Comment by oli5679

3 years ago

There is a concept in microeconomics called the Lerner equation. A monopolist maximises profits at the price where gross margin % is equal to -1/ price elasticity of demand.

The intuition behind this is their uplift in sales from a small price cut must equal the revenue they lose on all existing items, and their costs of producing the extra items. So if they have a gross margin of 50%, they need price elasticity of demand to be -2, since a 1% price cut will sell 2% more, raising revenue by 1% and costs by 1%.

The same applies for blocking fraudulent customers, you want your assessed likelihood of fraud to be higher than your gross margin. If I think you have a 25% chance of being fraudster, and I make a 25% margin, then selling to 4 customers I will make 25% 3 times, and lose 75% one time.

If you have more complicated factors like cost of processing chargeback, different interventions like 3DS/manual review, then the threshold is different, but the overall probabilistic framework and calculating breakeven thresholds can still be used.