Chargebacks are the dirty little secret of the fashion industry. The idea is that retailers force vendors to make good on the full markup to the wholesale price of a product, often 60 percent, even if it is sold at a discount. Vendors see the practice as bullying; they've even filed class-action lawsuits over chargebacks against Federated and Saks. In a twist, however, research by Murali K. Mantrala, a professor at the University of Missouri-Columbia, suggests that chargebacks can actually benefit upstart vendors. In cases where a vendor agrees to pay a chargeback, Mantrala explains, the retailer is more likely to increase the number of units it purchases. Thus, the vendor is able to reach more consumers, and as it builds its brand, it may be able to negotiate better terms. It's a strategy Mantrala thinks young companies can use to break into other markets with short product sales cycles, from PCs to consumer electronics.
How a chargeback works:
If the wholesale price is $10 and the retail price is $16 but the item sells for $12 then the chargeback is $4.