Dropshipping Merchants and Chargebacks

Dropshipping is an increasingly popular form of ecommerce among merchants due to the trend towards online transactions, and given extra momentum by the pandemic. By eliminating the need for merchants to maintain an extensive inventory, the dropship approach makes it possible for retailers to carry a much wider stock of inventory than would otherwise be the case.

Dropshipping Merchants and Chargebacks

What Is Dropshipping?

Dropshipping is a procedure for delivering merchandise in which the retailer doesn’t maintain items in inventory, instead shipping them directly from the warehouse where they are stored when a customer places an order. Especially for merchants offering niche or difficult-to-store products, the approach offers them a chance to be competitive without spending an inordinate amount of money storing goods.

Because dropship merchants can get started without investing heavily in product manufacturing and research or incurring high overhead costs, it can be a low-cost way to enter the ecommerce business.

While this method has the obvious benefit of cutting down on the risk of carrying too much inventory, it does give the merchant less control over the shipping process.

In some cases, this can result in late shipments or products that are either damaged or not what the customer expected. Besides the damage this can do to customer loyalty, it can also lead to chargebacks, something every merchant wants to avoid.

To cut down on chargebacks, dropship merchants must run their business in a way that caters to customer demand while providing them with excellent customer service.

The Costs of Chargebacks

The dropship business model offers a merchant less control of the fulfillment process, which can lead to disappointment when a product reaches a customer due to issues such as late delivery or damage to the product. In some cases, product descriptions are not accurate or are even misleading. Dropship merchants who sell luxury or expensive goods may be targeted by fraud rings trying to take advantage of presumably weaker anti-fraud defenses of smaller merchants.

Besides the loss of revenue associated with a chargeback that reverses a sale, there are other costs as well. These include fees charged by payment processors for each chargeback and the potential costs associated with a higher risk merchant rating. If you’re getting multiple chargebacks, it may cause your chargeback-to-sales ratio to exceed 1%, where banks and card networks impose higher fees.

This could result in being placed in a chargeback monitoring program featuring added fees on new chargebacks. In the worst-case scenario, you could lose your merchant account altogether and have to work with specialized high-risk payment processors that charge higher fees.

Given these costs, it is crucial for dropship merchants to take all possible steps to reduce the occurrence of chargebacks.

How to Cut Down on Chargebacks as a Dropship Merchant

There are a variety of ways merchants who use dropshipping can reduce their chargebacks. These include:

  • Be proactive with refunds
  • Allowing your customers to return and receive a refund when they are unhappy with a product is better than getting hit with a chargeback. Make sure that it is easy for them to reach customer service to increase the chances that customers will contact your customer service department rather than request a chargeback from their bank. It also helps to prominently display your return policy to make it more likely customers will reach out to you if they are unhappy with a product.

  • Make your product descriptions as accurate as possible
  • For dropship merchants, accurately describing the products you are selling is crucial to reducing potential customer dissatisfaction and chargebacks. When customers receive a product that is not what they expected, many will contact their issuing bank for a refund, even if you have a generous return policy. To minimize such incidents as much as possible, it pays to ensure that your product descriptions provide customers with a complete picture of exactly what they will be receiving when they make a purchase.

  • Avoid underestimating delivery times
  • While late delivery is not a valid reason for a chargeback, when a product doesn’t arrive when a customer expects it can nevertheless result in a dispute. To avoid the added time and effort involved with dealing with the dispute process, it is best to provide the most accurate delivery dates possible, erring on the side of caution when in doubt. Checking in with the warehouse(s) sending out your products is recommended to make your delivery estimates as informed as possible.

  • Employ anti-fraud tools and procedures
  • Fraudulent orders can result in chargebacks when card holders complain that fraudsters have used their cards to place orders they didn’t authorize. The use of 3D Secure authentication with AVS and CVV verification is a must to help cut down on chargebacks caused by fraud.

What to Do If a Chargeback Goes Through?

While providing accurate product descriptions and delivery estimates, along with a generous return policy, can reduce the number of chargebacks a merchant deals with, some are still likely to come through. When faced with a chargeback, you can dispute its legitimacy if you feel you have the evidence to back up your case.

Through a process called representment, you can deliver evidence supporting your transaction to the card-issuing bank. If the documentation and other evidence you present strongly supports your case, the bank will reverse the chargeback and reinstate the transaction.

For companies who lack the time or resources to effectively handle the process themselves, working with a chargeback management company can improve their chances of successfully overturning a chargeback.

Proactive Dropship Chargeback Management

While going into business as a dropship merchant offers a number of benefits, smart chargeback management is crucial to optimizing results. If you don’t take steps to reduce their occurrence, chargebacks can quickly cut into your profits and even erode them entirely if your chargeback-to-sales ratio exceeds 1%.
As a dropship merchant, the steps outlined above can help you reduce chargebacks and improve overall profitability. Taking a proactive approach to implementing them is essential to optimizing revenue retention.

FG Editorial Team
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