DRTV Case Study
Rapid Remediation of Credit Card Chargeback Rate for High-Volume DRTV Merchant
Client Description:
A top-ranked manufacturer and marketer of dietary supplements markets its principal product through multiple channels including Direct Response Television, retailers and various distribution partners. DRTV represents the Manufacturer’s primary method of demand generation. The manufacturer utilizes credit cards as its chief method for receiving payments within this sizable consumer-direct business. Consumers typically enroll into a subscription program whereby they are automatically shipped product at specified intervals. The consumer’s credit card is therefore charged on an ongoing basis until the subscription is cancelled. The manufacturer utilizes top tier third party service bureaus to handle customer service calls and physical fulfillment.
Problem Background:
Accepting credit cards in a Card-Not-Present environment opens merchants to some unique challenges. For instance, Visa and MasterCard have continuously tightened the guidelines surrounding acceptable levels of refund and chargeback activity. As an example, merchants experiencing an ongoing Visa chargeback rate of greater than one percent (one chargeback per hundred sales) are potentially subject to some very hefty fines. Merchants that are unable to resolve this chargeback problem will be placed on a monitoring program and might eventually lose their ability to accept Visa Cards.
Merchants utilizing DRTV as a principal demand generator are particularly susceptible to chargeback problems. There are three common factors associated with chargeback violations. Ironically, the first problem is success. While good operators usually perform the appropriate market testing, they sometimes wind up with a run-away success. If the customer service function is not geared-up to handle the volume, then high chargeback rates are likely. Regardless of business line, a certain percentage of consumers will always want to return a product or cancel a subscription. If these consumers are unable to contact the merchant, they will quickly contact their card issuer and charge back the sale.
A second factor that frequently aggravates chargeback rates is media buying activity. This is because certain media buying strategies, media supply constraints, and over-reactive placement cut-backs can often result in significantly variable sales volumes. Unfortunately, the credit card associations use a relatively simple algorithm for determining chargeback rates – the number of chargebacks per month divided by the number of sales transactions for that month. So, it’s easy to see that if a merchant abruptly cuts media buys, and sales (the denominator) fall quickly, then a healthy steady state chargeback rate (let’s say 0.4%) can rapidly increase to exceed the rates imposed by the card associations.
The last factor affecting chargeback situations is probably the most disquieting because it is a factor the merchant has complete control over. In order to accept Visa and MasterCard, a merchant must use some type of approved payment processor. The payment processing industry is notoriously fragmented with various tiers of players and some unusual relationships. There is an inherent risk that a merchant will select a processor with little experience in direct marketing, poor customer service, and limited chargeback management capabilities. What’s more, there is ample opportunity to contract with Independent Sales Organizations and commercial banks that actually farm-out their payment processing -- creating an added layer of static in situations where communicating with the card associations is important.
The Manufacturer’s Challenge:
This manufacturer approached Litle & Co. facing significant chargeback challenges. They were paying major fines, and actually faced the prospect of being dropped by the major card associations. The main driver behind this trouble was success. Since its launch in December 2003, sales of its principal had exceeded expectations. While refund rates were normal for the product category, the manufacturer’s fulfillment partner was overwhelmed with the unusually high volume. As the fulfiller attempted to compensate, chargeback rates began to climb. After several months of high chargebacks, the manufacturer was placed on a merchant monitoring program by one of the major card associations.
When the situation began to look particularly grim, the manufacturer made the intuitive but ill-advised decision to pull all Product advertising. As a result, sales waned while chargebacks continued to trend higher. The manufacturer’s chargeback rate therefore continued to worsen. Unsatisfied with customer service, the manufacturer decided to change payment processors. According to one of the manufacturer’s principal, “We decided to leave our payment processor due to their poor communication efforts and ever increasing paper flow troubles surrounding the chargeback issue resolution process.”
In September 2004 the manufacturer turned to its commercial bank for help. Although the manufacturer and its bank enjoyed a great relationship, it quickly became clear that the bank would not be able to solve the problem. As it turns out, the bank had limited experience with direct marketers, and it actually worked through a third-party processor. “Both processors had long chargeback resolution response times. This delayed our ability to cancel pending installments. Therefore, customers that charged back orders were billed again, which initiated another chargeback!”
Based on a recommendation from its fulfiller in late 2004, the manufacturer contacted Litle & Co., “We were attracted to Litle because they had experience helping direct marketers fix their chargeback problems. Their service, systems, and reporting expertise made them a better choice.”
With a contract executed in January of 2005, Litle & Co. immediately formed a critical care team headed by a seasoned customer service executive. This team included key staff members from the manufacturer and its fulfillment partners. Taking a holistic approach, they set out to remediate the manufacturer’s mounting problems. Litle & Co. initiated the following actions:
- Immediately contacted the card associations and proactively presented a remediation plan. This action provided the manufacturer with greater operational latitude and a more realistic remediation window.
- Worked closely with the manufacturer to institute best practices surrounding offers, continuity payment methods, and return policies.
- Worked closely with the manufacturer’s fulfillment partner to institute best practices surrounding credit card billing descriptors, declined cards, and refund procedures.
- Employed advanced statistical methods to provide an automated early warning system for potential spikes in chargeback activity. This system was also used to demonstrate to the card associations a more current view of declining chargeback trends.
- Developed an automated system precluding the manufacturer from inadvertently charging customers which had cancelled the continuity plan.
- Prepared the manufacturer’s executives for various face-to-face meetings with card association representatives.
Results:
The results of this effort became apparent very quickly. Within one month of processing with Litle & Co., the manufacturer’s chargeback rate started trending below the card associations’ thresholds. After five full months of processing, the manufacturer’s chargeback rate has fallen to approximately 0.5%. The company is no longer on any monitoring programs or receiving any fines. The product line is now enjoying the lowest chargeback rate since product launch without any negative impact in growth.
The manufacturer was noticeable pleased with the results, “Frankly, given previous experience, we were a little nervous about switching payment processors again. But now, we can’t imagine not having made the move. If it weren’t for Litle, we might have lost an extremely important brand. They really helped us solve the problem while being sensitive to potential negative effects on demand.”
Conclusion:
The challenges faced by the manufacturer are fairly common. The credit card associations are continuously changing the rules surrounding chargebacks and it is getting increasingly difficult for direct marketers to keep up. DRTV merchants should therefore keep a few things in mind:
- Be sure to keep you fulfillment partner closely informed with regard to sales trends, media buying plans, or any event that is likely to have large effects on demand.
- Always consider the possible effects of sharp cut-back in media spending with regard to chargeback rates. The closer you are to card association thresholds, the more you should consider such moves.
- Select a payment processor that specializes in Card-Not-Present transactions. This processor must also have a solid grounding in direct marketing principles. Best practices in credit card processing for DRTV merchants will straddle these two disciplines.
- In order to effectively remediate chargeback problems it is critical to maintain the shortest communications lines possible with respect to the card associations. It is therefore important for DRTV merchants to select a payment processor that operates its own platform with direct links to Visa and MC.