Every business has unavoidable expenses that affect the bottom line, and are accepted as the cost of doing business. Many merchants view chargebacks as one of these costs you just have to live with, but that's a category error.
Many chargebacks are avoidable, and you shouldn't just accept them as a cost of doing business. Ignore chargebacks, and you could see up to 40% of your revenue lost to fraudsters and unhappy customers.
The "True" Cost of Chargebacks
You see, chargebacks don’t just cost you the loss of the product or sale.
When you factor in transaction fees, marketing costs, operational expenses and chargeback fees, the average "true cost" of a chargeback is 2.5 times the sale price (essentially $250 on a $100 sale.)
On top of this, rising chargeback rates can mean higher payment processing fees or, in really bad scenarios, even put your entire merchant account at risk. For most business owners, this just isn’t a risk they’re willing to take.
The ability to prevent, avoid and fight chargebacks lies in identifying their root causes. Why are these chargebacks occurring in the first place? What are the issues at hand that push a customer to dispute a charge and request a refund?
Once you know what’s causing your chargebacks, you can take steps to address those issues and reduce chargebacks from the ground up.
Determining what’s causing your chargebacks isn’t as hard as it may sound. In fact, card networks assign what are called “reason codes” to each chargeback, which essentially tell you right then and there what’s behind the dispute. A chargeback with the Visa reason code 13.1, for example, means the product was never received or provided. A chargeback with a 4841 MasterCard reason code? That would indicate the customer cancelled their subscription but was charged anyway.
Unfortunately, most merchants don’t pay attention to these codes—and it’s often a grave mistake. Without knowing the cause, you can’t pull together the proper evidence to fight the chargeback, thus wasting time, effort and resources, and reducing your chance of winning. You also can’t take steps to proactively prevent chargebacks from occurring in the first place, an even bigger (and more expensive) issue in the long-term
Most business owners are incredibly busy—so busy, the mere thought of gathering the evidence, writing up an explanation and poring over receipts just to fight a chargeback seems impossible.
But letting chargebacks go—particularly when they’re unwarranted—can be a serious mistake, especially in the long run. Choosing not to fight an illegitimate chargeback can lead to:
If you do choose to use a professional tool or chargeback management firm, make sure you research your options carefully. Choose a vendor who is proven, has plenty of industry experience and who doesn’t require a long-term contract. Any legitimate firm will prove their worth to you month after month.
Want to learn more about the threat that chargebacks pose to your business? Need advice on how to fight and prevent them? Download our newest eGuide, Why Chargebacks Are No Longer a Cost of Doing Business, now.