3 Ways to Reduce Your Chargebacks and Cut Costs

3 Ways to Reduce Chargebacks and Cut Costs

Imagine you run an online business called, let’s say, World of Hats. As you might have guessed, you sell really cool hats via your website. Beanies, fedoras, fezes, snapbacks, flat caps and baseball caps — the lot!

Let’s say you’ve invested a fair whack of money into your website and the same again into marketing it. From your investment, you’ve attracted a steady stream of users, many of which have bought a hat from your website.

You inbox goes ping as the order confirmations roll in and your merchant account goes cha-ching as the money arrives.

You’re happy. Your customers are happy. Everyone’s happy.

Well, everyone’s happy until your bank whips the money out of your merchant account and sends it back to your customer in what’s called a chargeback.

For most online business owners, chargebacks are nothing new. They’re common, they’re disruptive and they can turn a good day into a bad one in the blink of an eye.

What if I could give you some super simple tips to reduce the number of chargebacks you receive? Pretty good, huh? Well, that’s exactly what I’m going to do!

Before we jump into the specifics of reducing chargebacks, let’s get a quick definition of what a chargeback is.

What is a chargeback?

A chargeback is basically just a disputed transaction between a customer and a business.

With chargebacks, however, the customer lodges the dispute with their card provider not the business and it’s their card provider that mediates the dispute.

After the dispute is resolved, there are two different outcomes. Either the card provider decides the chargeback is genuine and sends the money to the customer or it decides it’s unfounded and returns the money to the merchant.

And that’s all you really need to know. The technicalities are more complicated but they don’t really impact on how you reduce chargebacks and cut your costs.

Improve your refund system

Twenty years ago, returns policies and processes were simple. If you bought a hat and it didn’t fit, you took it hat back to the hat store and asked for a refund.

Unfortunately, it all gets a little more tricky when you take your business online.

Just think about it for a minute. World of Hats could be based in New York and your customers could be in San Francisco, Paris or London. They can’t exactly drive over and return their hat.

Since you and your customers are physically far apart, your returns process is way more complicated. Here are just a handful of things to think about.

  • Who arranges the return?
  • Who pays for shipping?
  • When do you actually refund your customer?
  • Do you refund the original shipping?
  • What happens if the delivery company loses the package?

Even the very best returns processes are a pain in the neck and that’s important because modern customers like convenience. They don’t like filling out forms, waiting for responses and organizing return postage themselves.

If your returns process isn’t convenient, do you really think they’re going to stick with it? Or do you think they’ll look for an alternative refund option like, say, a chargeback?

I know that’s not what chargebacks are designed for but it’s definitely how frustrated consumers will use them.

The good news is that improving your returns process isn’t all that hard. Here are a few tips to improve your process.

  • Include pre-paid envelopes or jiffy bags with deliveries
  • Employ dedicated returns staff
  • Publish a clear returns policy and publish it on your site
  • Don’t argue about returns as retention is cheaper than acquisition
  • Process returns on whatever channel your user is using
  • Communicate with users at every stage of the return

If your returns process can hold its own with the convenience of a chargeback, impatient customers should stop resorting to chargebacks for a cheaper return alternative.

Bill customers under a recognizable name

Back in 1999, Jason Fried, Carlos Segura and Ernest Kim founded a company called 37signals. At the start, they focused almost exclusively on website development.

However, somewhere along the line they stopped developing websites and started developing software. One of their products was Basecamp, a cloud-based project management system.

Basecamp - a cloud-based project management system.
Basecamp – a cloud-based project management system.

Basecamp is a really great product and it started acquiring customers left, right and center. Tens of customers became hundreds and hundreds became thousands.

With that success, Basecamp began to eclipse 37signals.

It got to the point where users were searching straight for Basecamp, clicking on the Basecamp website and buying a subscription to a product called Basecamp. Throughout the whole process, they never saw the name 37signals.

And that caused problems when they got their monthly credit card statement and saw a mysterious charge to a company — 37signals LLC — that they’d never heard of. Some people assumed it was a fraudulent transaction, panicked and lodged a chargeback.

This developed into a real problem for the company and they set about trying to fix it. Eventually, they stumbled on a solution: Replace 37signals LLC with 37signals-charge.com.

When a customer went to the URL, they found a website explaining what 37signals was and why they were billing them.

The result was pretty amazing with chargebacks dropping by 30 percent overnight!

The takeaway tip is pretty clear. Choose a statement name that your customers will immediately recognize!

Keep communicating

For my last tip, I’m going to keep it simple: Communicate, communicate, communicate.

Just think about the last time a company gave you awful customer service. Actually, not even awful customer service, just poor customer service. Can you feel your shoulders tensing up?

Well, imagine feeling that like and then hearing about chargebacks. Compared to the hassle of official customer service channels, chargebacks look like a stress-free way out. You can deal directly with your efficient card provider, bypass the merchant and get your money back.

(Again, I know this isn’t what chargebacks are for but you’ve got to be realistic about how they’ll be used.)

Sadly, your service doesn’t even have to be that bad to push a customer to this point. They just have to feel like you’re working against them and now for them.

And the weird thing is that good customer service isn’t even that difficult. It’s just simple things done well.

Communicate regularly. Avoid sending sporadic updates. Respond to emails and phone calls quickly. Train your frontline staff so they can actually provide answers.

Make those simple changes and you’ll be amazed at the change in the attitudes of your customers.

Average Chargeback Rates

According to Optimized Payments consulting, the average chargeback rate varies depending upon your line of business. They created this nifty graph here in which we see that a chargeback rate of under 1% is good by industry standards.

A standard chargeback rate of around 1% is the median across all industries.

Conclusion

So there you have it, three simple tactics you can use to decrease the number of chargebacks you receive. Let us know how they work and if you have any extra tips for us!

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About Stephen Hart

Stephen was the CFO of Worldpay before leaving to found the UK’s first merchant services comparison site Cardswitcher.

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  We will not share your details. Check our privacy policy.
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