There are several factors that contribute to the cost of e-commerce fraud prevention solutions, which can make it difficult for e-commerce teams to know how much they can or should be spending.
Unfortunately, there’s no rule of thumb when it comes to the cost of e-commerce fraud prevention. But that doesn’t mean you can’t have some idea of what to expect when you start budgeting for a solution.
Here are some of the biggest factors affecting the cost of an e-commerce fraud prevention solution and what you should be considering when exploring your options.
What Determines the Cost of an e-Commerce Fraud Solution?
A range of items can affect the cost of a fraud solution, but the three most significant factors are:
- Software development and maintenance
- Manual reviews
- Chargeback guarantees
1. Software Development and Maintenance
The cost of developing and maintaining robust software for fraud prevention is perhaps one of the biggest factors affecting a solution’s price tag. For example, consider the cost of data servers, where merchants will store software. Merchants need these systems to be reliable, but high-quality, secure data storage will always be more expensive to maintain and invest in than lower-quality systems.
2. Manual Reviews
When it comes to the manual review of orders, three elements will affect cost.
The most important is the quantity of orders that will be sent to manual review. The more orders there are, the more expensive the solution will be.
The next factor is the manual reviewers themselves — the employees: where they’re based, how experienced they are, and what kind of contract they have.
Productivity is the third element affecting the cost of a manual review, including how many manual reviews an employee can perform in a day, whether multiple employees must review every order, and whether the vendor is experienced and has sophisticated methods of training and hiring in place. Another factor affecting productivity is the knowledge of the reviewer. More seasoned employees can review more transactions more accurately than can their newer-to-the-field counterparts.
3. Chargeback Guarantees
Finally, whether a solution provider offers chargeback reimbursement affects the cost of a fraud prevention solution. High-risk merchants can expect higher program costs, as can merchants who implement programs with vendors who aren’t effective at stopping most fraud (and chargebacks) from happening.
How Does Business Size Affect Fraud Solution Cost?
For merchants handling e-commerce fraud prevention on their own, their size can have a big impact on cost. If you aren’t taking in enough orders to justify, for example, two or three employees dedicated to fraud prevention, the manpower cost may end up exceeding what you’re making in sales.
Similarly, while software is a fixed cost that doesn’t vary by size, small and medium businesses (SMBs) will generally end up with higher per-transaction costs and pay higher margins, since these businesses are less likely to have internal fraud specialists or specialized software.
Enterprise versus SMBs
When it comes to the overall cost of fraud, enterprise-level companies tend to be better-known brands with easier-to-resell products, so these companies tend to be targeted more than SMBs by fraudsters. But that doesn’t mean fraud has a bigger impact on these larger companies.
For example, if a fraud attack is launched and the merchant experiences 30 to 40 chargebacks, this fraud level will affect the SMBs far more than it does enterprise-level merchants. Smaller businesses don’t have enough good sales to dilute these chargebacks. A single fraud attack can affect the company’s profitability for the whole year. And if that merchant is just starting out, the cost of those chargebacks can make the business unviable.
How Much Should the Average Fraud Solution Cost?
When thinking about the amount you should spend — or how much your solution is really costing you — consider each and every element in the cost composition, including chargeback costs, the risk level of the product you’re selling, and the cost of the fraud prevention solution itself.
While these are the most obvious elements, they aren’t the only ones. Here are two of the other costs you may not be considering when evaluating your options.
Obviously, if there are people involved in your fraud prevention solution — whether they’re involved in programming or performing manual reviews, working full-time or part-time — you’re going to incur manpower expenses.
But what you may not realize is that you have customer service, finance or operations personnel who are occasionally dealing with fraud prevention issues. And if you aren’t taking into consideration those manpower hours and the lost revenue from personnel being unable to focus on their real business tasks, you won’t have a full understanding of how much your solution is costing you.
If your e-commerce fraud prevention solution is declining legitimate orders, then part of your solution cost is the revenue that was lost when those orders were declined.
As a rule, U.S.-based e-commerce merchants selling low-risk products shouldn’t have a decline rate of more than 2.5%. And that rate considers every person who makes a purchase on your website and every shopper who was blocked from making a purchase, whether it’s because of your fraud prevention solution or your manual review.
Why Do Some Solutions Have Multiple Pricing Models?
Solutions often have multiple pricing models based on the level of service needed and the different ways the provider includes performance elements — like approval rates, response times and chargeback rates — into pricing.
For merchants who have purchased a prevention platform but are managing it themselves and responsible for their own decisions, they’ll be billed at one tier of pricing. But for merchants using a fully outsourced solution in which the vendor is making and accountable for the decisions made, that merchant requires a higher level of attention and a different pricing tier.
Other solutions have multiple pricing models when a chargeback guarantee option is offered.
And that’s just what we do at ClearSale. With our first option, the KPI Pricing Model, we will work with you to identify a target chargeback percentage. If in a given quarter, we exceed that KPI, we offer a predetermined discount on your quarterly invoice, with your rate based on the number of approved transactions every month.
Our second model is the Fixed Percentage Pricing Model, in which we bill customers a fixed fee on every transaction based on their sales volume, how they use the solution, and their industry and risk profile. This approach also includes our chargeback insurance, which provides 100% guaranteed chargeback coverage.
We offer the two because at ClearSale, we believe every situation deserves customized solutions. So, customers with different risk profiles for example, need different levels of attention. Riskier merchants may want their solution to be guaranteed so they can have their reimbursements, while merchants that are less risk-averse and may want to pay less into a non-guaranteed solution that still properly aligns incentives.
If you’re ready to learn which of our e-commerce fraud prevention solutions is right for your business, contact us. We’d be happy to help you explore your options.