The Pros and Cons of Offering Money-Back Guarantees

Should you offer a money-back guarantee? 

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

Many business owners may wonder whether it’s worth it to offer a money-back guarantee. Does the risk of giving customers the opportunity to default on a purchase decision outweigh the marketing benefits or vice versa?

Unfortunately, there is no simple answer to this question. Conventional wisdom would tell you that because so many companies have used this strategy over the years, it must work. But you also have to consider the possibility that this approach may backfire. To make an educated decision, you must study both the pros and cons.

Pros of money-back guarantees

Money-back guarantees are often a direct reflection of a business’s commitment to quality, customer satisfaction and building great customer relationships. 

Brandon Frazier, CEO of Mobile Clear Shield, takes the strategy a step further and offers a lifetime guarantee on his business’s vehicle paint protection films. “It sets us apart from our competitors and helps us build a strong, loyal customer base,” Frazier explained.

Removes barrier to purchase

Perhaps the biggest advantage of offering a money-back guarantee is that it removes the barrier to purchase by instilling trust with the customer. Prioritizing customer satisfaction can convert more sales in the long run. 

A guarantee “instills confidence in our customers that we stand behind the quality and durability of our product,” said Frazier. “It shows that we are committed to providing a high-quality product that will last for a lifetime.”

With trust established, customers become loyal to your brand and are more likely to choose your product over others knowing you are offering that guarantee, according to Frazier.

Costco, for example, is one company that has a transparent and successful money-back guarantee policy. The business promises a full refund on Costco products if customers are not satisfied. There are a few limitations on certain products, but Costco encourages customers to visit the membership counter for details. In addition, Costco offers a money-back policy for its memberships. If customers are dissatisfied, the company will provide a full refund for the membership fee. [Read more about sustaining and growing customer relationships.]

Differentiates your brand

The second major benefit of a money-back guarantee is that it differentiates your brand from the competition. “It shows that we are confident in the longevity and performance of our product compared to others on the market,” Frazier explained.

Pretend you’re a customer and consider this theoretical scenario:

• Company A is considered a leading brand in TV technology and is selling a new 60-inch high-definition TV (HDTV) for $799.
• Company B is also considered one of the industry’s top brands and is selling a new 60-inch HDTV for $849, but the company also offers a 30-day money-back guarantee.

While some customers will go with Company A simply because price is more important to them, a solid percentage of customers will spend an extra $50 on Company B’s HDTV because it comes with a money-back guarantee. 

Enhances customer service and brand reputation

Ultimately, money-back guarantees enhance customer service and brand reputation. 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, this benefit supersedes the rest. 

A guarantee “enhances our brand reputation and credibility,” Frazier said. “It shows that we are a reputable company that values customer satisfaction and is willing to go above and beyond to ensure their happiness.”

For example, Jetstar Airways strives to provide a high level of customer satisfaction in all it does. Its customer guarantee policies ensure that the company is proficient and always striving for excellence, and its 10-Point Customer Guarantee contains Jetstar’s commitments to customer satisfaction. The list includes commitments to safety, low fares, customer service and issue resolutions. 

If Jetstar fails to meet certain commitments, customers may be given a Jetstar travel voucher or a refund, depending on the conditions listed. For example, if the company fails to respond to a customer query within seven to 15 business days, the customer will receive a $50 Jetstar travel voucher. [Learn about developing company ticket management best practices.]

Generates feedback

Companies can satisfy customers while collecting feedback. If customers are returning products or are unsatisfied with a service, companies should strive to make changes to grow and correct any issues. 

Businesses can set up a form for customers to request a refund and explain why they were dissatisfied. This is a straightforward way to generate feedback and guarantee customer satisfaction.  

“Your guarantee and/or refund policy [should] … support customer satisfaction and provide lessons learned to improve retention,” said Teri Williams, president and chief operating officer of OneUnited Bank.

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. “Money-back guarantees can provide customers with a feeling of safety to try your products and services but are very difficult to execute,” explained Williams. 

Let’s analyze a few negatives associated with this policy.

Attracts bad customers

One school of thought says offering a money-back guarantee attracts the wrong type of customer. In other words, some customers exploit these guarantees for their own personal interests. “Using a guarantee to attract new customers who are ultimately not happy and require a refund is not [always] a good formula,” Williams cautioned.

Although abuse of a money-back guarantee does happen, it’s not as common as you might think. Only a fraction of customers take a company up on their money-back guarantee and an even smaller percentage of these people are dishonest about it. However, this risk does exist and companies should be aware of it prior to offering a guarantee.

Creates friction if expectations aren’t met

It’s unrealistic to meet all expectations. Even if your product does exactly what it claims, some people either misinterpret the results or don’t extract the intended value. According to Williams, a guarantee can generate more negative reviews because it gives customers unreasonable expectations about your product. This dissatisfaction can result in friction between your company and your customers and, ultimately, could be toxic for your brand.

“A better option is to respond to all customer comments/reviews (positive or negative) and use the feedback to improve your products and services,” said Williams. “Referrals from happy customers who are friends and family are much more powerful than a guarantee by a business.”

Complicates accounting

Finally, a money-back guarantee 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, thus affecting your ability to track your finances accurately. 

Money-back guarantee laws

Before you decide if your business could benefit from a money-back guarantee, make sure you understand the laws surrounding these policies. In the United States, there is no law that requires businesses to offer money-back guarantees, but if companies advertise one, they must fully refund the purchase and make all requirements and limitations clear. 

Meanwhile, the United Kingdom requires customers to inform sellers within two weeks if they no longer want their product and to return it within another 14 days. The seller then has 14 days to issue the refund. The European Union has a similar policy, with a slight difference for customized, edible or digital items, which are nonrefundable. 

“Businesses need to ensure that the terms and conditions of the lifetime guarantee comply with consumer protection laws and regulations,” said Frazier. “They need to clearly outline the coverage, limitations and exclusions of the guarantee to avoid any legal issues or liabilities.”

Considerations for your money-back guarantee policy

Businesses need to evaluate the financial, operational and legal implications of offering a guarantee before implementing it, Frazier advised.

Consider these factors and how your business may be impacted before enacting a guarantee policy. 

The financial implications of honoring your guarantee

A guarantee to your customer base can put significant financial strain on your business. Frazier advises considering the costs associated with honoring the guarantee, such as product replacement and repair costs and refunds.

Businesses need to ensure they have the financial resources to support a guarantee without negatively impacting their bottom line, Frazier said.

Your product or service quality

Remember, offering a money-back guarantee requires confidence in the quality and durability of your product.

“Businesses need to invest in product testing and quality control measures to ensure that the product will last,” Frazier explained. “If the product is prone to defects or malfunctions, honoring the guarantee could become costly and unsustainable.”

Meeting and managing customer expectations

Since not every customer will be happy with the products or services you provide, refunds are a helpful option. However, Williams said customer refunds should be seen as lessons learned in what could have made the customer happy or how the sale should have been avoided to begin with. 

“The goal of business should not just be to sell,” Williams said, “but to build and retain customers over time.”

Anna Johansson contributed to this article.