Chargebacks Can Kill Crowdfunded Businesses

Chargebacks are basically refunds. But they happen before you ship. A customer asks for the funds that were transferred by credit card, the ones and zeros that moved from their account to yours, to be returned.

They’re mostly caused by fraud, bank processing errors, insufficient funds and problems with delivery. This post is about the last group: the people who ask for chargebacks because the product they ordered never arrives.

Non-delivery is a perfectly good reason to get your money back. People aren’t used to waiting, and most of the time, they shouldn’t. Software companies deliver their product via download in a few seconds, established online retailers will ship in a day. But early-stage hardware startups can take anywhere from six months to a year to deliver the product they raised crowdfunding to make, because they’re still in the process of manufacturing it for the first time. And their customers sign on for that.

But customers, by definition, are people who change their minds. You can’t blame them, you can only brace yourself. Most of them probably don’t realize that chargebacks will hurt the businesses that took their initial payment. Others didn’t read your ship date until after they bought. And that’s not their problem, it’s yours.

Imagine you’re one of your own customers: You just let someone take your money, realize you won’t get anything for a long time, and when you try to find a phone to call, you can’t. (A surprising number of startups don’t list a number.) What’s your next step? You call your bank and cancel the order.

Those chargebacks will burn you. Credit card companies generally cap the amount of chargebacks at 1-2 percent of a company’s total transactions. If your chargebacks exceed that, they limit your ability to process payments from their cards. Which means you won’t be able to sell online, a recipe for bankruptcy.

Crowdfunded businesses making a product for the first time need two things: the ability to accept payment and order information, and the ability to avoid chargebacks during the long manufacturing periods. (That also applies to going on back order after you run out of inventory.)

Most of the time, we don’t shamelessly promote ourselves on this blog (we do it subliminally instead), but this is our moment to shine. Celery lets you do take orders and avoid chargebacks, and that’s what makes it great.

With us, you can capture demand immediately after your crowdfunding project ends by taking orders. While those orders will contain credit card information, you don’t have to charge customers until you’re ready. That’s usually around the time you ship. Which means that during the months that you’re wrangling with the factories, freight forwarders and packaging makers to get your product delivered and delivered perfect, you don’t have to worry about chargebacks shutting you down.

There are two other solutions, both of them flawed. One is to just take your customers’ money when they order, and bet your business that 1 in every 100 people will not change their minds. That’s what most payment processors do, and it’s an option offered by Shopify. The other is to take only your customers’ email addresses, and then ask them to give you payment information when you’re ready to ship. That’s another Shopify option. But it means you have to convince them to buy twice: once when they first express interest, and again when you ship. It’s a good way to lose clients.

Of those two options, one leaks customers, the other risks getting shut down by credit card companies. Neither is true pre-commerce or pre-ordering. We understand crowdfunded companies and early-stage hardware makers, and we’ve designed order-processing software that supports your business even if there are production delays. With Celery, you can take all the payment and order information you need, sidestep chargebacks, and still capture payments and orders without having to revalidate your sale.