How to Budget to Avoid ChargebacksAt What Point Are You Spending More than You Save?
How Much Should You Budget to Avoid Chargebacks & Protect Your Bottom Line?
How much should you spend to avoid a chargeback?
No matter how many chargebacks you’re receiving, it’s a good question to ask… but also a hard one to answer.
If chargebacks aren’t a huge issue for you, how much protection do you really need? If you’re drowning in disputes, how do you make sure you're covered? Spend too little, and you’re exposed to crippling losses and penalties. Spend too much, and you’re wasting resources that could be used for growth, distributions, or other initiatives.
In this chapter, we present a simple framework for creating a chargeback prevention budget that’s just right for you.
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Budgeting for Chargebacks… & Chargeback Prevention
Every time you incur a chargeback, you lose out on the revenue from the sale, the inventory you shipped, and other associated costs. You’ll also be hit with a chargeback fee ranging from $20 to $100 per filed dispute.
But, these are just the initial costs. The true cost of a chargeback also includes the operational expenses of fighting the dispute and the long-term damage to your merchant account’s health.
LexisNexis Risk Solutions estimates that $1 lost to fraud in the US ultimately cost merchants $4.61 to resolve. That’s the “true cost” of fraud.
Once you have a handle on your true costs, you can start establishing parameters. Analyze your chargeback history and calculate the average amount you’re losing per dispute.
Are there smaller ones that aren't worth the resources to fight? Can they be automatically refunded? Based on what you can uncover, create a reserve fund specifically for potential fraud losses. Give yourself a cash cushion so disputes won’t disrupt your day-to-day cash flow.
The most expensive chargeback solution is the one that doesn’t work
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Your budget should also influence your pricing strategies. If a particular product line is a magnet for chargebacks, you may want to raise your prices a bit. That way, you can absorb anticipated fraud losses without universal price increases.
Similarly, you may want to allocate your fraud-fighting dollars in response to inherent risk characteristics. A high-value and easy-to-resell product, for example, may warrant a larger investment in fraud screening. Low-cost, low-risk items may require less protection.
To Re-Present or Not to Re-Present?
When it comes to chargeback prevention budgeting, you have another important strategic decision to make: should you fight a chargeback, or just accept it?
As we alluded to earlier, chargebacks under a certain price threshold may not be worth the fight. Sometimes fighting a dispute is a waste of resources (even if you win). This is another area where understanding the true cost of your chargebacks can help you create a more accurate budget.
Analytics can help you make informed decisions as to which chargebacks are worth fighting. Historical evidence, the dollar amount at stake, and the likelihood of winning should all be factors here.
Regardless of your specific approach, every dollar you spend on prevention should be viewed as an investment. Work with your finance and accounting staff to build an ROI model so you can see which efforts are paying off.
You can double down on what works and cut what doesn’t. This will enable you to harness your chargeback budget — ironically and against all odds — as a strategic driver of profitability.
