In pursuit of gaining a competitive advantage in crowded industries, many brands offer money-back guarantees. The idea is that they build trust with customers and remove any unnecessary friction from the conversion funnel. But, are these guarantees worth the trouble?
Understanding the money-back guarantee
We’ve all heard of money-back guarantees, of course: You may have even taken a company up on one in the past. But have you ever considered whether or not this sort of guarantee could be something your own business could offer?
The origins of the money-back guarantee can actually be traced all the way back to 1868 when door-to-door salesman J.R. Watkins offered customers a full refund of the purchase price on his home-cooked natural remedies if they didn’t like the product.
According to historical sources, Watkins offered the guarantee to combat the fact that his product was totally unknown in the marketplace.
What thousands of other businesses have since discovered (along with Watkins, presumably) is that the money-back guarantee reduces the perceived risk of the product and is rarely ever invoked by customers.
Today, you’ll see thousands of businesses across every industry using money-back guarantees. Bike company Sixthreezero is one such example. It offers a 365-day test ride in which tcustomers may send their bikes back if they aren’t fully satisfied. Sixthreezero even comps the shipping!
Another popular example is Heineken. Spokesman Neil Patrick Harris famously, and publicly, offered a money-back guarantee to all customers in the company’s 2015 television ad campaign. (And it wasn’t just a stunt.)
Is a money-back guarantee right for you?
Clearly, if a large company like Heineken and a newer brand like Sixthreezero are using money-back guarantees, they must offer some benefits. But there are also some notable risks associated with putting forth such a promise.
Let’s examine the pros and cons.
Pro: risk reduction
As Watkins likely discovered, the primary benefit of the money-back guarantee is that it gets people to try your product. If they don’t like it, they know they can get their money back. This can be very powerful in an online setting where customers don’t get the chance to try the product before purchasing.
“With a guarantee, they feel confident that they won’t be stuck with their purchase,” marketer Dean Rieck says. “And the very act of offering a strong guarantee lets buyers know you really believe the product is worth its asking price.”
Pro: increased trust
When you offer a guarantee, customers are more impressed by the fact that you stand behind your product than the potential to get their money refunded. In other words, the fact that you’re offering a money-back guarantee must mean the product works well. This increased trust in your brand will not only benefit you on this up-front purchase, but down the road as well.
If you operate in a market that’s already saturated with other companies offering similar products, a money-back guarantee is a good way to differentiate your brand. For example, say you sell the same widget that another brand sells and you each have the price set at $ 19. If everything else can be considered identical, except for your money-back guarantee, most savvy customers will choose your product.
Con: exposure to manipulation
Whenever you offer customers a way to back out of a purchase, there’s always the risk that people will attempt to take advantage of the system. In other words, there will be people who see your guarantee as a loophole for getting their money back — even if they had no problems or issues. The hope is that these incidents will make up only a fraction of the claims, and that you’ll be able to spot and challenge them.
Con: customer service burden
When you offer a money-back guarantee and publicize it to your customers, you have to be willing and able to handle complaints as they come in. If your customer service personnel are already stretched thin, it may not be the smartest idea to throw a money-back guarantee their way.
Con: complicated finances
Finally, money-back guarantees complicate accounting and finances by forcing you to amend expense sheets and income documents from previous months. Credit card processing also becomes more challenging, especially when refunds happen months after the fact.
Weigh your options.
At the end of the day, you have to decide if a money-back guarantee will add value to your brand. If you’re a new brand in a crowded marketplace, confident in the quality and value of your product, then it probably makes sense. The potential reward is much higher than the risk.
On the other hand, if the quality of your product(s) is questionable and you already have a recognizable brand name, you probably stand to lose more than you could ever gain.