspective. If a fraudster wanted to order a pergola and resell it, he’d have to receive a large crate delivery from the carrier and arrange pickup from his customer, who probably doesn’t own a forklift and flatbed truck. There are easier ways to be a crook than dealing with a 1500 pound freight shipment.

3. Customers Must Approve Orders

The average order value for one of our pergolas is $7,000. Most customers want to call or at least email us before placing their order. Also, there are almost always technical questions. We interact with all customers to provide quotes, answers to questions, and finally to have them sign off on drawings showing the measurements of what they are ordering. It almost always takes longer than a day to finalize an order. Again, there are easier ways to be a crook than defrauding this business.

4. Sales Volume Favored the Flat Fee

When I first started, sales were irregular as I worked to optimize marketing and conversions. At that stage, I absolutely benefited by paying only a percentage of each sale. The peace of mind and low cost (and great service, I might add) were worth it. As volume grew however, I started thinking about how to cap my costs in light of the factors we just covered.

Does this make sense for you?

Before you get too excited about the cost savings, you should evaluate your own risks. Average order value and other factors play a role in this kind of decision-making. Should you be looking for solutions like either of the models I described above, have a look at ClearSale and Pro Insight.

Allan Phillips, CFPHi, my name is Allan Phillips. I am an E-Commerce business owner and CFP® professional.

My goal is to help other E-Commerce business owners survive and thrive in both their business and personal lives.

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