A Primer on Chargebacks and Shortages

As e-commerce continues to grow, chargebacks and shortages will continue to grow as well. To maximize profits, it’s crucial for vendors to accurately identify their root causes to be in the best position to act and remedy them.

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E-commerce grew rapidly last year and shows no signs of slowing down. Online sales are a force to be reckoned with. In 2020, over 2 billion people purchased goods or services online and e-retail sales surpassed 4.2 trillion U.S. dollars worldwide, with global retail e-commerce sales growing more than 25%.  

More brands are shifting their businesses to e-commerce platforms, increasing their sales and profits. As sales grow, so do unexpected deductions in the form of chargebacks or shortages. Not only do these claims cut into vendor margins and make e-commerce less profitable, but they are also incredibly time intensive to dispute. Understanding and identifying the root cause of these fees is an important first step to regaining control, and as a result, greater profits.

­What are chargebacks, shortages and price claims?

Brands that sell through online retailers must adhere to specific operational compliance processes and standards to be paid in full by the retailer. Any discrepancies from purchase orders, shipping, receiving, packaging or data misalignment may result in chargebacks to vendors that significantly impact profits. 

A shortage is a product quantity variance and is assessed when a retailer believes that the quantity received is less than the quantity invoiced and withhold paying the vendor the difference. 

There can be different reasons for shortages. Some shortages occur when the vendor has not shipped the product. For example, a retailer orders six items and the vendor reads the order differently in their system and only ships two items, leading the retailer to short pay the vendor’s invoice. Other shortages occur when the vendor ships the product, but non-compliance issues by the vendor, such as incorrect labeling, result in the retailer not receiving the product correctly. This is why it’s important for vendors to closely examine their shortages to get to the root cause.

Once vendors review what they actually shipped and compare it to what was invoiced, they can determine if the shipped quantity matches the invoiced quantity. Once they’ve determined this, they can see if the issue is a system disconnect or another issue on the retailer’s end causing the short pay.

Identifying the root causes of chargebacks and shortages  

When vendors take the time to look closely at their chargebacks and shortages, they are often surprised at how the fees are assessed and the financial impact of these fees. Because most chargebacks are volume-based, these fees can multiply quickly, which is particularly detrimental to brands who are in a growth stage. The good news is that businesses can dispute their chargebacks. However, there is a learning curve for vendors who are new to the complex dispute process. It’s important to first identify the cause of each chargeback and shortage and then figure out which ones are worth disputing. For example, if a vendor discovers that they did in fact ship the product they invoiced the retailer for, they will want to dispute that shortage.

Shortages have been increasing, fueled by the e-commerce boom of 2020. For example, many retailers launched new fulfillment centers last year. With an increase in new staff, they may not be as efficient and accurate as other, more established fulfillment centers might be. During this period of rapid growth, efficiency and accuracy are bound to falter. The brand may have the same process they’ve always had, yet their shortages are increasing. This is why it’s important to determine which issues are retailer-driven and which are vendor-driven. 

Brands that dedicate resources to getting to the underlying cause of chargebacks, either internally or soliciting help from an e-commerce specialist, are the ones saving themselves time and money. Relying on experts can offer valuable insight into chargebacks and help navigate each retailer’s requirements. Understanding why the chargebacks are occurring is essential to finding solutions to reduce future chargebacks. 

The impact of chargebacks and shortages

How much do chargeback fees and shortages cost? It depends on several variables that vary by vendor. A good goal is to target less than 1% of cost of goods sold (COGS) in chargeback fees and shortages, but this may vary by industry and shipment method. The best in class is approximately 2%.

Fortunately, chargebacks are preventable. If a vendor can get to the root cause of the issue, they can implement a solution that will stop them from hemorrhaging money on chargeback fees. The future cost savings is often well-worth taking the time and money to resolve the root cause of these chargebacks.

For shortages, it can be worthwhile to take time to assess the reason for the shortage and possibly dispute it. For example, if the vendor did indeed ship the product but there were non-compliance issues, such as mislabeling, the vendor may see some level of success in disputing it. The level of success in recovering past due invoices and future invoices that are shorted will vary depending on the level of non-compliance and relationship with the retailer involved in the dispute. If a vendor disputes a shortage and fails, they may need to escalate the dispute.

Ultimately, it’s crucial for vendors to discover the root cause of their issues. Professional experts can assist vendors by explaining why the chargebacks are surfacing and how to mitigate them by providing guidance on how to navigate the complex shortage process.

E-commerce specialists can use innovative analytics tools that can not only save vendors precious time, but also help demystify the complex invoice hierarchy system produced by online retailers, not to mention what can be confusing jargon. In addition to recovering money and saving time, these consultants also provide coaching and insights that can prevent future problems. 

Brands can’t control retailer-contributed issues, such as delayed receipt and fulfillment centers making mistakes, but can help hold retailers accountable through the dispute process while working to control their own internal processes. As e-commerce continues to grow, chargebacks and shortages will continue to grow as well. To maximize profits, it’s crucial for vendors to accurately identify their root causes to be in the best position to act and remedy them.