Customer Lifetime Value

Are Fraud & Chargebacks Distorting Your Customer Lifetime Value?

As an online merchant, your business depends on growing your customer base. But before you invest in market research, ad campaigns, promotions, affiliate partnerships, and other marketing, your first step should be calculating how much is reasonable to spend on acquiring each new buyer.

Customer lifetime value—often referred to as LTV—is the amount you can expect one buyer to spend with you over the course of your entire relationship, from acquisition to the customer’s final purchase. Obviously, no two individuals are alike: some will take a lot of convincing before making a purchase, while some require no convincing at all. Some stick with you out of loyalty or simple habit, while others will be one-time buyers. LTV averages out these figures, giving you a ballpark value per individual.

LTV is an incredibly important metric to determine marketing spend, resource allocation, and future strategy. Using this figure, you can determine a reasonable cost-per-individual to spend on acquisition and retention, so as to reap the highest ROI. It can also help you determine the point of diminishing returns: even if a prospect does eventually becomes a buyer, you shouldn’t make the investment unless the LTV is significantly higher than the cost of acquiring him or her.

That’s the formula in a simplified form; of course, there are other variables to consider, too, like accounting for returns. One of these variables in particular is fundamentally at-odds with a reliable evaluation of customer LTV. We’re talking, of course, about friendly fraud.

How Friendly Fraud Affects Lifetime Value

“Friendly fraud” occurs when a cardholder files a chargeback without proper justification. The buyer completes a transaction, pays, and receives the goods. At this point, it seems that the transaction is over…but weeks later, the customer files a chargeback. The buyer could make any number of claims:

• The product never arrived
• The transaction was unauthorized
• The product was damaged/defective/not as described

Those are just a few examples, but the bottom line is this: the buyer is getting something for free. A single friendly fraud instance is bad; it costs you revenue and merchandise, and you’re forced to pay a chargeback fee. And if friendly fraud is a persistent problem, you could be looking at serious long-term challenges.

Friendly fraud works specifically by passing as a legitimate transaction. As a result, it can distort your customer lifetime value count.

We know that roughly 40% of consumers who commit friendly fraud will do it again within 60 days. So, the longer a friendly fraudster remains a customer, the more likely that person is to commit friendly fraud multiple times. Thus, the amount a customer spends can appear much higher than the final total. You calculate for a much higher LTV, when in reality, fraudsters cost you more and more the longer they hang around.

If you project customer LTV to be much higher than actual customer spend, you’ll probably spend too much to acquire customers…some of whom may go on to commit friendly fraud themselves. This can create an ongoing systematic drain on your revenue that gradually increases over time..leaving you unable to diagnose the true cause of the problem.

Can I Detect Friendly Fraud?

The short answer: not really.

With most eCommerce fraud, there are clear indicators suggesting you may be dealing with a fraudster. For example, if a thief uses stolen cardholder data to try and complete a purchase, you have multiple indicators to suggest something is wrong:

• Billing/shipping address does not match information on file with the issuing bank.
• IP address does not match customer address.
• Buyer is in a territory or region known for fraud activity.
• Buyer mismatches the card CVV.
• Multiple transactions for high-value items in quick succession, shipping to same address.
• Buyer attempted a transaction multiple times with different information.

With friendly fraud, though, you don’t have the benefit of pre-transaction fraud indicators. It’s what we refer to as a “post-transaction” threat source. That means you can’t usually detect friendly fraud ahead of time because, as mentioned, friendly fraud hides behind seemingly-legitimate transactions.

There are exceptions to that rule. For example, you can identify and decline transactions from repeat offenders…assuming you can engage in close examination of historical chargeback data. This demands in-depth expertise in chargeback rules across different card schemes and up-to-date knowledge on rule changes and new regulations.

Even then, trying to intercept every potential friendly fraudster will be a massive undertaking. You also risk declining legitimate buyers, potentially destroying your relationship with a loyal shopper and further jeopardizing customer lifetime value.

When it comes to friendly fraud, the only real answer is to fight back through chargeback representment.

Successful chargeback representment allows you to gain real insight into your friendly fraud problem. The better you understand your chargeback situation—and how many of those chargebacks are invalid—the better-positioned you are to understand your true LTV.

Of course, successful chargeback representment is easier said than done. You need to have the resources to respond to each dispute, including time, expertise, and data.

Seeking Help

You don’t need to waste time and money assembling cases that will ultimately fail. You can recover revenue, reduce costs, reallocate staff, and boost your customer lifetime value by calling Chargebacks911® today.

We offer the tools, strategies, and specialist know-how you need to ensure long-term chargeback reduction. Our suite of products includes:

Why not ensure you and your customers have a long, prosperous relationship? Stop chargebacks, save money, and increase your customer lifetime value with Chargebacks911. Click below and get started now.