Out of Control Chargebacks

March 9, 2016

Studies indicate that chargebacks can add up to almost 2 percent of revenue. Ask these three questions to learn whether or not chargebacks are out of control in your organization.

Usually retailers have good reasons for implementing chargebacks. Yes, chargebacks can be painful, but the retailer believes that the momentary financial pain will drive suppliers to better comply with policies and eliminate costly inefficiencies in the overall supply chain.

However, when the supplier lacks visibility into the actual reasons for those chargebacks and are unable to fix the systematic problems, they usually resign to the fact that chargebacks are simply a ‘cost of doing business.’

With today’s modern EDI technology, it doesn’t have to be that way.

First, an organization must understand how chargebacks affect their business and, more importantly, relationships.

Start by asking these questions:

1. Does your organization have a deduction threshold and how much is it?
2. Do you believe retailers ‘are playing games?’
3. Are chargebacks considered a cost of doing business? How are they reported and is there an understanding of why retailers assess chargebacks?

Deduction Thresholds

Accounting teams seeking to streamline operations implement deduction (or chargeback) thresholds to reduce research time spent on issues considered ‘too small to worry about.’ They are trained to write-off anything under a certain threshold (let’s say $75 for this example) with the assumption that anything less wouldn’t be worth the time to investigate.

While the assumption seems logical, the reality is that these deductions quickly add up. In fact, in Attain Consulting Group’s Customer Deductions: 2015 Benchmark Study, they suggest that those fines can add up to 2 percent of overall revenue. So if there is little to know oversite, the issues can be difficult to resolve.

Once an organization understands how large the deduction thresholds are for a supplier, it can determine how big of a problem they have with chargebacks, but a good indication that chargebacks are out of control is thresholds that exceed $100.

Retailers Playing Games

A vast majority of retailers issue chargebacks as an attempt to make the supply change more efficient. For example, if an Advance Ship Notice (EDI 856) is missing when the goods are received in a distribution center, it can be costly for that retailer. Instead of automatically sorting goods, they must each be manually entered and labels must be printed before they are sent on their way. So when a supplier indicates that a retailer is just playing games, it’s pretty clear that the supplier doesn’t have a full understanding of the chargebacks they are receiving and how to resolve the issue.

Cost of Doing Business

Many suppliers feel that chargebacks are just a cost of doing business, and even have a budget line on the income statement to account for them. When chargebacks become so predictable that and organization must budget for them, then the system is out of control.

Moving forward

Over the last 20 years, the retail supply chain has been automated to a large degree and suppliers do have the tools to eliminate this friction, here’s how:

1. Measure chargebacks by retailer and by type
2. Develop a team from accounting, IT/EDI, fulfillment and customer service that meets regularly to review chargebacks
3. Implement tools to catch chargebacks and other fees before they reach the accounting department

Learn more about minimizing and even eliminating chargebacks and deductions. Contact us today.