Why Banks and Credit Card Processors are Leery of Trial Offers

The concept of “try it before you buy it” certainly isn’t new, advertisers and marketers have relied on it for years. Grocery stores offer samples for shoppers to try, clothing stores have dressing rooms, car dealers offer test drives – it has become a standard part of the buying process. But since commerce has shifted drastically to the Internet in recent years (Q1 of this year had over $100 billion in U.S. online retail revenue1) the concept of trial offers has morphed, creating challenges for online marketers utilizing this strategy.

Why are there so many trial offers?

Online sellers of various products often work with lead generation partners or ad networks to drive traffic to their site to produce sales. These partners are often paid a flat dollar amount for every person they drive to your site who buys your product – this is known as “cost per acquisition” or CPA advertising. This can be an advantageous model for the marketer as it gives them a fixed cost per new customer, versus spending money on pay per click or banner advertisements that may or may not produce a new customer. However, many CPA ad networks push sellers to offer a free or low-cost trial, which is much easier to do than finding a customer who pays outright for the product, but the quality of that customer can be significantly lower than a straight sale.

Free really isn’t free

To recoup the high fees these online CPA ad networks charge sellers for each new trial customer, marketers need to tie the trial offer to an ongoing subscription or continuity offer. This is commonly referred to as “negative option” marketing, meaning consumers must provide their credit card number to get the trial/introductory offer and will continue to be charged if it is not cancelled during the trial period. These offers have become very popular with many online marketers of vitamins, nutritional and herbal supplements, as well as companies who market memberships and coaching/consulting services.

Why it’s a problem

Terms and conditions of the ongoing billing are often buried in fine print or in a paragraph next to the “agree” button and easily missed. Even if customers see the terms they may forget to cancel until they see the charge on their credit card statement. The cancellation process itself may be difficult, such as no phone number on the website or an email-only contact us page with insufficient staff to handle inquiries. Compounding the problem, CPA ad networks often require the marketer to accept a certain volume of new sales or they won’t agree to drive traffic to their website. This can push a marketer to grow too quickly and outpace their ability to buy and stock adequate inventory, resulting in shipping delays and unhappy customers. All these factors can lead consumers to call their credit card company directly and dispute the charge.

This can spell disaster for the marketer.

Visa and MasterCard have very strict thresholds on the number of chargebacks a merchant can have in a month – in the US it is 100 in count and .75% for Visa, and 75 in count and 1% for MasterCard. Come close to those or go over and you’ll likely be put into a chargeback monitoring program, face additional fees, and potentially even lose your credit card processing account. These rules are dictated by the card brands themselves, and banks and credit card processors are required to enforce these policies to continue providing merchant processing services.

Make no mistake about it, setting up multiple accounts to skirt the chargeback limit requirement is strictly prohibited by the card brands and is what they refer to as “load balancing.”

You may be getting bad advice

Marketers approaching chargeback limits may think opening additional credit card processing accounts with other processors is the answer. Your CRM software or gateway vendor may support multiple MIDs, or you speak to individuals who tell you “this is how other people do it.” Remember when you were a kid and your Mother warned you not to do something because everyone else was doing it? That was sound advice then and still is now. Make no mistake about it, setting up multiple accounts to skirt the chargeback limit requirement is strictly prohibited by the card brands and is what they refer to as “load balancing.”

Big brother IS watching

The card brands and banks are getting very savvy about detecting load balancing, and you may never even know they are onto you until you are notified your merchant account is closed or your funds are held. Changes in beneficial ownership rules have also made it easier for banks and processors to catch merchant applications submitted by “straw signers” selling the similar products on templated websites as an attempt to evade the chargeback rules. It is important to point out that there are legitimate business reasons multiple merchant accounts make sense and are permissible, including separating retail sales transactions from eCommerce sales, separating certain product lines from others, or the need for higher processing volume cap than your current processor is willing to extend, etc. Keep in mind, though, that the chargeback limits apply across your entire business, not each individual MID, so if you have 5 merchant accounts with 100 total chargebacks across them you have exceeded the threshold set by Visa.

A few bad apples really can ruin the bunch

Marketers heavily reliant on trial offers to generate new customers often ramp up their business and grow too quickly, before they can even assess whether those trial orders are turning into lasting customers. They are working off retention projections that may not prove accurate, and rapid growth occurs before the proper infrastructure is in place to support it. They set strict return or refund policies which drives chargebacks. They listen to bad advice and set up multiple merchant accounts for the same product with multiple processors. All of this leads to a rapid rise and fall before closing up shop — generating a large number of unhappy customers in their wake. Processors and banks are left holding the bag for any subsequent refunds and fees associated when that happens, making them leery of the business model in general and the types of products causing most of the problems. These include nutritional and herbal supplements (such as weight loss, skin care and muscle building/male virility), digital subscriptions or memberships such as shopping or travel clubs. Even if your product falls outside these categories you can expect a bumpy road if you’re offer involves a trial.

How are others making it work?

There are marketers who have successfully utilized trial offers to grow their customer base without getting into trouble. They sell tangible products and services that their customers are generally satisfied with as evidenced by a reasonably low return/dispute ratio. They have fair return/refund policies and are willing to make exceptions to keep customers happy. Most utilize chargeback mitigation companies and receive alerts to resolve a disputed charge before becomes a chargeback. They typically don’t rely solely on trial offers to grow their business and when utilized it represents just a small percentage of their overall sales strategy. They plan for controlled growth over time with enough cash flow for inventory, support staff and systems that help effectively manage their business and measure overall the profitability of each marketing channel. Finally, they develop a strong relationship with their credit card processing partner and communicate as their business evolves, grows, and changes in the business model are contemplated.

1Both Adobe and Salesforce released Q1 2018 e-commerce reports. (Digital Commerce 360)