Does Direct Response Always Mean High Chargebacks?

By Travis Gomez and Richard Parkin

Direct Response marketing is an effective, high-speed marketing approach designed to convert visitors into buyers within a single engagement. By leveraging a Direct Response approach, businesses can maximize the impact of the traffic they’re able to generate by making the most of a relatively limited budget.

Successful entrepreneurs learn how to manage the drawbacks sometimes associated with Direct Response. In financial terms, the most critical trend to stay ahead of is navigating chargeback rates.

Because of how quickly customers move from initial contact to purchase in Direct Response, there’s a tendency for buyers to think twice after purchase, which may lead to a larger-than-expected chargeback rate.

Buyer’s remorse often causes major problems for Direct Response marketers, with chargebacks wiping out profits from lost products, revenue, and fees. More significantly, however, excessive chargebacks can potentially jeopardize your merchant accounts.

That said, chargebacks don’t necessarily have to be a problem for Direct Response marketers. Handled correctly, chargebacks can be kept at an acceptably low level, allowing marketers to retain the benefits of Direct Response — without one of the approach’s biggest drawbacks.

Below, Shockwave Solutions co-founder (and merchant account expert) Travis Gomez explains how Direct Response entrepreneurs should prepare to handle chargebacks, why it’s so important to have a plan — and why you should start building that plan before anything goes wrong.

Understanding Chargebacks in Direct Response

When entrepreneurs start out in Direct Response, they’re usually operating at a low scale, getting to know their client base before scaling their operations. From a financial perspective, this can create some problems. At a low scale, most payment processors are content to allow businesses some leeway in terms of chargeback ratios.

As businesses scale, however, they often find that their payment processors are no longer able to be as lenient. With increased revenue, payment processors need to pay more attention to merchants that may exceed the card brand thresholds, rather than just applying automated risk monitoring processes to their accounts.

At this point, chargebacks start to present a more severe problem for businesses. While a 2–3% chargeback rate may be a minor inconvenience at a small scale, maintaining this chargeback ratio as your business scales to 10x your initial volume can become a crisis.

While the specifics may vary depending on the individual payment processors, Visa’s rules specify that businesses have an excessive number of chargebacks when they exceed 100 chargebacks a month AND have a chargeback ratio over 0.9%.

Staying over this excessive range will damage your business. Visa and other payment processors can apply heavy fines for accounts with overly-high chargebacks, in addition to the lost revenue, fines and time spent fighting chargebacks. Banks really don’t want to deal with high-chargeback accounts, and won’t hesitate to offboard companies that rock the boat with excessive chargebacks.

Having your account suspended or cancelled by your payment processors puts you in a terrible position. You don’t have much ground to negotiate from, and have a very short window in which to find an alternative, so any replacement you’re able to secure will come with unattractive terms and restrictions.

Because of this, Direct Response entrepreneurs need to get chargebacks under control before beginning to scale. It’s always easier to solve potential MID problems at a small scale than it is to redesign your approach running at full scale. Here’s where to start:

Preventing Direct Response Chargebacks

Generally speaking, there are two main reasons why customers choose to file a chargeback. Each one needs to be addressed uniquely by entrepreneurs: ‘Real’ Fraud & ‘Friendly’ Fraud

‘Real’ Fraud

Chargebacks are supposed to give consumers protection from unauthorized charges to their credit card. However, real fraud can happen when a consumer realizes how much energy and effort it takes for a business to contend a chargeback. Unscrupulous buyers can file a chargeback without any justification, under the assumption that the defrauded company won’t take the time to contend the charge.This type of chargeback fraud is an increasingly common issue. The best defense against this type of chargeback fraud is to ensure that you can successfully fight valid orders when chargebacks are filed.

Another form of real fraud happens when other bad actors steal credit card data or attempt to take advantage of incentives built into your offers. For example, affiliates may use stolen credit card data to obtain commissions on “sales” that they generate. Consider

Depending on your payment processor, CRM or fraud management vendor, you may be able to automatically block suspicious transactions (for example users who frequently file chargebacks, IP or email addresses that attempt numerous transactions). At the very least, set thresholds to stop the most egregious fraud attempts and investigate how your provider handles these, and whether they’re sufficient for your company’s requirements.

‘Friendly’ Fraud

Unfortunately, there’s nothing friendly about fraud. Friendly fraud occurs when the real consumer legitimately makes a purchase, but later claims “fraud” or disputes the transaction through a chargeback.

Fundamentally, no matter what circumstances lead to this, it all happens for one core reason: Mismanaged Customer Expectations. Did you charge them the amount they expected when they expected it? Did they recognize the charge on their credit card statement? Did they feel like you oversold the value of the product or they paid too much? For example, they paid a premium price, but the order showed up in a plastic sleeve drop shipped from China.

Whether you set these expectations or not, consumers always have them when they make a buying decision. To reduce dissatisfaction-related chargebacks to a minimum, there are three essential steps to follow:

First, investigate and understand the specific reasons behind your chargebacks. Are customers disproportionately filing chargeback requests for specific products? Is there a problem with your packaging or fulfillment? Don’t let chargebacks go unexplained: find out what’s causing them, and fix the issue or learn how to set or reset their expectations. It could be as simple as changing your order confirmation email or tweaking some of your sales copy.

Next, restrictive refund policies tend to be a mistake in Direct Response. While you don’t want to lose a sale, it’s always better to offer a refund than it is to receive a chargeback request. Ensure that your refund policy (or lack thereof) isn’t driving dissatisfied customers to file chargebacks.

Last, your customer service team should be one of your strongest assets for preventing chargebacks. A customer who has a positive interaction with a CS agent is almost certainly not going to file for a chargeback, so take the time to plan out scripts, offers and options so that your team can satisfy customers wherever possible.

Ultimately, minimizing chargebacks is about making them a less desirable option for buyers. By implementing a framework wherein would-be chargeback filers have other options, you take away their incentive for filing, allowing your company to scale without the risk posed by excessive chargebacks.