Should you offer a money back guarantee?

money back guaranteeA few weeks ago I was going to buy a digitizer tablet for my PC. Then I noticed in the vendor’s terms and conditions that they wouldn’t accept a return once I had opened the packaging. But I couldn’t know if the tablet works until I open the packaging. Duh. I didn’t buy it. Similarly I look for a sensible money-back guarantee whenever I buy software. I don’t remember ever invoking such a guarantee for software, but it is nice to know that I could if I wanted to. Also, I see the lack of such a guarantee as a warning signal that the vendor isn’t confident about the quality of their product.

I offer a 14-day money back guarantee on my own Perfect Table Plan software. The only provisos are:

  • They have to tell me what they didn’t like about my software. This is very useful feedback for me.
  • They have to email me that they have uninstalled the software and won’t use it again. I have no way of checking this, but I want them to be clear in their own mind that they are a liar and a cheat if they carry on using it (if you have read Ariely’s excellent ‘Predictably irrational’ you will know that many people are prepared to be a little dishonest, but few will lie and cheat outright).
  • They have to return the CD, if they purchased one.
  • The guarantee is only valid for 14 days.

But I am fairly relaxed about about all of these. If it is clear that someone thinks they haven’t got their money’s worth out of my software, I will pretty much always give them their money back.

Note that is isn’t a ‘no questions asked’ money back guarantee. I haven’t been quite brave enough to try that yet and really want feedback on why they didn’t like my software. Also the 14 day guarantee is shorter than most. The reason is that a lot of people buy my software for a single use (e.g. their wedding reception) and I don’t want to make it too easy for them to use the software and claim a refund after they have finished with it. However I have heard vendors say that their refund rate actually dropped when they extended the length of their money back guarantee (due to increased procrastination, perhaps). I may test switching to a ‘no questions asked’ and/or longer guarantee period at some point.

The advantages of a money back guarantee to the vendor are:

  • More sales. If they customer is confident they can get their money back they are more likely to buy. I don’t have any numbers to back this up, as I have always had a money back guarantee. But I know I am considerably more likely to buy if there is a money back guarantee. Aren’t you?
  • Less chargebacks. If a customer buys with a credit card they can get their money back anyway. They just have to ring their credit card company and do a chargeback. Your payment processor will then take the payment back and, to add insult to injury, slap a chargeback fee on top. Too many chargebacks and they might even close your account. Better to refund and avoid the chargeback fee.
  • Less bad vibes. No matter how great your software is, some people aren’t going to like it. Maybe your software isn’t a good fit for what they want to do. Maybe they are just having a bad day. Better to give them their money back than to have them bad mouth your product on every forum they can find.
  • Less bad customers. Some customers (thankfully very few, in my experience) cost more in time and mental energy than their licence fee is worth. It is better for you to cheerfully refund them and focus your efforts on more financially and psychologically rewarding customers.
  • Staying legal. You may be legally obliged to give a refund in some circumstances.
  • Good karma. If you aren’t happy, I really don’t want your money.

Generally it costs you nothing to refund a software purchase, apart from a few seconds of your time (depending on your payment processor, some may not refund the processing fee). The only disadvantage of a money back guarantee is that it makes it easier for a customer to cheat you. A lot of vendors worry about this, but in my experience (and of others I have spoken to) this isn’t much of an issue in reality. My refund rate has been consistently around 0.5% (I am not including cases where I refunded because people bought the wrong type of licence, bought 2 licences instead of one etc.). I would be very surprised if dropping my prominent money back guarantee didn’t also drop my sales by a lot more than 0.5%. So, even if all the refunds are fraudulent (which I very much doubt) I am confident that the refund policy increases my profits overall. Sufficiently confident that I don’t intend to run an A/B test any time soon.

Interestingly, my refund rate is 10 times lower amongst customers who have purchased a CD. This could be because these customers are less price sensitive and so don’t see the refund as worth their precious time. Or it could be because of the extra hassle of having to send the CD back (I know a wily B2B vendor who includes a CD with every purchase for exactly this reason). Probably it is a combination of both.

Some vendors think that they don’t need a refund policy if they have a free trial. I don’t agree. When I buy software I want a free trial AND a money back guarantee in case I only discover a problem after purchasing. Also I know (from a survey) that some 25% of my customers don’t even try the free trial of my software before they buy. I expect I would lose a lot of these sales without a money back guarantee.

I think the case for a money back guarantee is even stronger for B2B software. Customers buying B2B software typically aren’t spending their own money, so they are probably less likely to ask for a refund. Especially as this would mean admitting to their boss and peers that they made a mistake buying your software in the first place. Certainly I have a lower refund rate to businesses than to consumers.

From a business point of view, I think the only case where you can justify a no refund policy is when you have a high cost of sale, e.g. enterprise software that requires a lot of configuration. In that case you could include a non-refundable set-up fee that covers your costs, but still have a money back guarantee on the remainder of the purchase.

No doubt refund rates vary according to product type, price range, customer demographics, geographic market and a range of other factors. But , reading forums and talking to other vendors, the typical refund rate seems to be in the range 0.1% to 1%. If your rate is much above 1%, perhaps there is a problem with your product you need to address? If your rate is much less than 0.1%, perhaps you aren’t marketing your product aggressively enough?

In the early days I found it hard not to see refund requests as an insult to my product. But now it really doesn’t bother me and I cheerfully make the refund. I just add the key to a ‘blacklist’ in the software so it won’t work in any future releases.  I don’t attempt to disable it in the current release. I don’t see implementing a ‘phone home’ strategy to make this work as being a profitable use of my time.

In summary, by not giving a money back guarantee you might avoid a small number of customers cheating you. But I think you are very likely to be losing a lot more in chargebacks, missed sales, ill will and missed feedback than you save in fraudulent refunds. Try it. You can always revert back in the unlikely event that your refunds go up significantly more than your sales. And if you have a money back guarantee you should shout about it on your website. Having a money back guarantee and not advertising it prominently seems like the worst of all worlds to me.

14 thoughts on “Should you offer a money back guarantee?

  1. Ryan Ginstrom

    I offer a 60-day, no-questions-asked money-back guarantee. So far, I’ve only had one person ask for a refund (knocks on wood). I figure that I’m really saving myself the hassle of charge-backs while taking the worry out of the purchase for the customer.

  2. Thomas Holz

    I recently increased my 14-days guarantee to 90-days and didn’t note any increase in refunds. Maybe even a drop, but I didn’t measure it.

    BTW: Two of my products are “duplicate scanners” which are usually used only once, like your table planer. And I don’t have the impression that customers abuse my refund policy, so you might give a longer guarantee a try. :))

  3. Ian

    Many companies don’t even have a way to efficiently process refunds to them so more often than not people just stop using your product rather than bother with the refund. Not really saying this is good, but just a fact.

  4. Giammarco Schisani

    I agree that there is nothing wrong with offering a money-back policy. Moreover, in most countries the buyer of software products is considered a “consumer”, and therefore he’s protected by a number of laws, regardless if you have a money back policy or not!

    I am not sure about US, but in Europe, if you buy something as consumer (e.g. a software product), then I believe you are entitled by law to get your money back if you are not happy with the software (e.g. it does not do what it says on the tin).

  5. Marcus Tettmar

    +1 Giammarco. Also, in the EU we have something called the “Distance Selling Directive” which gives non-business consumers the right to cancel their order within 7 days.

    So if you are in the EU and selling software to consumers via the web you are obliged by law to provide refunds within 7 days anyway. See:

    Note also the requirement to provide this and other information in written form to the customer. (e.g. in your web site’s terms and conditions).

    I’m not sure what the interpretation of the law would be if you are selling via a non-EU based reseller, such as Plimus.

  6. Oliver Grahl

    We offer an unconditional 60-day guarantee, and only rarely customers make use of it.

    When we do promotions, like coupon deals, and send out newsletters to existing customers, often, people who just purchased, ask to get the discount. Then I try to reply gently, that they can claim their money back guarantee, and buy again at the discounted price. I think only half of those who asked then go that way.

    For that reason, sometimes I exclude our newest customers from discount mailings. And sometimes I don’t, because all-in-all, our office coffee costs me more within a year than all refunds and chargebacks together. Money back guarantee – just offer it – nothing to lose.

  7. Jon Peltier

    I offer a 90-day no-questions-asked money-back guarantee, and if anyone asked past the 90 days, I’d still refund their purchase. I know all of the reasons for offering a refund, but really, I only do it to avoid bad karma.

    I don’t think it’s necessary to require a reason the customer wants a refund. Most of them volunteer that information because they expect a hassle with their refund.

    I’ve had a return rate of about 2% in about 16 months of sales. The most common reason is that, even though the program did what was advertised, it didn’t do what the customer wanted. Only one guy couldn’t figure out the interface (at least nobody else has complained).

    I’ve had two chargebacks, once because the download link ended up in the customer’s spam folder, and once because a manager didn’t know his subordinate had ordered the software on his credit card. I got stuck with the chargeback fee, and still provided the software. Stupid karma.

  8. Zviki

    It all makes sense.

    Still, I offer a 30 day free trial which is full featured. In most cases, that’s enough time for people to form an opinion. I offer a “no questions asked trial extension” for people who ask (considering nobody will be stupid enough to ask more than once or twice).

    At the end of the day, it seems enough for me. Just try it until you are ready to make a decision. I’m not sure if this has any affect of sales, but I’m ready to try.

    BTW, I’m not sure if the rules will apply to oversees companies. AFAIK, the jurisdiction which applies is the one of the seller country.

  9. Romain

    With respect to the Distance Selling Regulation, the disclaimer at the end of my last Amazon (UK) order’s confirmation email caught my eye:

    “we regret that we cannot accept cancellations of contracts for the purchase of video, DVD, audio, video games and software products where the item has been unsealed.
    Please note that we are unable to accept cancellation of, or returns for, digital items once downloading has commenced.”

    This would appear to be confirmed by the link Marcus provided above:

    “Exceptions to the right to cancel
    13. – (1) Unless the parties have agreed otherwise, the consumer will not have the right to cancel the contract by giving notice of cancellation pursuant to regulation 10 in respect of contracts –

    (d) for the supply of audio or video recordings or computer software if they are unsealed by the consumer;”

    Therefore, it would seem that software is basically excluded from the “Right to Cancel”.
    (Obviously AINAL, etc.)

  10. Gareth

    I don’t publicise a money back guarantee, except on special offers, although if asked within 60 days I’ll refund. In 4 years I’ve refunded 5 people and only 1 of those from a special offer where I’d specifically mentioned a money back guarantee. I’ve only ever had one chargeback which was when the download/license/order confirmation email landed in their spam folder and they didn’t have the intelligence to email “Where’s my software?” before running screaming to Mastercard 3 days later (you can tell I was upset!)

    I offer a 30 day free-trial and if I’m honest I much, much rather they try my software first and if they don’t like it, back off than being too lazy to give it a go and leaning on the guarantee if it’s not for them. In terms of customers ripping me off, that has definitely not happened and it’s not a worry for me.

    My experience is that people won’t buy unless they’re at least 90% sure after their trial and the MBG is a safety net which may or may not make them leap – my refund procedure is painless for them but they don’t know that at the time. I think if you have a free-trial the advantage of publishing a MBG is pretty negligible.

  11. Lisa

    Money back guarantee is best option in your software/product that gives trust to you customer. They feel no fear to buy your product. But this is in case when you have small product.

    No one has experience about enterprise software? Never Mind :). I share my experience of using enterprise software.

    Actually in most cases enterprise software have no money guarantee. When we were planning to install help desk software, first this question raised by the management that, What ll happened if you fail to get the required results. And of course their question was real. So we figured out one company “HelpStar” they provided us guarantee for their software. This is rare option we find in them. This is very big issue with enterprise software that they don’t provide guarantee. If they make their buyer secure they can have more sales.

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