Pros & Cons of Moneyback Guarantees in Small Business

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One of the most challenging aspects of running a small business is building a loyal consumer base that returns to your business time and time again. Consumers these days have many choices in almost every industry, from mom-and-pop stores to large conglomerates. A tactic many businesses use to entice customers is a money-back guarantee, which can reduce the buying risk from a consumer perspective. Do your research to figure out whether it’s worth it for your business to offer a money-back guarantee.

What Is a Money-Back Guarantee?

A money-back guarantee is a marketing tactic that is designed to convince new customers to purchase the product for the first time and to encourage returning customers to purchase the product again. While the policy for a money-back guarantee differs from business to business, for the most part, the company offers customers a full refund of the purchase price if they are not happy with the product or service. This satisfaction guarantee mitigates any risk the consumers have on their part because they have the ability to recoup their losses.

Different Kinds of Money-Back Guarantees

There are several different ways to offer consumers a money-back guarantee. Evaluate which one is right for your industry, product and customers.

  • Standard guarantee: As the most common guarantee, this promotion provides customers with a full refund if they are not satisfied with the product. This guarantee return policy can work with almost any kind of product. Many standard guarantees have a time limit, such as a 30-day money-back guarantee.

  • Risk-free guarantee: The policy of this guarantee is the same as the standard guarantee, but the messaging and use is different. This guarantee refund policy is best for items with a high price point.

  • Forever guarantee: Unlike most guarantees, this one does not have a time limit. This means that a customer can bring the product back after even years of use. This is ideal for new products that tout longevity and durability.

  • Free trial guarantee: Ideal for ongoing services, this guarantee enables customers to use the service for free for a set amount of business days. Like a money-back guarantee, it reduces the risk for the customer.

Benefits of Having a Money-Back Guarantee

A money-back guarantee can help boost your sales and introduce new customers to what you have to offer. Depending on the type of guarantee you have and your industry, your business can see a number of benefits:

  • Reducing purchasing barriers: By taking away the financial risk of the sale for the customers, the money-back guarantee makes it easier for them to make the decision to buy. This can help increase your sales.

  • Establishing trust: When a business offers a guarantee, it shows customers that the business is confident in the product or service. This helps the customer to trust the business and see it as a credible expert in the industry.

  • Differentiating from the competition: A money-back guarantee can help your business to stand out from the crowd, especially if you sell products that are similar to the competition.

  • Improving customer service: When you have a money-back guarantee in place, the business needs to up its customer service game to ensure clients are always satisfied with their purchase or risk getting a return.

  • Convincing on-the-fence customers: A money-back guarantee can help nudge those customers who are not sure about making the purchase. This can open up your potential target market to a larger demographic.

Drawbacks of Having a Money-Back Guarantee

While a money-back guarantee can help your small business to increase your revenue, it also comes with a number of potential risks. It’s important to weight the pros and cons before implementing such a policy in your company because you don’t want the product returns to start affecting your bottom line. The drawbacks of having a money-back guarantee include:

  • Customers may take advantage of you: When you offer a no-questions money-back guarantee, you have to accept that there may be customers who take advantage of your goodwill. Some may ask for their money back even if they were actually satisfied with their purchase. While this kind of negative behavior may be a small percentage of total claims, it can still have a financial and emotional impact.

  • Stretching your resources: With a policy for returns like a money-back guarantee, you’ll need to train your customer service team on the guidelines. You may also have to have additional staff on the floor to manage returns and claims.

  • Affecting your bottom line: Depending on the amount of returns you receive, you may find yourself in a stressful financial situation.

  • Complicating your finances: If you have a money-back guarantee, then you’ll need to spend more time on your financial statements. You may have to adjust spreadsheets from previous months as returns come in, and you’ll have to figure out how to handle credit card processing with returns.

Evaluating the Success of a Money-Back Guarantee

While a money-back guarantee is a marketing tool that can help you reach more customers, it may also be a burden on your business. Be sure to assess the return rates you expect each month and calculate whether those expenses are worth it in order to gain new customers. If the result is not a positive number, then the money-back guarantee might not be right for your business. At the end of the day, you want your money-back guarantee to help increase your sales.

How to Create a Money-Back Guarantee Policy

If you decide to implement a money-back guarantee offer, it’s important to have a clear written policy that is shared with all of your employees. Offering your employees training is critical, as they need to understand the parameters on accepting returns. Your money-back guarantee policy should also be publicly available so your customers can read it. Many businesses include it on their website, in email marketing materials and at the bottom of every printed receipt.

Your policy should state:

  • Whether you offer a full refund or store credit in the amount of the purchase price

  • How long your offer is valid, such as 30 days, 90 days or a lifetime

  • From where the product must have been purchased, such as at your retail location or online store

  • The condition in which the product should be returned

  • Whether the product or service needs to be purchased at full price

  • How many times a single customer can return the product

  • The consequences for customers who take advantage of the policy

Having guidelines for your money-back guarantee will help you prevent abuse of your policy. If you notice that a particular customer is taking advantage of the situation, you may need to let him know that the policy no longer applies to him, and he cannot return anything for a full refund.

How to Advertise a Money-Back Guarantee

When you have your money-back policy in place, it’s important to create a marketing strategy so that all potential customers and existing customers are aware of the offer. By including your guarantee in your marketing materials, you can improve your customer conversion rate and increase sales.

Tell customers about your policy if they sign up for your email list, when they visit your website and with every store promotion. Be sure to train employees about how to talk about the guarantee with customers so they can help convince customers to make a purchase.

References

About the Author

Anam Ahmed is a Toronto-based writer and editor with over a decade of experience helping small businesses and entrepreneurs reach new heights. She has experience ghostwriting and editing business books, especially those in the "For Dummies" series, in addition to writing and editing web content for the brand. Anam works as a marketing strategist and copywriter, collaborating with everyone from Fortune 500 companies to start-ups, lifestyle bloggers to professional athletes. As a small business owner herself, she is well-versed in what it takes to run and market a small business. Anam earned an M.A. from the University of Toronto and a B.A.H. from Queen's University. Learn more at www.anamahmed.ca.