Do Free Trials Affect Your Chargeback Rate?
Offering free trials is a simple way to acquire new customers. They give potential users opportunities to try out products or services before purchasing. Free trials are common with businesses selling subscriptions.
Free trials give potential customers a chance to try out a service before committing to a subscription.
Offering free trials is a simple way to acquire new customers. They give potential users opportunities to try out products or services before purchasing. Free trials are common with businesses selling subscriptions.
Your gym, local newspaper, or favorite app most likely gave you a free trial. Free trials are everywhere and easy to access. As a merchant yourself, you may have considered utilizing this popular method.
How do free trials affect a business? Free trials can bring in customers, but can they affect important aspects such as your chargeback rate?
What are Free Trials?
Free trials are part of negative option billing models. It’s a marketing and acquiring method effective for many businesses. However, the FTC and major credit card companies have had to crack down on regulating trials.
Most free trials require users to first submit payment information. There is no charge right away. Businesses intend to automatically charge a free trial user once they’ve reached the end of their trial.
What is a Chargeback Rate?
Chargeback rates measure your chargeback to transaction ratio. Customer disputes and fraud result in chargebacks, which can harm a business’s finances.
Your chargeback rate determines your merchant risk level. Financial institutions flag certain businesses and industries as high risk when they’re likely to acquire chargebacks. A high risk merchant can lose relationships with banks and merchant service providers.
It’s every business’s goal to maintain a low chargeback rate. This grants them access to better payment processing and other necessities. It’s crucial to look at every aspect of business that could affect your chargeback rate.
How Do Free Trials Affect Your Chargeback Rate?
Communication can Make or Break Free Trials
You can write the best disclosure possible and still have customers file disputes. There is no way to completely prevent chargebacks from free trial issues. However, there are ways to set up your disclosure so that it reduces confusion.
A clear disclosure can protect you in a dispute. Even if a customer did not understand your terms, credit card companies can verify whether you correctly represented your free trial.
Free trial disclosures should make customers aware of future billing. They should be followed up with proper cardholder acceptance and billing notifications.
The Right Customer Service
Communication is a two-way street. You create a clear disclosure, offer easy cancellation, and send SMS reminders. However, your customers need to be able to reach you.
Many clients do not consult businesses in the case of an unknown charge. They may go to their bank and file a dispute thinking they’ve been hit by fraud.
Subscription-Based Model is an Inherent Chargeback Risk
Subscription-based businesses are considered high risk by banks and payment processors. The convenience of recurring payments comes with the consequence of forgotten charges.
Users may forget about a subscription or think that they’ve already canceled it. They see the charges on their account and don’t recognize them. Their disputes can involve multiple recurring charges, which could be a large amount for some companies.
Cancellation Processes
Canceling a subscription service should be as easy as it is signing up for one. Customers may resort to filing a dispute instead of consulting with your customer service if they feel the need to cancel. This can be due to them not recognizing charges or being unable to cancel payments.
Self-service cancellation options reduce dispute and chargeback risk. If a customer wants to cancel a service and receive a refund, they want that process to be as quick as possible. Inconvenient cancellation leads to frustration and chargebacks.
How can you make canceling a free trial easy for customers? Send communication via text or email to alert users that their trial is about to expire. This heads-up can remind them of the free trial.
Is it Worth Offering Free Trials?
Chargebacks will always be a risk whether or not you offer free trials. However, businesses do see high conversion rates from offering free trials.
Implementing the right communication and customer service can make free trials a lucrative method. Your team should also stay on top of updates to free trial regulations credit card companies make. In addition, Revitpay businesses utilize chargeback notifications to stay on top of incoming disputes. These alerts give merchants time to respond to disputes before they become chargebacks. Contact us today to see how we can help your subscription-based business.
Questions related to this guide
How much are credit card processing fees?
Credit card processing costs most U.S. businesses between 1.5% and 3.5% per transaction. The floor is interchange — the card networks' published wholesale cost — plus your processor's markup. Online and keyed transactions cost more than in-person chip payments because card-not-present fraud risk is priced into the rate.
Read full answerWhat is a merchant account?
A merchant account is the arrangement with an acquiring bank and a payment processor that lets a business accept credit and debit cards. Card sales are authorized and settled through it, fees are deducted, and the funds are deposited to your business checking account, typically within 1–2 business days. Approval involves underwriting, because the bank takes on risk for every sale.
Read full answerWhat is a payment gateway?
A payment gateway is the software that securely captures card details on your website or app, encrypts them, and sends them to the processor for authorization — the online equivalent of the card terminal in a store. Gateways also handle recurring billing, tokenization, and fraud screening before a transaction ever reaches the networks.
Read full answerWhich industries are considered high-risk?
Commonly high-risk industries include CBD and hemp, firearms and ammunition, nutraceuticals and supplements, telehealth, vape and tobacco, subscription and continuity billing, travel, coaching and info products, debt services, adult products, and pawn. Most appear on the published restricted-business lists of Stripe, PayPal, and Square — which is why those providers decline them.
Read full answerWhat documents do I need to apply for a merchant account?
A standard merchant account application asks for a government-issued ID, your EIN or business registration, a voided check or bank letter for your settlement account, and about three months of recent bank or processing statements. High-risk businesses should also expect to provide licenses, supplier agreements, and financial statements.
Read full answerCan gun shops and FFL dealers accept credit cards?
Yes. Gun shops and federal firearms licensees (FFLs) can accept credit and debit cards, and Visa says it serves any legal purchase. Paying by card does not change the dealer's federal duties: record the sale on ATF Form 4473 and contact NICS before transfer. The harder part is finding an acquiring bank willing to board the business.
Read full answerWhat is a chargeback?
A chargeback is a card payment taken back by the cardholder's bank after the cardholder disputes it. The issuing bank sends the dispute through the card network to the merchant's bank, which deducts the amount from the merchant's account. Visa's merchant rules call this a dispute. Mastercard calls it a chargeback. The process is the same.
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