The Impact of Chargebacks on Dropshipping Merchants
Table of Contents
- What Is Dropshipping?
- How Do Chargebacks Affect Dropshipping Merchants?
- How Can Dropshipping Merchants Prevent Chargebacks?
As e-commerce has exploded onto the global stage, companies have been creating and testing new business models with increasing frequency. One business model that's become increasingly popular in e-commerce is dropshipping.
Launching a dropshipping business can be an easy and affordable way to step into the world of online sales, but dropshipping merchants can be especially vulnerable to chargebacks. What can dropshipping merchants do to anticipate and prevent common dispute scenarios that lead to chargebacks?
The online dropshipping market is poised to grow by as much as 28% per year over the next few years. With e-commerce experiencing a boom of new customers due to the COVID-19 pandemic shuttering brick-and-mortar retail stores in 2020, the environment is favorable to new dropshipping merchants who can find a niche to serve, despite some skepticism from customers and analysts about the long-term viability of the dropshipping model.
Much of the negative talk around dropshipping has to do with issues like poor product quality and long shipping times. These are the exact same issues that often lead to transaction disputes and chargebacks.
Dropshipping merchants can find ways to avoid and mitigate these issues with proper planning and an approach that prioritizes the needs of their customers.
What Is Dropshipping?
In a traditional e-commerce model, the merchant buys fifty units of Deluxe Green Widgets, lists them on their website, and ships them from their warehouse as orders come in.
In a dropshipping model, the merchant keeps nothing in stock. When a customer orders a product, the merchant orders one from the manufacturer and has them ship it directly to the customer.
It's not uncommon to wonder what purpose a dropshipping merchant even serves, since the product is going straight from the manufacturer to the customer. In truth, the primary role of the dropshipping merchant is marketing.
They come up with an appealing brand, create an attractive and user-friendly storefront, and market the products they offer through a variety of channels. And like any other merchant, the quantity of orders a dropshipping merchant makes for a particular product often entitles them to a wholesale discount, even if they're not buying those products all at once.
For merchants, the benefits of the dropshipping model are readily apparent. For one thing, the merchant doesn’t have to pay for a warehouse to store their goods. They can also ship products of any color or size the customer wants without having to make decisions about how much of each to purchase for resale. Plus, nothing is ever out of stock.
Dropshipping can be a great way to offer unusual, luxury, or specialized products for sale. Traditional merchants can rarely afford to stock up on products that only sell to rarefied niche markets, but dropshippers don’t have to worry about whether they can afford to keep such products in stock—they can just focus on marketing the products and shipping them on-demand.
Because the overhead costs for a dropshipping operation are so low compared to traditional online retail, it can be a great way for an entrepreneur to get into the e-commerce business without having to borrow money or raise capital first.
Unfortunately, dropshipping isn't without its downsides, and many of those downsides can rear their ugly heads in the form of chargebacks.
How Do Chargebacks Affect Dropshipping Merchants?
There are a few drawbacks to the dropshipping merchant model, and one of them is that you don’t have a lot of direct control over how the products you’re selling will be shipped to your customers. Many manufacturers are located in China, which means that the products they ship have to be sent overseas and pass through customs to reach American customers.
Even under the best of circumstances, shipping times will be far longer than customers have grown to expect. Delays are common, and packages may arrive in less-than-pristine condition. Customers may also leap to conclusions about the quality of the product once they see where it came from.
Customers also may have legitimate complaints about quality and condition. Merchants may not be able to inspect every product they sell beforehand, and long-distance shipping presents opportunities for mishandling and damage.
Some manufacturers provide product descriptions and photos that don’t match the finished goods they ship out. In some cases, this can simply be the difference between a prototype and a finished product, but other times the difference can rise to the level of the product being considered defective or counterfeit. It's not uncommon these days to see social media posts complaining about a piece of clothing being completely different in size or shape than what was shown in the product image, for example.
Smaller dropshipping merchants who sell luxury goods may also find themselves targeted by fraudsters seeking to obtain valuable merchandise. They will often surmise that small, independent merchants are less likely to have strong fraud prevention measures in place, or less likely to be able to fight an illegitimate chargeback.
Because of these issues, chargeback rates for dropshipping merchants tend to be higher than average. There are two primary consequences that result from this, and both of them can severely harm a merchant's bottom line.
First, every payment processor assesses chargeback fees. When considering those fees plus the lost revenue from the sale, every chargeback can end up costing you more than double the amount of the original transaction. Chargebacks can eat into your profits very quickly.
Second, your chargeback ratios are monitored by the banks and card networks, and when they exceed 0.9%, you may be penalized. This might mean placement in a mitigation program that charges additional fees for every new chargeback, or it might mean losing your merchant account entirely and being forced to contract with expensive “high-risk” payment processors.
How Can Dropshipping Merchants Prevent Chargebacks?
Every merchant can benefit from the following tips, but they’re especially important for preventing the chargebacks that dropshipping merchants deal with:
- Provide accurate delivery date estimates. If possible, work with the companies you’re buying from to pass delivery tracking information along to your customer. When items are being shipped from overseas, it can be difficult to say when delivery will actually occur, so be upfront about that with your customers. It may be a good idea to purchase shipping insurance, too.
- Provide honest and transparent product descriptions. Make sure your customers know exactly what they’re buying, what it can do, and what it will look like when it arrives. If you can purchase samples from the manufacturer before selling, that can be a big help when it comes to writing accurate marketing copy.
- Be generous with returns and refunds. A refund is always cheaper than a chargeback. You can avoid a lot of chargebacks if your customer service department is easy to reach and you’re always willing to offer a refund when a customer lets you know that they’re disappointed.
- Use up-to-date anti-fraud tools to screen out fraudulent orders. AVS and CVV verification are the bare minimum, but most dropshipping merchants will benefit from more advanced fraud prevention tools that use risk scoring to flag suspicious transactions for review.
Honesty, transparency, and excellent customer service can prevent a lot of chargebacks, but what about the ones that get through? If you’ve done everything right and held up your end of the sales agreement, you can fight those chargebacks with the right evidence.
This goes double for fraudulent chargebacks, where a customer tries to cyber-shoplift by falsely claiming fraud on a purchase they made. Fighting these chargebacks is always the right move, but small merchants don’t always have a lot of resources to devote to it. If you’re having a hard time dealing with these chargebacks, remember that an experienced chargeback management firm can help put you on the right path.