Measuring the True ROI from Chargeback Management
Chargebacks cost so much more than just the lost sale. When you factor in the chargeback fees, the marketing expenses, and all your transaction costs, chargebacks often equal losses of 2.5 times the sale or more.
On top of this, rising chargeback rates threaten your merchant accounts—the very things you need to collect payment and do business. This is why fighting chargebacks (and working to prevent them) is so important.
Whether you decide to manage your chargebacks in-house or outsource, the best plan is the one that provides a positive return on investment.
The Chargeback Fight: In-House or Outsourced?
You have two choices when looking to reduce and prevent chargebacks: handle the efforts in-house or use a third-party chargeback management team or tool.
As with anything, both options have their pros and cons.
Fighting Chargebacks In-house
The big issue with fighting chargebacks in-house is that most businesses don’t have the resources to do it properly.
They’re not up to date on the latest regulations and practices, and they’re not sure what evidence they need, how to present it or when to present it by. This puts them at a disadvantage and significantly reduces their win and recovery rates.
There are some advantages, however. These include:
- Lower upfront costs. Business owners who handle chargebacks in-house will see upfront savings. In the long run, though, they’ll typically lose out due to higher chargeback losses and lower win rates.
- More data security/control. Many business owners are worried about their data security when outsourcing to a third-party chargeback firm. Though keeping things in-house does safeguard your data in a sense, using a third-party firm doesn’t necessarily mean the opposite. It’s all about doing your research, vetting your firm and finding a company that takes proper measures to protect your data and proprietary information.
- Opportunity to keep on more staff. Some business owners will hire new team members to handle chargeback management efforts. They may be hesitant to lay off workers or reduce their hours in order to use a third-party management firm.
If you do choose to handle chargebacks in-house, it’s very important to get regular chargeback reports from your payment processors. Having this data on hand is vital to ensuring your efforts are successful and improving.
Outsourcing the Chargeback Fight
Using a third-party firm to fight and prevent your chargeback might come with a nominal upfront or monthly fee, but if the firm is effective in their strategy, your recovered revenues will far outweigh that cost in the long run.
Outsourcing your chargeback efforts can give you access to:
- Vital expertise and experience. A chargeback firm will have hands-on experience in fighting and preventing chargebacks. They will also be up to date on the latest rules and regulations.
- Tools. Chargeback firms will have comprehensive tools you can use to track, monitor and measure your chargeback efforts. These are tools most businesses just can’t afford to build in-house.
- Proven strategies. Chargeback firms have time-tested and proven strategies that have worked for hundreds (maybe even thousands) of businesses over the years. They can hone in on the right one to reduce your company’s chargeback rate.
You also get a dedicated, reliable team that can scale up when you need it. Experiencing a holiday spike in chargebacks? No problem. A chargeback firm has the dedicated resources to help you tackle it.
Measuring True ROI from Chargeback Management
No matter which route you choose, it’s important to track and measure your efforts often to ensure you’re making the most of your resources. Here’s how to track your ROI in both scenarios.
You’ll want to measure the following data points: monthly chargebacks, average transaction totals, total amount of revenue subject to chargebacks, chargeback win rate, total chargeback revenue recovered and total cost to dispute chargebacks.
To calculate your net ROI, subtract your total cost to dispute from your total recovered chargeback revenue.
In general, if your recovered revenue is 40% or less, you’re recovering less than a professional chargeback firm could on your behalf.
Also, keep in mind that not all issuing banks will respond promptly to your chargeback evidence. Don’t mistake this as a win. Often, these chargebacks go into arbitration and hit your bank as an additional chargeback later on. You might think you’re winning 60% of your chargebacks, but when you really dig into the data and track it backward, you’re only winning about half that.
You’ll want to measure the following data points: monthly chargebacks, average transaction totals, total amount of revenue subject to chargebacks, chargeback win rate, total chargeback revenue records and total cost paid to your third-party vendor.
To calculate your net ROI here, subtract your total cost paid to vendor from your recovered revenue.
Typically, if your chargeback firm isn’t recovering at least 50 to 60% of your chargebacks, they’re not worth the investment.
Maximize Your ROI
Regardless of which route you choose, it’s important to take steps to improve your ROI month over month.
Many merchants view chargebacks as a "cost of doing business" that you just have to live with, but that is a category error.
Our new guide, Why Chargebacks are No Longer a Cost of Doing Business, shows you that many chargebacks are avoidable, and by addressing them effectively, you can improve your bottom line.