The Costs of Chargebacks to Merchants
The cost of chargebacks to online merchants can be significant. In fact, countless merchants have found their business efforts completely thwarted by frequent chargebacks.
The initial cost of chargebacks is reason enough to be concerned. Every chargeback automatically results in a loss of income due to the cancelled payment of an order. Money a merchant already collected is suddenly (and often unfairly) taken from them. For businesses that deal in relatively high-ticket items with lower sales volume, a single chargeback can truly devastate the bottom line. Businesses dealing in smaller cost items that are not well financed may also have a difficult time weathering the storms that can be created by chargebacks.
Chargebacks are a margin killer. Consider this scenario of John Acme and his widget sales site. Each widget retails for $1,000. The cost to Acme for a widget is $500, resulting in a profit of $500 per widget. John has additional operating expenses of $2,000 per month. Acme sells 20 widgets per month. So, Acme clears $10,000 per month. If Acme’s operating expenses are taken into account, his total cost of doing business is $7,000 ($5,000 for widgets plus $2,000 in other costs). He makes a profit of $3,000 per month, on which he relies of living expenses.
If Acme suffers two chargebacks in a month, he loses the $2,000 in sales after already purchasing the widgets. His profit is now all the way down to $1,000. Two chargebacks would crush Acme’s ability to pay rent, buy gas and eat. Acme may or may not recover the merchandise he’s already sent out, but he will still not be able to profit from that until he processes orders for the next month. Two simple chargebacks can turn his sufficiently profitable business venture into an outright disaster.
The impact of chargebacks can vary, of course, based on the exact nature of a merchant’s enterprise. Regardless of whether or not a few chargebacks will destroy a venture, however, the Acme case illustrates that every chargeback creates a palpable reduction in bottom line profits. Merchants are in business to make money—not to have it taken away. Chargebacks, therefore, must be minimized or avoided whenever possible.