Should Your Business Offer Money-Back Satisfaction Guarantees?

Many retail businesses offer money-back satisfaction guarantees on the products they sell in order to give customers greater peace of mind when making purchases. This is especially true for online businesses, since customers can’t physically touch the products before ordering.

For example, Amazon offers generous money-back return policies on most products and makes it as easy as possible for customers to return items at their nearest UPS Store or Kohls department store. Without this kind of money-back guarantee, it’s possible that Amazon and other big retailers (both online and bricks-and-mortar) would forfeit a significant amount of sales and revenue.

Abuse of Return Policies: Wardrobing and Borrowing

Unfortunately, many customers abuse retailers’ generous satisfaction guaranteed return policies. Of the $260 billion in customer returns accepted by retailers each year, about $9 billion is estimated to be fraudulent returns. There’s even a term for the practice of buying and using a product with the intention of returning it — this is known as wardrobing or borrowing.

One way businesses attempt to reduce these fraud costs is by offering only a partial refund on returned items. The difference between the purchase price and the amount refunded is often labeled a “restocking fee.” Charging this fee, which typically ranges from 10% to 20% of the original purchase price but can be as high as 50%, helps businesses recoup some of the costs associated with offering money-back satisfaction guarantees.

The percentage of items returned varies widely by industry, as do the reasons cited by customers for making returns. In the computer electronics industry, for example, more than two-thirds of customers (68%) returning items said that there wasn’t a problem with them but that the items did not meet their expectations. This is according to a report published by Accenture, which calls these “No Trouble Found” (or NTF) returns. About a quarter of computer electronics returns (27%) were due to “buyer’s remorse” and only 5% of were actually defective products.

Regardless of the reason for the return, returned items usually can’t be resold as new — even if the customer who originally bought the product never used it. Retailers must salvage returned items or sell them at a discount and label them as “open box” items. In this scenario, the business must “eat” the difference between the original sales price and the discounted price, which directly impacts sales revenue.

There are also indirect costs associated with the labor involved in accepting and processing returns and repackaging them, including shipping for returned items that were purchased online. And don’t forget: Every open box product bought by a customer takes away the sale of a more profitable new product he or she probably would have bought instead.

Is Offering Guaranteed Satisfaction Worth It?

The question that retailers face is whether offering money-back satisfaction guarantees is a smart business practice or not? In other words, do the potential benefits of increased sales and greater customer peace of mind and loyalty outweigh the direct and indirect costs of offering such guarantees?

Research has indicated that in the right circumstances, offering money-back satisfaction guarantees can increase sales and profits. In addition, second-sale opportunities that result from restocking returned items help retailers generate additional revenue. If retailers decide to resell returned products as open-box, they can increase the prices of new products as well, further boosting sales revenue.

According to the research, reselling returned items decreases a retailer’s initial stocking levels. This in turn lowers inventory-related costs and boosts profits. In this way, retailers can recoup some of the losses that occur due to return fraud.

Not surprisingly, businesses that sell products with a high risk of returns — such as high-end fashionwear and high-tech consumer products — often tend to tighten and restrict their return policies. However, the research indicates that retailers could reap the most benefits by offering money-back satisfaction guarantees on these kinds of high-return-risk products and then reselling the products at a discount after they’re returned.

Focus on Limiting Returns

While offering money-back satisfaction guarantees can be smart in the right circumstances, the Accenture report stresses that businesses should primarily focus on limiting returns in the first place. The key is to make strategic adjustments to return processes by realigning resource allocations.

For example, most businesses concentrate the bulk of their resources on supporting return processing rather than on preventing returns. Shifting resources to return prevention can help businesses improve their overall financial performance.

The Accenture report offers a number of return prevention strategies for both manufactures and retailers. For both, it starts with measuring the impact of returns to establish a baseline for future metrics and assess the scope of the problem. In addition, manufacturers should focus on improving product design and enhancing customer education at the point of purchase, point of first use and point of need.

Return prevention strategies for retailers include the following:

• Offering product education classes to customers.
• Providing delivery and setup services for highly technical products.
• Contacting customers after they purchase items to see if they have any questions.
• Developing analytics to identify frequent returners.
• Providing multiple service options.

The Accenture report offers a five-step process to revitalize return strategies:

1. Create favorable customer expectations that discourage returns in order to reduce the number of NTF returns.
2. Support products before and after the sale with attractive alternatives to returns.
3. Identify NTF returns as quickly as possible and return these items to your inventory as soon as you can.
4. Obtain customer feedback to find out why they returned specific items.
5. Seek opportunities to share return prevention responsibility and streamline your return and repair networks.

Are Guarantees Right for Your Business?

Every business must decide for itself whether to offer money-back satisfaction guarantees — and if so, what kind of guarantees to offer. Talk to your managers about the pros and cons of offering such guarantees to your customers.