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 widely 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

If a strategy has held up for nearly three centuries, there must be a 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 using this age-old policy.

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. It can convert more sales in the long run by prioritizing customer satisfaction. 

Costco is one company that has a transparent and successful money-back guarantee policy. The company 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. 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 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

Ultimately, money-back guarantees enhance customer service. They establish an environment where everyone in an organization must be on top of their game 100% 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. 

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 and simple way to generate feedback and guarantee customer satisfaction.  

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 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.

Although this does happen, it’s not as common as you might think. Only a fraction of customers take a company up on a 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. This dissatisfaction can result in friction between your company and your customers, and thus ultimately could be toxic for your brand.

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 accurately track your finances. 

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 U.S., 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. 

The U.K., on the other hand, 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. 

As a business owner or marketer, you should seriously consider a money-back guarantee. While there are a few possible drawbacks, these promises are almost always beneficial for the brand. When properly implemented and marketed, a money-back guarantee can yield high returns by instilling trust in customers and differentiating your business from the competition.

Anna Johansson contributed to the writing and reporting in this article.