The Pros and Cons of Offering Money-Back Guarantees

Business.com / Customers / Last Modified: February 22, 2017

As with any big business decision, there are pros and cons to offering money-back guarantees. Weigh your options here. Read on.

We’re all constantly on the lookout for ways to increase conversions and drive sales, but there’s one thing many of us are afraid of trying: the money-back guarantee.

It sounds scary and complicated, yet so many other companies seem to be effectively leveraging it with positive results.

Could your business benefit, too?

Should You Offer a Money-Back Guarantee? 

The money-back guarantee isn’t a new or progressive strategy. Josiah Wedgewood, an 18th century entrepreneur, is widely credited with developing the strategy, but he certainly wasn’t the last. Everyone from large corporations to small mom-and-pop businesses have offered these strong promises over the years.

From the outside, many wonder whether or not the money-back guarantee is worthwhile on the business end. Does the risk of giving customers the opportunity to default on a purchase decision outweigh the PR benefits, or vice versa?

Unfortunately, there is no simple answer to this question. Conventional wisdom would tell you that, since so many companies have used this strategy over the years, it must work. But then you look at some of the negatives associated with money-back guarantees and you have to consider the possibility that the approach can backfire on companies.

As with any big business decision, there are pros and cons to the choice regarding whether or not to offer a money-back guarantee. If you’re going to make an educated decision, you must study both sides of the argument.

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The Pros of Money-Back Guarantees 

If a business strategy has held up for the better part of three centuries, then there must be some reason businesses keep coming back to it. Let’s check out some of the biggest benefits of implementing a money-back guarantee and why modern businesses are still pursuing this age-old strategy.

1. Removes Barrier to Purchase

Perhaps the biggest advantage to offering a money-back guarantee is that is removes the barrier to purchase by instilling trust with the customer. There’s arguably no more timely or effective example of this than Purple, a new mattress company that’s selling mattresses direct to consumer over the Internet.

Purple’s website boldly tells shoppers, “Sleep on your Purple Bed for 100 nights. If you don’t love your mattress, we’ll pick it up and refund your money.”

In order to understand how effective this guarantee is, you have to consider the price point and the industry. A mattress, especially a mattress that costs $699 to $1,299, is not an arbitrary investment or spur of the moment purchase. And because it’s something that you sleep on for five, 10, or 15 years, you want it to be perfect. Furthermore, the fact that customers are purchasing the product over the Internet means they’ve never seen, touched, or felt the mattress.

If you were to add up all of these factors, the barriers to purchase would be very high for the average customer. However, once Purple offers the 100-night money-back guarantee, all of these fears dissipate. Sure, the price point remains the same, but the risk associated with not being satisfied is gone. It’s a genius business move for Purple, and one that has served them well thus far.

2. Differentiates Brand from the Competition

The second major benefit of a money-back guarantee is that it differentiates a brand from the competition. Pretend you’re a customer and take the following fictitious situation as an example:

  • Company A is considered a leading brand in TV technology and is selling a new 60-inch HDTV for $799.
  • Company B is also considered one of the industry’s top brands and is selling a new 60-inch HDTV for $850, but also offers a 30-day money-back guarantee.

While some customers will go with Company A, simply because price is their most sensitive buying criteria, a healthy percentage of customers will spend an extra $50 on Company B’s HDTV because it comes with a money-back guarantee. Even if the two products are identical, most customers will place a premium on the company that’s openly committed to satisfaction and transparency.

One relevant example of a company in a competitive industry offering a money-back guarantee is Heineken. Their 2015 ad campaign with Neil Patrick Harris was built on the (somewhat humorous) foundation of a money-back guarantee. Though most people aren’t going to return a beer and ask for a refund, the guarantee does establish some trust by differentiating from the competition.

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3. Enhances Customer Service

Ultimately, money-back guarantees enhance customer service. They establish an environment where everyone in an organization must be on top of their game 100 percent of the time. They also build trust with the target market by offering a transparent look at quality. In the long run, it’s this benefit that supersedes them all.

You can read more about how money-back guarantees impact customer service and industry reputation by checking out how New York City-based Halevy Life, a fitness program, has thrived thanks to a money-back guarantee.

The Cons of Money-Back Guarantees

If the money-back guarantee were perfect, every business would implement the same approach. Unfortunately, no business strategy is flawless. Let’s carefully analyze a handful of the negatives that are often associated with this approach.

1. Attracts Bad Customers

There’s one school of thought that says offering a money-back guarantee attracts bad customers. In other words, there are customers out there who prey on these guarantees and use them to exploit their own personal interests.

Does this happen? Sure, but it’s not as common as you may think. Only a small fraction of customers will ever take a company up on a money-back guarantee, and an even smaller percentage of these people will be dishonest. However, this risk does exist and companies should be aware of it prior to offering a guarantee.

2. Impossible to Meet All Expectations

The second thing to be aware of is that it’s unrealistic to meet all expectations. Even if your product does exactly what it claims, there’ll be people who either misinterpret the results or won’t extract the intended value. This can result in friction between your company and your customers, which can ultimately prove to be dangerous and toxic for your brand.

3. Complicates Accounting

Finally, money-back guarantees can complicate your finances and accounting if customers end up taking advantage of the offer. Depending on the length of the offer, you may have to adjust expense sheets and income documents for prior months, which can impact your ability to accurately track your financials. There’s also the issue with credit card companies, who often don’t allow refunds after a certain period (usually 90 days).

Related Article: Why Efficient Customer Service is Better Than Friendly

Making the Decision

While there are negatives associated with offering money-back guarantees, the truth is that these promises are almost always beneficial for the brand. According to Martha C. White of Time.com, “…these guarantees are mainly empty marketing tactics, the commercial equivalent of a date pulling out his or her wallet with no intention of paying.”

As White points out, only five or six percent of purchases ever get returned (across all retail categories). And these numbers are heavily skewed by serial returners. If you remove those customers, the return percentage is much lower.

As a business owner or marketer, you should seriously consider a money-back guarantee. When properly implemented and marketed, these guarantees can yield high returns by instilling trust and differentiating from the competition.

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