Everything’s calm. Your warehouse is humming, and retail orders are being filled. But you’ve got an email. You’ve received a chargeback.
You thought you did everything right, but the email explains that you’ve been penalized for mishandling a recent order. The penalty could be a warning or a large percentage of the order’s value. You may have lost all the margin from this order and then some.
You just got another email… This time from your CFO.
The cost of a chargeback
The processing fee for a chargeback is typically between 1.3% and 3.5%. The cost of Chargebacks ranges from $20 to $240 in extreme cases, and that doesn’t include ancillary costs such as your time spent fighting. These chargeback penalties add up.
Why do chargebacks exist?
A chargeback is infuriating for the shipper. It’s just one of the many nightmares making your job feel impossible.
From chargebacks and overselling to a complete system shutdown that makes all your orders vanish — This fun yet informative video series sheds light on the darkness.
With the rate of issuance, sometimes a pile of orders will incur chargebacks before an issue can be remedied.
In that scenario, asking you to consider the retailer’s point of view can be absurd.
Retailers issue a vendor manual
This is a combo instruction manual and binding contract. It outlines things like shelf condition, labels, box configurations (e.g., musical runs of clothing), and other warehouse requirements. The manual also defines penalties for non-performance. The key is that the shipper accepts and signs their receipt and agreement.
What is a chargeback?
Chargebacks, by definition, are a retailer’s attempt to recoup additional time and effort at a downstream warehouse or store based on a product not being in the condition it was promised. This is also referred to as a ‘cost offset’.
In principle, a chargeback should be a fair compensation for corrective actions the receiver has to take.
When chargebacks go bad
In practice, many organizations are accused of charging more than the annoyance of correction. They are also accused of creating chargebacks for minor nits or things that are hard to quantify, such as “lost sales.”
I often hear the phrase: “Chargebacks are a revenue stream”.
This is a hard one. If we generalize, then proper chargebacks get lumped with the bad ones. But, many chargebacks are issued for amounts and reasons that, one could argue, didn’t have much impact on the receiver.
The other issue is that (generally) chargeback fees are applied with no appreciation of the shipper. In working for a large retailer, the same formula gets applied to a mom-n-pop as a Fortune 500.
The minimum broke the mom-n-pop because a chargeback just wiped out multiple orders of margin.
The maximum was a cost of doing business for the Fortune 500 who never fixed their process.
You can’t do much about a bad chargeback other than disputing it or cutting your losses and canceling your contract with that retailer.
The rules are the rules; don’t be shocked when you break them.
Prevent chargeback fees in the first place
If you can’t cut and run, or the upside is too good, you have to do something. You don’t want more chargebacks. This won’t be a cool hack – fix the problems.
- Fix your warehouse: If you aren’t supposed to label a certain way, information is missing from your collate, or you aren’t shipping shelf-ready — knock it off. Go back and address your automatic or manual fulfillment processes with a modern WMS. Add extra verification steps and rules to automate the proper product selection.
- Fix your vendors: Many companies are distributors and 3PLs who receive their products from an original equipment manufacturer (OEM). If that OEM is pushing packaging and label issues downstream, then you might need your own chargebacks to convince them to align with the end retailer.
- Capture evidence before you need it: The best defense is meticulous record keeping – documentation and photos. If you are getting dinged for loads, snap a picture before the gate goes down. If you are getting dinged for pack-out, snap the box before it’s sealed. The best defense is proof of a job done right.
Fast-track the future of your supply chain! Integrations within a modern WMS system make these steps super simple.
What other choices do you have?
OK, but you’ve already got chargebacks. Working directly with retailers can cancel, reduce, or pause chargebacks.
☑️ Call vendor compliance
When I worked in compliance for a large brand of hunting, fishing, and outdoor gear, many of my vendors would call up and complain about the chargeback. If it was the first time, we’d usually zero it out and give them a chance to correct it. We’d also flag a time window of ship/receipt dates in case multiple shipments would all have the same problem.
☑️ Plead poverty
Time for the eye drops. If you are the mom-n-pop discussed above, explaining that you can’t make payroll if you pay these chargebacks is a compelling case for most compliance teams. Organizations are collections of people; they are more receptive than you might think.
☑️ Grace periods for chargebacks
Ask for time to fix the problems. Most vendor compliance systems can allow a grace period. We designed the system to set a date and it would keep issuing $0 chargebacks or warnings until that date. So the shipper kept getting notices that issues were occurring, but there was no financial penalty.
☑️ Leverage your merchant
While my teams built the chargebacks, the buying team could choose not to authorize them. If you maintain a good relationship with your buyer(s), they can advocate for you. They may have the power to directly rip up the chargebacks.
☑️ Standardize best practices and compliance with a WMS
An old adage goes: if you can’t do the time, don’t do the crime.
If you can’t afford chargebacks, fix your people and processes — Then look for better technology.
Prevent chargebacks, late or incorrect orders, and unnecessary shipping and labor expenses. Streamline your workflows and see rapid improvements in customer experience!
Discover Deposco
Deposco’s warehouse management software fixes way more than just chargebacks and compliance. Optimize your entire supply chain from warehouse picking and packing to shipping management, order management, supply chain planning, and the critical integrations you need to:
- Slash shipping & labor costs
- Sell more products in more places
- Dramatically speed throughput, processing times & delivery
- Streamline customer escalation issues with real-time information
- Get near-perfect order accuracy
- Keep your tech stack modern with minimal IT knowledge or involvement
Over 3,000 of the fastest-growing retailers, 3PLs, brands, and ecommerce businesses trust Deposco to optimize every area of their supply chain operations. In fact, our Bright Warehouse WMS joined Gartner’s WMS Magic Quadrant in 2024 and was named Best WMS for Midsized Businesses by U.S. News & World Report.