Subscription payment models are now immensely popular and companies leveraging these models have upended various markets. Unfortunately, however, subscription models can quickly drum up chargebacks. That said, with the right approach, it’s possible to prevent chargebacks and protect your bottom line.
Once upon a time buying software was a one-time transaction. You’d buy the software, install it on your computer, and that was that. A few years later, the developer might offer an updated version and then you could decide whether or not to purchase the new version. Now, many developers have embraced “Software-as-a-Service” (SaaS) and similar models. With SaaS, you pay fees on a regular basis (say once a month) for access to continuously updated software.
Many video game developers have likewise embraced subscription-based models. Microsoft, for example, offers Game Pass, which grants subscribers access to a vast library of games. Netflix and myriad other streaming services provide access to huge movie and TV libraries. These days, you can even subscribe to food deliveries, razor blades, dog toys, and more.
Ultimately, subscription models allow companies to generate higher revenues. Customers benefit in many ways as well. Regarding software, upfront costs are typically lower with subscriptions, and you don’t have to worry about updating anything, the provider does all of that for you. They also handle maintenance, patches, and to some extent, cybersecurity threats.
Yet there’s a dark side for goods and services providers: subscription-based businesses are often hit with more chargebacks than other companies. This is crucial to note because chargebacks incur hefty fees and penalties. So let’s take look at why subscription models drive up chargebacks.
Why Do Subscription Models Fuel Chargebacks?
There’s no short answer to the above question. When it comes to subscription chargebacks, many different factors may be involved on a case-by-case basis. It’s important to understand what factors can drive up chargebacks so that you can proactively mitigate risks as much as possible.
Perhaps the most common reason subscriptions drive chargebacks is that customers simply forget to unsubscribe from a service. When they see the charge for the subscription in their credit or debit account, they may come to believe they wasted money. Some people may also simply be in a tough financial spot and can’t really afford the subscription.
Customers may first try to reach out to the goods and services provider to ask for a refund. However, some businesses refuse to offer refunds. Doing so is a rather risky proposition. If companies (no matter the business model) won’t offer a refund, the cardholder may simply turn to their bank. From the customer’s point of view, chargebacks essentially function as refunds, allowing them to claw back their money.
Various other aspects can result in more chargebacks.
Further, subscriptions result in more transactions and each transaction could pave the way for a chargeback. If a customer buys a one-off product, there’s only one transaction that can result in a chargeback. Should a customer subscribe to a service for 12 months, that means there are 12 different transactions that could produce multiple chargebacks from the same customer.
Multiple transactions also mean there are more opportunities for merchant errors. For example, you could accidentally bill a customer twice a month. If the subscription involves physical goods, you might make six deliveries on time but then mishandle the seventh scheduled delivery.
Chargebacks are a grave threat, especially for subscription-based businesses. Fortunately, there are several steps you can take to reduce them.
How Subscription-Based Companies Can Mitigate Chargebacks
First, it’s a wise idea to offer refunds. Refunds still bite into a merchant’s bottom line, but at the very least, you’ll avoid chargeback fees and other penalties. Keep in mind as well that getting into disputes with customers over refunds could result in customer dissatisfaction and brand damage.
You also need to make sure that the refund process is easy. If you create too much friction, say by forcing a customer to call you rather than being able to handle it online, the customer may simply take the easier route and file a chargeback.
Subscription providers can also combat chargebacks through the representment process. When a merchant gets hit with a chargeback they can either accept it or fight it through representment. With representment, the company will be provided with an opportunity to tell their side of the story. If they can prove that the chargeback was illegitimate, they get to keep the funds from the transaction.
It’s also a wise idea to set up chargeback alerts, which will warn you of pending chargebacks. Alerts allow merchants to resolve the issue before the chargeback is filed. Often, this means offering a refund. Businesses may not want to grant a refund but if the disputed amount totals only say $10, it’s better to offer a refund than get hit with chargeback fees, which typically cost between $20 and $100.
Many other steps can help, including:
- Using clear billing descriptors
- Reminding customers of upcoming payments
- Offering timely customer service and technical support
Businesses also need to prioritize combating fraud as fraud is a leading source of chargebacks. Someone could steal an individual’s credit card and then use it to pay for subscriptions. By monitoring for strange behavior, such as overseas IP addresses, you can spot suspicious transactions. If a customer lives in Ireland, but the IP address shows the order coming from Brazil, you may want to pause the transaction until you can confirm with the cardholder that it’s legitimate.
It’s also wise to use a chargeback management platform. The right platforms make it easy to manage chargeback alerts and other tools, share transaction data, and manage the chargeback representment process. Want to explore solutions for reducing chargebacks? Get in touch with ChargebackHelp.