Why your online business should offer a no-hassle money-back guarantee and avoid chargebacks

Posted on Posted in business advice, COO, Foundation, free business advice, Getting Started, Marketing

I work with lots of startup companies that sell goods or services to consumers online. Every company believes they are providing a great product but, the fact is, not every customer will be satisfied. So, the question becomes, if and when should a customer get their money back? I believe the correct answer is, when they ask for it. Here’s why…

If you’re selling a physical product that can be returned in “as new” condition, I think it’s pretty clear the customer should get their money back when the merchandise is returned. However, should the shipping be free in both directions? Should your company charge a restocking fee? Should only a partial refund be given if the merchandise is difficult to resell as new? What if your physical product is consumed or perishable? You don’t want the product back or it simply may be impossible to get it back. Should the consumer be out their money if they are not happy? I say no. Give them a full refund and eat the return shipping cost if you want the product returned.

Money-back guarantee logo
If your company is selling information or e-products you may be thinking, “I can’t un-ring a bell”. The consumer has received the information or could easily make an e-copy that may be of continued benefit to a customer even if they claim they are not satisfied. If the customer claims to be unhappy, is it reasonable to charge the customer a full or even a partial fee? I say no, if a customer wants their money back, I think it’s best to make a full refund upon request.

Maybe, for revenue recognition purposes or simply to be reasonable, you can put a time limit on refund requests, like 7 or 30 days but, even within those parameters, try to go overboard for the customer.

Of course if you’re selling something highly customized or unique, with a limited audience, and the product was delivered as described, then maybe you could be a little more restrictive, but for a general consumer or mass market product, if the customer wants their money back, just do it.

If nothing else, your company will certainly earn a great reputation for customer service. Isn’t that worth a lot in the long run?

You might be thinking, my company is young and struggling. Perhaps you’re in a competitive business with very thin margins. You may be thinking that you need to get at least some revenue off of any transaction otherwise you’ll be out of business in no time. Therefore, you might offer things like a discount for trying out the product or service. Perhaps you offer a bonus amount for first-time buyers. Maybe even a very generous one-time $5 30-day trial. Surely, no one is going to hassle you or expect to get a couple dollars back; they can’t expect to get something for free, right?

Well, before ruling out an unconditional money-back guarantee, consider this. Look at the language on your site. Do you say things like “satisfaction guaranteed”? Is your price point greater than $15? There may be FTC or US Postal regulations covering interstate commerce that might require you to offer consumers an easy way to get their money back for some period of time. I’m not a lawyer, so you’ll have to check that out.

However, whether there are regulations or not and, even if your product is less than $15, why not embrace an easy refund policy? At one of my companies we were selling information online for as low as $5, yet, we made a no questions asked, money-back guarantee, a prominent part of our marketing pitch. We knew that customers got to keep the information even when they got their money back but, it didn’t matter. Consumers loved our service and the business took off like a rocket. Returns were always an extremely low percentage of sales.

Sure some consumers took advantage of us, but the great thing about a mass market is that there are hundreds of millions of consumers and, if you’re selling a good product, the vast majority are willing to pay a fair price for it.

Refunds or Chargebacks
If that isn’t reason enough, consider this… When customers ask for their money back and you give it to them, that’s called a refund. If you don’t make it easy for consumers to get their money back, they can simply call their credit card company and say, “take this charge off of my bill, I didn’t order that”. In credit card merchant processing parlance, that’s called a chargeback.

Chargebacks are an important consumer protection. It helps weed out bad merchants who hide behind shell companies or cloaked personas and sell faulty or misleading goods and services to consumers. It allows customers to get their money back when a bad merchant doesn’t make good on their part of a transaction.

If you are running a legitimate business and don’t make it easy for customers to get a refund, right or wrong, honest or not, when customers call their credit card company, the issuing bank virtually always favors the consumer over the merchant and issues a chargeback. The customer’s charge is reversed and the money is taken back from you, the merchant, virtually every time. Don’t waste your time fighting it either. Offering an easy refund only costs you time, what the consumer paid and possibly the merchandise. On the other hand, a charge-back costs you time, the revenue, possibly the merchandise and a charge-back fee. If your charge backs exceed 1% of your monthly revenue the chargeback fee becomes punitively high. If your chargebacks exceed 1% of revenue for several months, Visa, MasterCard, Amex and the other credit card associations may cut off your ability to take credit cards and you’re out of business.

If that isn’t scary enough, keep in mind that as your company grows, hackers and thieves from Russia, Romania, China, North Korea and who knows where else will start using your site to test their stolen credit card numbers. When the people whose stolen accounts were used on your site see the charge from your company on their next bill they are going to initiate a chargeback because, they have no idea who you are. Any seasoned online merchant will tell you this alone makes it difficult to stay under a 1% chargeback threshold.

Disclaimer: the following paragraph is my opinion only. I have no proof or evidence to corroborate it. I am not accusing anyone or any company of wrongdoing.

Keeping chargebacks below 1% of your revenue is a serious problem and I can virtually guarantee you will have to deal with it at your company as soon as your online sales begin to ramp upward. 1% is a ridiculously low threshold. In some foreign countries it is 2%. Whether due to customer initiated or fraud related chargebacks, you may find yourself in a virtually impossible situation that the merchant processors know you cannot win. They may offer you low credit card processing rates to win your online merchant account because they know at some point, if you are successful, they are going to get extra money from your company every month due to chargeback fees.

With rampant stolen identity and credit card theft occurring around the world, the bad guys alone may push your chargeback rate to near or above 1%. Therefore, the only ways to prevent excessive chargeback fees, or worse, keep from being allowed to accept credit cards altogether, is to take every precaution to limit the bad guys from testing stolen credit cards on your site and make it very easy for legitimate customers to ask for and get a refund.

So, again, when should a customer get their money back? When they ask for it.

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