All brands that sell through retailers are familiar with chargebacks. (Hopefully not too familiar.) Retailers issue chargebacks when requested shipments are out of compliance: wrong quantity, wrong location, delivered too early, delivered too late, and inaccurate paperwork. There are a number of reasons a retailer might issue a chargeback to a supplier brand – and none of them are good.
Most obviously, chargebacks result in a direct loss of revenue for the brand. But beyond the direct financial loss, chargebacks come with hidden costs that can erode profits and strain retailer relationships. Understanding these hidden costs is crucial for brands aiming to maintain healthy business operations and partnerships.
Here’s what else brands need to be aware of when it comes to chargebacks…
Operational Disruptions
A chargeback typically requires an investigation and a resolution. This diverts resources from core business activities. A brand’s team may need to review documentation, communicate with the retailer, and submit evidence to dispute the chargeback. This time-consuming process can put a drag on overall productivity.
Damage to Retailer Relationships
If someone kept no-showing you, would you keep asking them to hang out? Of course not. Frequent chargebacks can damage trust between a brand and its retail partners. Retailers may perceive a high chargeback rate as a sign of unreliable products, poor fulfillment practices or spotty EDI. This could lead to stricter oversight, reduced shelf space or even termination of the relationship.
Reputational Risks
Chargebacks can sometimes stem from customer dissatisfaction. (Think poor product quality or shipping delays.) High chargeback rates can harm your brand's reputation, potentially leading to negative reviews and a decline in consumer trust. This, in turn, can impact future sales and brand loyalty.
Loss of Future Opportunities
Retailers closely monitor a brand’s performance, most often with an instrument called a retailer scorecard. These scorecards always cover chargebacks. Consistently poor scorecard performance can result in fewer promotional opportunities, delayed payments or stricter payment terms. In extreme cases, retailers may blacklist the brand. The end!
Increased Compliance Costs
Retailers often require brands to comply with specific guidelines for packaging, labeling and shipping. Chargebacks related to non-compliance can lead to costly changes in operations, such as upgrading systems or retraining staff to meet retailer expectations.
How to Minimize Chargebacks and Their Hidden Costs
The short answer? Invest in powerful, accurate, integrated and easy-to-use EDI software. But there are additional steps brands can take, including:
- Work with your fulfillment provider to optimize logistics and reduce shipping errors and delays.
- Proactively communicate with trading partners to seek feedback, address concerns, and prevent recurring issues.
- Regularly review chargeback data to identify patterns and root causes.
- Train employees on compliance requirements and best practices for order management.
Bottom Line
The hidden costs of chargebacks extend far beyond the initial financial hit. They affect operations, reputation and relationships. But by adopting a proactive approach to chargeback management, brands can not only protect their bottom line but also foster stronger, more collaborative partnerships with their retail counterparts.
