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Jan 05, 2006
Best Practice

How Subscription Sites Can Wage War Against Fraudulent Chargebacks ($90 Million for 2006)

SUMMARY: According to MarketingSherpa estimates, online subscription sites will lose a combined total of at least $90 million to fraudulent chargebacks this year. That's about 3% of your bottom line. Even with extra labor costs, you'll probably become 2% more profitable if you simply fix your chargeback problem. Our how-to article includes:

- The 6 Myths of Chargebacks
- 6 specific tactics to fight chargebacks

Plus a handy worksheet to quickly estimate how much chargebacks are costing your ecommerce site:
In 2006, ecommerce sites as a whole are predicted to lose about $1 billion to fraudulent credit card chargebacks.

Online subscription offerings are particularly vulnerable -- in fact, ContentBiz estimates, at minimum, sub sites will lose $90 million this year due to chargeback fraud.

Why? You're selling something that's virtual, less "real" than a box that comes in the mail, so some consumers feel less concerned about reversing charges. And, some are confused by (or pushing the envelope on) in your free-trial-with-credit-card offer. Or maybe they're in the ranks of the approximately 20% of the population who think all-Web-content-should-be-free.

Quick backgrounder on chargebacks

A chargeback is generated when a customer calls their credit card issuing bank (rather than the merchant directly) and alleges that an item on their monthly statement was unauthorized. If the merchant doesn’t dispute the chargeback and get it reversed, the merchant must refund the money to the customer plus usually pay an additional $25-$50 fee for each chargeback.

Plus, excessive chargebacks (anything over 1% of transactions) can put a merchant's ability to take credit cards in jeopardy.

With these losses and risks, one might think that most publishers have an iron-clad process to defeat and dispute chargebacks, right?

“The credit card infrastructure is incredibly opaque from the merchant’s point of view.” says Gene Hoffman, CEO Vindicia, a credit card fraud protection service. Prior to Vindicia, Hoffman was the founder and CEO of eMusic, one of the first companies to launch a digital music subscription service.

“eMusic was kind of a pioneer in some ways for content subscription billing. We were dealing with all of the backend mess,” describes Hoffman.

When eMusic's subscriber base hit 80,000, chargebacks became a significant enough loss item that Hoffman dedicated a research and recover effort team to the problem. ”We wondered what is a chargeback, and why are these happening? Is it a problem with my product? Is it a marketing issue? Am I being gamed by a third party?”

Hoffman learned two critical facts: o Revenue and profit is left on the table if chargebacks are ignored. “The $15 that guy is disputing, he is liable for it, and with very little effort you can generally dispute the chargeback and get the money back.”

o Other sales are lost that eMusic didn’t know about simply because they weren’t dealing with chargebacks.

“Chargebacks are kind of like a blood sample. What chargebacks will tell you is what people are confused about in your buy process. Oh crap, I’m actually confusing people over this issue around the way I’m selling it. A wealth of knowledge tracked over time…you get to know a lot about your whole business.”

Six Common Myths About Chargebacks

Why aren’t more subscription sites proactively dealing with chargebacks? Here are six myths that you'll probably recognize:

Myth #1: Chargebacks are just a cost of doing business.

“Looking at your chargeback flow as a new marketing/operations issue is a very interesting way to look at it than just saying it’s ‘just a bad debt,’” describes Hoffman. (See link below for sample worksheet to figure out how much chargebacks may be costing your site). “You need to make sure someone in the organization is looking at this holistically. Otherwise you are losing too much data and so much money.” Rather than just letting chargebacks stack up in a file cabinet somewhere in the accounting department, Hoffman suggests that ideally the CEO be involved, if they are product-oriented the CFO and head of interactive marketing must be involved.

Myth #2: As long as my chargeback rate is below 1%, I can ignore them.

Acquiring banks (the banks that give a merchant the ability to take credit cards for purchases) usually have a 1% threshold for what is considered an acceptable level of transactions that are chargebacks.

But Hoffman points out “you can be cruising along at say 0.7% at the transaction level, but you might be actually losing 2-5% of your revenue by ignoring them.” That’s because the average order that gets a chargeback ticket is *twice* the dollar amount average of all other orders. (Those who intend to dispute the charge, often order the publisher’s premium subscription.)

Myth #3. Chargebacks are from stolen credit cards.

“In fact, for digital merchants, very few chargebacks are from stolen cards,” Hoffman says. About the only time this happens is if one or more of your affiliates is stealing cards, and placing orders through their affiliate link, grabbing commissions from the fraudulent sales.

Myth #4. Our subscribers will hate us if we fight chargebacks.

“At the point of a chargeback, the customer probably already hates you or thinks you’re untrustworthy at this point.” Hoffman has found that 80% of chargebacks are due to subscriber remorse. “We routinely see a reason for chargebacks as ‘I can’t afford.’ 20% of them -- there is some true fraud or a legitimate dispute. But it’s worth your time to fight the chargeback to try to get back that 80%.”

Myth #5. We have to be sneaky to get subscribers.

Marketers often fear that if they communicate too much with the subscriber, retention rates will lower. Example, reminding a free trial subscriber of the negative opt-out (i.e., a free trial offer that requires a credit card to start, and if the subscriber cancels before the end of the trial, no charge is made to the card). Should a publisher make it easy to opt-out of the trial?

“We’ve found that the people you lose in reminding them are usually those who would be a chargeback. They weren’t going to pay me anyway,” Hoffman suggests.

Marketers are a bit hesitant to do this because it probably will result in a drop in free-to-paid conversion rates. This is why the chargeback issue must be looked at from a broad corporate perspective. What is gained in real revenue (and likely profit) over the long run makes more sense than just looking at isolated conversion reports.

Myth #6. Bank rules are clear and always followed.

The rules are not always followed, often because they are so complex. “And they change frequently… it’s hard to keep up.” Example, the bank rep may not know the answer to a question about a rule, which makes things confusing, resulting in wrongly coded chargebacks. Wrongly coded chargebacks can often be reversed, according to Hoffman.

Six Practical Tactics to Fight Unreasonable Chargebacks

If a publisher is convinced they should be tackling chargebacks, how do they dispute them effectively?

Best Practice #1. Categorize and analyze the chargeback.

Chargebacks generally can be put in three categories:

o True fraud. “These are not worth doing anything more with. You got taken,” says Hoffman. These might come from stolen cards.

o Legitimate problems. This is when a subscriber is really upset with the publisher or the product. Maybe they couldn’t access the download, or the password wasn’t working. Hoffman suggests getting feedback from the customer service database to figure out how to keep these kinds of events from occurring again.

o Friendly fraud. “Most chargebacks come in this way, from customer resistance, and sometimes from just mean and bad people,” Hoffman says. “It’s kind of like petty theft.” A publisher might find some are repeat offenders, too.

Best Practice #2. Revamp your check-out & communications

To address the friendly fraud category, it’s important to take steps in the check-out process and your customer service procedures to build a file so you can “stitch up” the evidence later if a chargeback is generated. Four specific tips:

Tip: Add a separate check-box that explicitly requires the subscriber to agree to the site’s terms of service.

Tip: Capture ongoing relevant information from subscriber. Example, get the IP address at both the purchase stage and when they log in to use the service afterwards. If the IPs match, it gives more proof that the purchase was legitimate.

Tip: Have a clear cancellation policy in your terms and conditions for subscribing, and teach each customer to contact the publisher directly to cancel the sub. Perhaps place “your account” type links and buttons on web pages and emails. Don’t try to hide or bury the “I want to cancel” options.

Tip: Use a clear credit card statement identifier that matches the company or product name whenever possible. The closer the identification, the less likely a customer will dispute a charge. Make sure your telephone number is correct, and consider a toll-free number. Anything you can do to encourage a subscriber to call you directly rather than the credit card company will reduce potential chargebacks.

Best Practice #3. Create the chargeback dispute documentation

Hoffman’s rule of thumb: “If you were standing in front of a judge in a small claims court, would he believe that the transaction occurred?” Your on-hand documentation should include:

-- Detailed cover letter describing why the merchant believes the transaction was valid

-- Transaction and activity information after the sale (Example: Did the customer buy, log in and then use the product at the same IP address, but now claims they never subscribed?)

-- Additional info such as the site terms of service, screenshots of purchase process, purchase receipts, emails exchanged with customer service reps, etc..

Best Practice #4. Fax response to merchant processor.

“Do it as fast as possible, within 1-2 days, even though the merchant processor says you have longer. You want to keep it fresh in the customer’s mind,” Hoffman recommends.

Best Practice #5. Be willing to arbitrate if necessary.

“If your facts are good enough, arbitrate. If you made your case strongly enough, you’ll win. You’re setting precedence in your file,” says Hoffman.

The credit card issuing banks usually have profiles of merchants’ chargeback dispute history. If a publisher doesn’t have a precedence of disputing chargebacks, the bank is likely to quickly recommend the chargeback. But if they see on the file a publisher has disputed (and, more so, reversed) many of them, the banks are likely to persuade the customer to call the merchant directly to resolve the problem – thus avoiding a chargeback entirely.

Remember, the subscriber is also the issuing bank’s customer. That means the bank can be hesitant to argue with the customer, unless they see the publisher disputes chargebacks a lot and wins.

Best Practice #6. Gather results of disputes report and analyze.

“What’s most interesting about it is the true buy process and marketing program analytics that come out of the chargebacks,” Hoffman says. After a couple of months of tracking, the publisher can apply what was learned back to improve marketing, ecommerce, customer service – plus to reduce future chargebacks.

Two ways you can use this data: o Tweaking marketing copy. Is there text in the subscription offer that is causing confusion for customers on the backend? This can often only be discovered from chargeback data.

o Clean up your affiliate pool. “You think one if your affiliates is your best one, but he generates 80% of your chargebacks. This affiliate might be misrepresenting your product or, for whatever reason, buying crap traffic. Finding out which affiliates might be robbing you blind is key.”

A publisher might be able to get rid of a huge pool of chargeback customers in one swoop. “Showing your chargebacks by affiliate can be a very profitable tool,” says Hoffman.

Useful links related to this article

Sample worksheet: “How much chargebacks are costing your business?”

See Also:

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