Karmaloop’s Chargeback Catch-22
The lower the chargeback rate, the better for business, right?
According to eRetailer Karmaloop, the answer to that question is a resounding “no.”
In an interview with Internet Retailer, Bounthay Khammanyvong, Karmaloop’s vice president of operations, detailed how his site found that lowering chargeback rates to extreme lows actually hurt sales more than it helped with fees, and how Karmaloop has changed strategies since.
According to the piece, Karmaloop was on the brink of major trouble several years ago when its chargeback rate hit between two and three percent of all of its orders. With numbers that high, Karmaploop was in jeopardy not only of receiving stiff penalties from payment card companies, but were in jeopardy of losing major card acceptance as well.
So Karmaloop did what any business would do: it took measures to reduce its chargeback rate, using ReD Shield software and implementing a system that flagged more transactions as suspicious, holding them for manual review.
The result? Karmaloop’s early 2011 chargeback rate was just 0.11 percent. But unfortunately for the “streetwear” eRetailer, its chargeback victory proved to be Pyrrhic.
Chargebacks may have fallen to an impressive low, but sales were trending down as well. Karmaloop was blocking too many legitimate sales along with the questionable ones, including “friendly fraud” transactions, such as kids using their parents’ credit cards.
“The credit card companies come down hard on you,” said Khammanyvong. “But the steps that can cut a chargeback rate can also cut into sales. It’s a double-edge sword. If you want to keep the chargeback rate low, you have to cancel more orders. But if you keep it too low, you can also cancel too many good orders.”
Karmaloop’s solution was simple: ease up on the chargeback policy, while also keeping it substantially lower than before. Once the chargeback rate hit 0.25 percent, sales stabilized.
To read more on Karmaloop’s chargeback policy, click here.
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