As the subscription business model continues to boom worldwide, they attract 3 to 10 times more chargebacks than other e-commerce businesses.
The subscription business model has been around since the 1600s. But it wasn’t as appealing as it has become over the past few decades. Different business verticals all over the world are increasingly adopting subscription business models.
From media and entertainment to grocery and education, you can ship anything from the merchant’s store to the consumer’s doorstep or inbox on a recurring cycle. It makes perfect sense for both sides of the transaction pole -- and the subscription economy is growing at an incredible rate!
Why different verticals are embracing the subscription economy
Research by Zuora reveals that companies that have adopted the subscription business model saw a spike in revenue growth of roughly 5x faster than both the retail sector and the S&P 500 from January 2012 through June 2019.
The growth spike in subscription businesses stems from several factors. The first reason is quite obvious. The advance in technology makes subscription feasible for both consumers and merchants.
And apart from offering consumers the comfort to "structure and forget" their recurring transactions, 44% of consumers agree that subscriptions provide better value for money than other payment options for a similar service or product.
More so, the subscription business model means regular cash flow, optimized customer loyalty, and retention for merchants. Even companies and individuals that do not offer real products now use the subscription business model. The subscription economy has grown to encompass celebrities, Social Media influencers, and Connoisseurs who provide different forms of experiences, access, and insights on the Everything-as-a-Service and pay-to-play basis.
Payment processors see merchants with the subscription business model as high-risk businesses
Whereas these repetitive billing strategies yield increased revenue for merchants, they are not without significant drawbacks. There seems to be a direct proportion between the rise in the “set and forget” business model and increased chargebacks, for starters.
In effect, card networks consider companies that use the subscription business model as high-risk businesses because of the higher instances of chargebacks.
Available data puts the rate of chargebacks for subscription merchants offering digital goods at an average of 3.25 percent. For sellers offering tangible products, the subscription chargeback rate is on the average of 2.25 percent.
So do the math.
A business doing $1 million yearly in subscription sales, for example, could lose an average of $325,000 to chargebacks. That’s aside from the fees, administration expenses, and any payments to merchant affiliates or handlers.
The high risk of chargebacks in subscription businesses often results from several issues. For one, the very nature of “card-not-present” transactions creates much massive room for fraud and a higher probability of chargebacks.
Fraudulent buyers often use chargebacks to steal merchandise or services from sellers. As recorded by the Internet Crime Compliance Center’s Scam Alert, the FBI has it that friendly fraud is the third-largest problem facing online merchants.
That’s even more significant than identity theft and projected to represent nearly two-thirds of all chargeback issuances by 2023.
Another cause of the high risk of chargebacks for a subscription business is processing transactions that consumers already canceled - or should’ve canceled but didn’t remember. In some instances, consumers might wish to opt-out of the subscription service.
However, the vendor’s refund policy might not accommodate such actions, or the buyer might not have the time and patience to go through the refund process. By the way, there are concrete data to support that fact assertion. Research shows that 75 percent of subscription chargebacks are due to buyer's remorse.
On the flip, some subscription chargebacks are results from merchant’s substandard distribution methods. In today’s society of fast food, fast cars, fast download, and so on, consumers demand more optimized service methods from merchants. Failure to meet those expectations often results in consumers using chargebacks to fight back.
But of course, there are also legitimate cases of unauthorized transactions. For example, several parents were surprised by myriads of mysterious charges on their credit and debit cards. On further investigation, they realized their kids were racking up those bills playing Facebook Messenger games.
In one case study, the child blew “nearly $1,000, in small increments, by performing simple actions within the game.” That resulted in a barrage of issues, including two U.S. senators and a coalition of children’s advocacy groups demanding information about Facebook's refunds and remedies.
How to address the chargeback threat and grow your subscription business
Preventing chargebacks is a crucial sustainability metric for all businesses, but much more for merchants using the subscription business model. If a merchant’s chargeback-to-transaction ratio nears 1%, the acquirer will flag the account, requiring the merchant to work on reducing its chargeback ratio. They could also make outright changes in account terms, which might include administration.
Overall, chargebacks represent a $150 billion annual problem worldwide. That risk is not showing any signs of going away anytime soon -- more so because of the notion that chargebacks are a cost of doing business. And the myth that fighting chargebacks are not worth the time and effort you invest in it.
If you are one of the merchants who bought into these rhetoric, you will indeed have a rethink by the time you finish reading this article. But more crucial than developing an informed opinion is the fact you will learn how to deal with chargebacks professionally. That is, without switching from the subscription business model.
The first step is to find a billing provider that fits your subscription business model, to avoid ridiculously high processing fees. Now, you must also do your due diligence to set in place parameters that will reduce chargeback incidents.
The first step is to provide clear payment structures and provide updates of recurring billing at every interval. It’s essential to ensure your billing, cancellation, and refund policies are clear to the customer right from the get-go.
Equally important, you should have relevant identity verification protocols and other fraud detection tools to prevent unreliable transactions.
And you should provide clear terms of service, get buy-in from your customer, be transparent about any changes in both products and service terms, and offer adequate customer service to your customers.
Upgrade your business practices with a comprehensive chargeback mitigation tool
If you are a new e-commerce founder and just hearing about the risks posed by chargebacks, the first thing I want you to dislodge from your mind is that thinking that fighting chargebacks aren’t worth the time. It’s untrue...you must fight ALL chargebacks.
Why? If you don’t dispute a chargeback, the bank and payment processors assume the chargeback is justifiable. It’s neither right for your brand nor the industry at large.
But of course, I get it. Some people are spending their working days in the hysteric cycles of representment without commensurate results to show for their efforts. Gathering paperwork and writing bank-and-forth emails with the entities isn’t how you grow your e-commerce business. It’s stressful, hurtful, and expensive.
How about you skip that mundane process entirely and automate your chargeback management with tools such as Chargeflow, the world’s first chargebacks, and dispute automation service?
Instead of fretting about providing compelling evidence that will most likely fall short and probably not be in line with the chargeback reason code, you can automate your chargeback and dispute management. And let our AI work the magic for you!
Chargeflow uses a success-based pricing strategy, which shields you from liabilities. Your win-rate will quickly go above the industry average, and if you don’t win, then it’s FREE. You don’t pay a dime from transactions that resulted in a loss of money for you. Learn more and start your free trial here.
Can I charge customers a fee for chargebacks in my subscription business model?
Yes, you can charge customers a fee for chargebacks in your subscription business model. However, it is important to be transparent about this policy and to ensure that the fee is reasonable and in compliance with any applicable laws and regulations.
How do I communicate chargeback policies to my customers in my subscription business model?
You can communicate your chargeback policies to your customers in a number of ways, including through your website, email newsletters, billing statements, and customer service interactions. It is important to make sure that your chargeback policies are clear and easily accessible to your customers. Additionally, it is a good idea to regularly remind your customers of your chargeback policies and the steps they can take to avoid chargebacks.