The very definition of marketing is to entice customers by highlighting a product's value for the purpose of selling that product. Marketing is supposed to make you money—not cause you to lose money.

But if you aren't careful, that is exactly what can happen. Simple flaws in your marketing can lead to chargebacks. And there is nothing in the world of business that can drain profits faster and more pointlessly than a chargeback.

Chargebacks Explained

If you've been fortunate enough to evade chargebacks so far, you might not know what they are. But since very few businesses manage to avoid them altogether, you'd better understand the general idea:  A chargeback is a forced credit card refund, initiated by the cardholder and executed by the credit card company.

What is the difference between a traditional refund and a chargeback?

If a customer contacts you for a refund, you get the product back. That means you can sell it again, though it might also cost you a few bucks to repackage it or restock it. But that's it. That's the extent of the negative ramifications of a refund.

A chargeback brings about a host of losses:

  • First, the customer keeps the item in question. That means you've lost any chance to sell it again.
  • Next, the bank will charge an administrative fee for each chargeback you receive (it could be as much as $70 each).
  • Finally, if you receive too many chargebacks in a month, the bank will just close your merchant account (if you want to get into the nitty-gritty, the bank will usually terminate an account if your chargeback-to-transaction ratio is above 1%). That means you'll have to close your business: How can you expect to sell anything if customers can't pay by credit card?

If you do lose your merchant account, it could take years to get another. You'll be placed on the MATCH list for five years. If you do get a new account, it will be considered "high risk" and the accompanying fees will be steep.

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image of Jessica Velasco

Jessica Velasco is a business veteran, working in various entrepreneurial ventures over the last 14 years. She has successfully launched two companies in completely different niches.

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Twitter: @JessLeeVelasco