As a dropshipper, one of the worst challenges you’ll have to contend with is the dreaded chargeback. When you don’t know how to avoid chargebacks, it’s a nightmare. A customer places an order, you ship it out, funds are released, then – sometimes months later- you unexpectedly get a notification that funds have been taken from your account.
To make matters worse, the transactions can be hundreds or thousands of dollars.
Sometimes, customers request chargebacks legitimately, and sometimes they’re a result of buyer fraud. Either way, you can be proactive to mitigate chargebacks for your dropshipping store; that’s the goal here.
First, you’ll learn what a chargeback is and explore the impact they have on dropshippers. Then, you’ll see answers to some of the most common questions sellers ask and learn how to avoid chargebacks.
Now, let’s get to it!
- What is a Chargeback?
- The Ultimate Guide: How to Avoid Chargebacks as a Dropshipper
- Final Takeaway
What is a Chargeback?
In short, a chargeback is a demand made by a credit card issuer or payment processor for a retailer to compensate for a loss on a disputed transaction. In dropshipping, disputes and chargebacks tend to occur when a customer is unsatisfied with their purchase.
Once a chargeback is initiated, the funds are removed from your business account and placed in escrow until the dispute is resolved. Unfortunately, once they occur, they are difficult to win.
The dispute process can be initiated weeks, months, or even up to a year after a transaction is supposedly finalized. I’ll speak plainly: This sucks for sellers. There is no transaction limit on chargebacks, so a fraudulent chargeback can set you back thousands of dollars out of the blue.
Even if you win a chargeback dispute, a hold on funds can throw a wrench in your cash flow, as funds can be held for up to six months.
Sadly, in the end, you may have to eat the costs, even when you’ve done nothing wrong.
Here’s How Chargebacks Affect Dropshippers
Dropshippers hate chargebacks because they immediately hinder their cash flow, impact their bottom line, and can have long-lasting negative effects.
The outcomes of the dispute process are typically determined at the discretion of the card issuer or payment processor – these institutions tend to hold the customers’ interests above the sellers.’
Sometimes, chargebacks become a recurring problem when a seller doesn’t understand why they keep happening. Setting unrealistic expectations for shoppers, unintentionally providing poor customer service, and technical mistakes are everyday occurrences with new dropshippers.
There is no set number of chargebacks that a seller is limited to. However, according to Sift, the industry-standard maximum is 1%. This means that more than 1% of your transactions result in chargebacks or disputes, and there can be consequences.
Depending on which platforms you sell on or process payments through, too many chargebacks can lead to excessive payment holds. Eventually, it may even get you banned from using a platform, so you have to learn how to avoid chargebacks.
The Ultimate Guide: How to Avoid Chargebacks as a Dropshipper
Some chargebacks are inevitable, but they don’t have to be a continually recurring problem, even for dropshippers. As a dropshipper, here’s what you can do to steer clear of them.
1. Quality-Check Every Product You Offer
Dissatisfaction is the leading cause of chargebacks & disputes — Legitimate chargebacks occur when a customer feels they didn’t get what they bargained for.
Of all online sellers, dropshippers are at the highest risk of legit chargebacks because we tend to have less quality control with our inventory.
So, before you put a product in front of your customers, do your due diligence. Some dropshippers read reviews and choose to only work with suppliers that have high customer satisfaction. My advice is to take it a step or two further.
Prior to offering a product in your dropshipping store, order and examine it yourself. Inspect and use each product in your catalog to learn as much as you can about it. If you don’t like the offer, chances are your customers won’t.
Along with your products, you also need to test your suppliers. When you choose a supplier, make sure they are informative, and organized, and that your account can be assigned to a specific person – someone that you can develop a relationship with.
A worthy supplier will also be located in a convenient location or region with the ability to ship quickly, as your customers will expect this.
2. Be Aware of Buyer Fraud
Fraudulent chargebacks happen when a buyer sets out to scam you. New “customers” aren’t always peaches and cream.
So, as pessimistic as it may sound, you need to be on the lookout.
Some common signs of buyer scams that tend to impact dropshippers are:
- Multiple orders from the same account at one time
- Several customers using the same shipping address
- Suspicious email or shipping addresses on an order
- New requests made after an order is placed (change to the shipping address or rush shipping)
- Multiple requests for one item or a transaction higher than usual
- The shipping address in a high-risk location or an influx of international orders
These are all indications that an order is at high risk for fraudulent chargebacks in the near future. So, be on the lookout and learn how to act fast when you run into evidence of a buyer scam.
3. Set Realistic Expectations for Your Offer
Sometimes, a customer will honestly feel that they deserve to have their money back because they don’t fully understand your offer (I knew someone who paid a few thousand dollars for laser liposuction on her chin – when she didn’t feel that her face was perfect after the process, she initiated and won a chargeback for the full amount of the transaction).
You can reduce the occurrence of this type of chargeback by setting clear and realistic expectations.
Product descriptions aren’t just a great place to persuade shoppers and present benefits; you also need to let customers know about the features that they might not like. This may sound counter-intuitive, but – I’m telling you – it’s crucial.
Use your sales pages to weed out people who you already know would be unsatisfied with your offer.
Don’t make disparaging statements like, “the battery life sucks,” but you need to be honest. Instead, you could say something like, “Up to 2 hours battery life.”
Someone looking for something with 12 or 24 hours of battery life would know that your product isn’t a good fit for their needs and move on.
Here’s a perfect example of transparency done right: Gymshark lets customers know exactly what to expect with their clothing via a visual diagram.
Gymshark’s product chart *candidly* highlights the value, comfort, range of movement, quality, size, and length.
Instead of touting misleading information about comfort or leaving out details that some shoppers might see as negative, they just tell it like it is – when you put ‘em on, they’re gonna “feel like compression shorts” (translation: not very comfortable).
4. Create Clear Refund & Return Policies
Realistic should apply to individual product pages and your overall operations.
First of all, if your products ship from overseas, let customers know. Never be deceptive. Sadly, this is a common rookie mistake that has ruined many online stores.
If you insinuate that your products are coming from the buyer’s country, but they take weeks to arrive, customers will hate the waiting game.
Next, your shipping policies should be based on your supplier’s offer. If it will take three days for shipping and handling, make sure your shoppers know this.
Plenty of consumers are happy to wait for a package, but only if they know how long they should expect to stay patient.
Finally, write your own return policy, but be sure that it aligns with your supplier’s. Your return window must be shorter than your supplier’s to give you time to clean up any messes.
If a supplier offers 14 days to make a return, you should give your customers 9-10.
Quick Tip: If your supplier doesn’t allow returns, consider how you might adjust your pricing to accommodate managing them on your own.
And, think about how you might resell, recycle, or dispose of any surplus inventory that you acquire through your return processes.
The bottom line is that you need to share honest details about how shipping, handling, and returns will work. Through your policies, let customers know how they might
5. Use a Trusted Payment Gateway
Using an established, trustworthy payment gateway is more important than you might think.
In addition to moving funds between accounts, full-featured payment gateways provide fraud detection and prevention, which can further help reduce the risk of chargebacks.
A misused credit card is a valid reason for a chargeback, and the fault can rest on you if you don’t take the necessary steps to provide payment security.
Here are a handful of trusted dropshipping payment gateways to consider:
- Amazon Pay
- Shopify Payments
- Google Pay
If you dropship products that aren’t eligible for one of the above platforms (CBD, etc.), then you might look into one of the following:
- Pinwheel Pay
- Merrco Payments
Obviously, this list isn’t exhaustive, but it’s a good starting point.
6. Always Use Tracking Numbers
Not everyone knows this when they first start selling online, but tracking numbers are crucial for trust.
Every single order should have a tracking number. And, it should be shared, not only with the customer but with the payment gateway.
One seller I know lost upwards of $10K after waiting months for chargeback dispute results.
The key factor that allowed the customer to prevail was the fact that no tracking number was shared with the payment gateway (PayPal) at the time of the transaction. Before this, the seller didn’t even know that he should be sharing tracking numbers.
You can add tracking numbers manually or use a third-party app or service to sync your tracking numbers between your online store and your payment gateway.
The latter is more efficient, especially for a dropshipper with multiple orders.
Note that some chargeback management apps have built-in tracking number syncing — always take advantage of this feature when it’s available.
7. Respond Quickly & Fairly to Complaints
First of all, you need to have a clear, easy-to-find method for customers to connect with you. At a minimum, post your customer service email address conspicuously on your website or use a working contact form.
Customer service reps should be trained to act professionally and empathetically and to prioritize complaint resolution. If you’re the one handling complaints, brush up on your customer service skills.
When complaints arise, you need to address them as quickly as possible and keep customers informed every step of the way.
Consider compensation and incentives you might be able to offer customers who’ve had a negative experience to transform these incidents into positive interactions.
In the same tune, chargebacks should be continuously monitored to find patterns or common issues and keep your machine well-oiled – making necessary changes can keep your chargeback rate low.
When they do occur, act fast to provide evidence to the issuing bank, credit card company, or payment gateway.
9. Make Use of Chargeback Management Tools
Chargeback management is the process of taking precautions to prevent chargebacks, documenting transaction details, and responding to disputes.
Most of the safeguards you can implement are listed above, but you don’t have to do everything manually.
Consider taking advantage of apps and services that can help you manage your chargebacks and maximize your win rate on disputes.
- Fraud prevention apps
- Chargeback management services
- Chargeback management apps
- Tracking number syncing apps
- Dispute resolution templates (specific to your payment gateway)
- Customer blacklists
- Chargeback insurance
For complete control of your operations, use these tools as needed to save yourself time and minimize the impact of chargebacks on your bottom line.
These tips will help you mitigate chargebacks for your dropshipping store. Quality-check your products on a case-by-case basis, and watch out for common signs of buyer fraud.
Seat clear, realistic expectations of your entire offer, from products to shipping and returns. Use a trusted payment gateway, and input tracking numbers for each order.
When you receive complaints, give buyers the benefit of the doubt. And, take advantage of available chargeback management tools to make your job easier.
If you’re looking for tools to streamline your dropshipping processes, check out our recommended apps.