Drop Shippers: Beware of Chargebacks

Drop shipping has become all the rage over the past few years because it allows sellers to avoid expensive inventory fees. With drop shipping, the retailer will lock up a sale, purchase the product from another party, say a manufacturer, who then ships the goods to the customer.

Since the retailer doesn’t have to set up warehouses or buy goods in bulk up front, this helps keep costs low for the drop shipper. However, where there are rewards, there are also risks, and drop shippers need to keep an eye out for chargebacks.

Let’s take a closer look at drop shipping before diving into chargebacks, why they’re a threat, and how you can mitigate them.

Drop Shipping Explained in Brief

Drop shipping allows people and businesses to jump into the e-commerce space without a large amount of capital or expansive facilities. Instead of needing to build and stock a warehouse, you can focus on marketing and making sales. Drop shippers often leverage social media, websites, and other digital marketing strategies to drum up orders.

As sales roll in, drop shippers work with third-parties to fulfill orders. Often, these third parties handle most if not all of the aspects of fulfillment. Drop shipping can be a great way to get started in e-commerce without a lot of upfront investment. However, there are some potential downsides to drop shipping that you should be aware of before getting started.

Most importantly, you’ll have to rely extensively on third parties, and if they drop the ball, you might find yourself on the hook. And if customers are unhappy, it could end being your brand, not the fulfillment company, that takes the damage. Perhaps even worse, you may also end up on the hook for dropshipping chargebacks, which can cost you revenue and incur hefty fees.

What is a Chargeback?

A chargeback occurs when a credit card issuer, at the request of the cardholder, claws back funds already sent to a merchant. Essentially, the cardholder contacts their issuing bank and requests that they reverse a transaction.

Chargebacks can happen for a variety of reasons. Sometimes it’s because the customer didn’t receive what they paid for, or because they feel misled about what they bought. In many cases, however, chargebacks are fraudulent, and the customer simply doesn't want to pay for the products or services rendered.

How Do Chargebacks Affect Drop Shippers?

When the drop shipper is accepting and processing payments, they could end up getting hit with chargebacks. If this happens, the card issuer’s bank may reverse charges, resulting in you losing revenue. Meanwhile, you will have paid a third party to fulfill an order and you may be on the hook for that too.

Costs are already piling up, but we’re not done yet. As you get hit with chargebacks, your chargeback ratio will rise. Payment processors could begin charging you higher fees or may decline working with you altogether.

How Chargebacks are Especially Risky for Drop Shippers

Chargebacks are a major problem for many online merchants. Often, chargebacks are the result of friendly fraud, which occurs when a customer makes a legitimate purchase and then files for a chargeback so they can get that product for free. Friendly fraud may be the most common type of chargeback, and drop shippers, among others, will likely have to deal with them.

Drop shipping presents some unique and specific risks for merchants. Not all chargebacks are fraudulent and some of the biggest non-fraud reasons they occur is due to slow shipping and poor miscommunication. Unfortunately, the drop shipping model is prone to both.

First, as a drop shipper, you won’t have much control over the logistics, including handling and shipping. You can send partner companies messages or try to get them to guarantee specific shipping times. However, it’s typically up to your partner to put the products in the mail.

If you’re working with a company like Amazon, good chance they’ll get the product to your customer’s door quickly. If you’re working with wholesalers based in say Hong Kong, it may take much longer for products to arrive, even if your partner is moving as quick as they can. Customers, meanwhile, expect products quickly and if they don’t arrive, they may think their purchase was lost somewhere in the mail or that the merchant scammed them. In either case, they may file for a chargeback.

Communications can also be more complex with drop shipping. If you’re selling products from your own stock, you’re in control of the process. If something is getting delayed in the warehouse, you can contact your staff to figure out what’s going on. With drop shipping, adding a third party may result in communication snafus.

Finally, as a drop shipper you may not have regular access to the products you’re selling and it can be hard to verify stock. Your third-party merchant could send you sample pairs of socks, for example, and you find they’re of great quality. So, you sign a deal with them, drop-shipping socks, and for the first several months everything is going great.

Then something happens on the third-party’s end. Maybe they use cheaper cotton to cut costs, or perhaps they switch suppliers, whatever. Suddenly, quality drops and the products they send your customers are no longer up to snuff. Next thing you know, you’re getting hit with a flood of chargebacks and refund requests, blindsided and not even able to verify the quality of the current products.

Here’s How Drop Shippers Can Prevent Chargebacks

Drop shippers should work proactively to prevent chargebacks. Doing so will help you protect your business from unscrupulous fraudsters and other issues too. First, you’ll want to make sure that you select reliable 3rd parties to work with to fulfill orders. As a drop shipper, you will be beholden to their performance.

You’ll also want to make sure you check the quality of products and read customer reviews for said products. When putting up descriptions on your sales platform, make sure they are clear and honest. This way, you can reduce the risk of failing to meet expectations.

As for managing disputes themselves, even the best merchants get hit with chargebacks. Fortunately, you can use a variety of tools to reduce chargebacks, such as alerts that let you know of upcoming disputes. Drop shippers can also use dispute management platforms to manage the entire chargeback process, which is rather complicated. If merchants fail to provide evidence or meet stipulated deadlines, they're more likely to lose the dispute.

Ultimately, drop shippers want to be both informed and proactive when managing chargebacks and other disputes. This way, they can avoid and reduce issues.