Savings Showdown: Cashback vs. Refund in E-Commerce

Customer acquisition can be difficult, especially for pocket-size brands. To tip the scales in their favor, many advertisers opt for various marketing strategies. Cashback and refund are prime examples of e-commerce gambits. You give in some funds in exchange for long-term commitment and retention.

While technically the same, they serve different purposes. In this article, we’ll go through the specifics of cashback and refund. We’ll explain which one is better for business and customers, what should a fellow affiliate do while standing in between, how to use both strategies, and how to mitigate common pitfalls. Let’s start with explaining cashback and refund one by one.

Cashback explained

Cashback is a reward system, where a percentage of the purchase amount is returned to the buyer after the transaction. Unlike a straight-up discount, the user has a chance to receive a bit of money in the end, which leaves a good impression. The last step in the marketing funnel is what is usually remembered, and cashback makes sure this step is rewarding and pleasant.

Cashback is frequently provided after the purchase is completed, either as an immediate discount or as a credit to the buyer’s account for future use. It is a form of marketing promotion and can be viewed as a gesture of goodwill. Cashback incentivizes customers to come back and purchase more, thus fostering loyalty and long-term commitment.

Refunds can be different

A refund means you lost a sale. A customer comes back to you displeased, willing to get their money back, either in full or partially. If the customer succeeds, they get a refund… or a chargeback. They represent two sides of the same deal, where chargeback is the financial transaction itself.

When the merchant pays back directly after the return or exchange of a product or report of dissatisfaction with a service — that’s the refund. Refunds are usually requested, when the product is damaged, of poor quality, delivered late, or does not match the description. A merchant has the right to decide whether to reimburse the customer. A refund is typically initiated after the buyer has returned the product. It is aimed at rectifying reputation-threatening situations.

When the payment provider credits the customer — this is when chargeback occurs. This action typically involves some kind of dispute over the original purchase and may come with additional fees for the merchant. A chargeback can be triggered by the same reasons as a refund, like poor quality or late delivery. However, it can also be initiated when the user does not recognize certain charges on their credit card statement.

Defending from refunds & chargebacks

Chargebacks are a major headache for advertisers. Not only do they involve refunding the full purchase price, but they also come with additional fees and time-consuming disputes. Merchants must diligently communicate with the issuing bank to prove their innocence, a process that can be both stressful and frustrating.

Unlike a voluntary refund, chargebacks are a legal battle where merchants are at a disadvantage. They are often initiated by unscrupulous customers who attempt to exploit the system for their own gain. This process can be time-consuming, costly, and emotionally draining for merchants.

Refunds allow advertisers to handle disputes directly with customers, preventing them from escalating to costly and time-consuming chargebacks. While some customers may still initiate chargebacks, having a refund policy in place gives advertisers the opportunity to gather evidence and defend their position. Let’s go through some of the most common situations when cosplaying Marcus Kincaid’s “no refunds” attitude is justified:

• Non-refundable products or services, e.g., lingerie or event tickets
• Final sale items — just make sure to inform your customers in advance, e.g., clothing
• Downloadable content or consumables, e.g., a music album or nutra pills
• Custom or personalized orders, e.g., personalized artwork
• Expired return windows — make sure you’re not a charity agency and set up boundaries for refunds and chargebacks, e.g., 30 days for a retail item
• Abuse of refund policy, e.g., wardrobing
• Violation of terms & conditions, e.g., returning a gadget without original packaging
• Subscription services, e.g., no refunds for the current billing cycle after a monthly charge

An irritated customer will eventually get what they want. So if nothing from above applies to your particular case, it’s best to meet the client’s demand to avoid additional costs of chargebacks.

Minimizing the risk of refunds & chargebacks

Reducing refund and chargeback disputes requires a proactive approach. By differentiating between legitimate requests and fraudulent claims, advertisers can effectively manage these challenges. Let’s explore legitimate refund scenarios first:

• Sell high-quality products & services — to generate fewer unhappy customers, because your goods are the definition of excellence.
• Provide professional and quick customer service — to spot customer complaints early and deal with them in a blitz-like fashion.
• Ask your payment processor for a merchant descriptor that accurately reflects your brand — to avoid situations when a customer doesn’t recognize some transactions.
• Invest in a reliable delivery service — to make sure all your goods arrive on time and undamaged.

Given that merchants are often initially seen as the culprits in refund disputes, it’s crucial to establish a strong defense beforehand. Here’s a list of strategies to minimize fraudulent refunds and chargebacks:

• Disable guest checkout — forcing the user to log in makes it easier to trace the shopping carts back to them.
• Send a bonus gift or discount after the purchase — claiming a freebie makes it harder to feign an involuntary purchase.
• Require additional verification details — on top of the credit card number and expiration date, you can request 3-digit card verification values (CVVs) or 4-digit card identification number (CID). With an address verification system (AVS) in place, you can match the user’s billing address against the one indicated by the card-issuing bank.
• Use fraud management systems — they tag suspicious transactions automatically, made, for example, from unknown locations.

While it’s important to safeguard against fraudulent refunds, it’s also crucial to prioritize customer satisfaction. This means making it easy for genuinely dissatisfied customers to obtain refunds without unnecessary hurdles. Remember, a refund is always less costly than a chargeback. It also contributes to positive user experience and can even encourage customers to return for future purchases, boosting retention rates.

Perfecting cashback

So far, we’ve been discussing damage control. In this regard, cashback is different. From the marketer’s perspective, it is a constructive approach, aimed at increasing sales, retention rate, average price tag, etc. Cashback promotions can be used for a plethora of scenarios:

• Reaching out to new customers — spark the interest of frugal customers with a freebie
• Winning over clients from competitors — the devil is in details and a tiny gift can sway the customers to buy from you
• Gathering more insights — use cashback as an excuse for some slightly prolonged surveys to gather more data for your user database for the sake of in-depth segmentation
• Saving on costs — the redemption rate of cashback promo is 30–40%, compared to straight-up discounts with 100%, i.e., cashback sways the customers but is not always redeemed!
• Maintaining the luxurious allure — upfront discounts might cheapen the brand image, and cashback promos keep the perceived value of the product at its highest
• Improving customer retention — integrating cashback promos into a large-scale loyalty program is a go-to solution for keeping the retention rate at its peak

For the cashback promotion to work, it is imperative to go through the following points:

• Set up clear objectives
• Target an exact audience
• Balance out offer lucrativeness with business possibilities
• Pick the right time
• Communicate cashback promotion
• Measure the efficiency of your promotion afterward by gathering the data

Cashback vs. refund in your ads

The choice between cashback and refund marketing depends on various factors, including your advertising goals, target audience, and the nature of your products or services. Neither option is inherently better or worse; they serve distinct purposes.

Generally, it’s better to highlight cashback. A refund is assumed by default and is also a loss for the merchant. Cashback, on the other thing, is a gain, which helps to build customer loyalty and promote future sales. Retaining a customer costs five to seven times less than acquiring a new one — just sayin’ 👉👈.

Nonetheless, bringing refunds to the limelight is justified when you focus on unparalleled customer satisfaction or deal with a complex product of high value. Either way, this helps to build trust and makes it easier to complete a costly purchase. People are naturally hesitant to lose money, so addressing their concerns about potential dissatisfaction can be more persuasive than simply highlighting the potential gains. However, it’s important to strike a balance and avoid suggesting that refunds are commonplace, as this could undermine confidence in your product.

Of course, if your lander allows it, include both. Your product might not be based on impulse buying, which is why you don’t have to rush things up. When you need to shed as much information as possible, a hybrid approach is your best bet. Cashback and refund are not mutually exclusive, it’s just you don’t always have enough space or user’s attention to advertise both options.

When doing A/B testing, you end up highlighting both cashback and refund, albeit not at the same time. Even when not in doubt, it’s best to trust data instead of your hunch. So make sure to precede all your campaigns with split-testing to make sure you walk the right path toward profit.

As a final suggestion, think about implementing instant refunds and cashbacks to please even the most capricious customers. Nobody likes to wait, and by sparing the time of your users, you show them respect.

Conclusion

Cashback is generally a positive concept for advertisers. Refund, on the other hand, aims at rectifying marketing failures. An incentive vs. a warranty — these promotional techniques serve unique goals. At the same time, refunds should not be confused with chargebacks, which are initiated by customers as a last resort and can be more costly for merchants. Proactively handling refunds is crucial to minimize chargebacks.

Showcasing both cashback and refund options would be ideal, but that’s not always an option. Whether you want to win over customer loyalty or boost future sales, cashback is your default pick. However, “rocket science” products or high-end items might require extra persuasion. This is when highlighting the refund option is better.

Still… start all your campaigns with A/B testing. Choosing between advertising cashback or refund is easier when you have data to back up your decision. Also, think about investing in instant refunds and chargebacks to make sure the user’s experience with your product is hassle-free.