Risk Reversal & Guarantees

Customers Are Nervous

  • Scared of making the wrong decision
  • Being taken out of their comfort zone (remember your first PC)
  • You know much more than they do about whether you can solve their problems
  • But you have an incentive to say “Yes definitely” when you mean “Yes maybe”
  • So customers carry the risk of making a bad purchase – and it stops many from making the decision to buy.

If you have somebody interested in buying, then unless they are:

a) completely hooked

b) the money involved is little consequence for the potential benefit/pleasure (think impulse buys with their instant “Yes I’ll have it” decision)

you prospective customer is looking for a reason not to buy.

Any reason will do.

At the moment they have a problem and some money to help fix it.

If they buy right, they get rid of their problem and receive value.

If they buy wrong, they still have their problem and less money to help fix it – buying has made them worse off.

It may be that buying takes them out of their comfort zone.

They know they have the symptoms of a problem but they’re not sure of either the diagnosis from symptoms to the cause of the problem or whether your product or service is really the solution to the problem and will make their symptoms go away.

You are in a position of strength and knowledge and your customers know it.

They also know that their is a financial incentive to say “yes definitely your product will do the job” when you mean “yes maybe, it might work with a bit of luck.”

Customers know they carry the risk of making a bad buying decision and it slows done their decision making and can even stop it completely unless you reverse the risk and reassure the prospective customer that if it doesn’t work, you and not they will carry the cost.

Risk Reversal

  • You take the risk by offering a guarantee
  • Would you give a refund for a complaint?
  • Make it clear in your marketing makes your offer much more attractive and lead to action.
  • Poor operators can’t afford to offer guarantees – good operators can’t afford not to.
  • Especially good for highly leveraged offers – big upside/little downside if people take advantage.
  • Who should take the risk? What’s the big fear?

You take away your customers risk by offering a guarantee which gives protection if the marketing promise is more hot air than substance.

Let’s suppose you have a new cream carpet in one of your living rooms and you and a group of your friends are having a glass of red wine. One of the kids plays a joke and startles you and you spill your wine on the carpet. You do what you can but you can see the stain.

You call a carpet cleaning company who promise to remove any stain and leave the carpet looking as good as new. They use chemicals to remove the stain but eat into your shag pile, leaving a bald patch. You refuse to pay – the carpet is ruined.

Or if you had to pay in advance, you make a complaint and demand your money back, threatening to tell everyone you know about this cowboy carpet cleaning firm who make promises they can’t keep.

If you’re difficult as a buyer, what do you so as the seller and you have customers complaining? Do you waive payment or give the money back when you know you’ve done a poor job and not delivered on your promise?

If so, then effectively you are guaranteeing your work. You are looking after your customers post-purchase.

But unless you have a guarantee in your marketing, you don’t use the power of a guarantee to provide pre-purchase reassurance by saying to the customer “Don’t worry, if it goes wrong, we’ll give you your money back.” Nervous customers won’t give you the benefit of the doubt, even though you run a trustworthy and honourable business.

When you have a guarantee in your marketing, your customers have one less reason not to buy and the more powerful the guarantee, then the more they will believe what you say.

Poor (honest) businesses can’t afford to give a guarantee. Those who give a guarantee and have no intention of honouring it are amongst the lowest of the low and blatantly manipulative.

Many good businesses can’t afford not to offer a guarantee. It sets them apart from their second rate competition and a guarantee can be an important part of the USP/positioning statement. Remember Dominos “Fresh, hot pizza in 30 minutes or it’s free.”

Guarantees are particularly good for high leverage offers where you have a high upside if customers buy and little or no downside if they demand their money back. It’s why guarantees are so powerful in information marketing  sell more and you get more profit and returns of a digital product don’t have a cost attached.

Some products are more difficult to guarantee than others since the degree of control over the process may differ. Keep going back to the question of what you do if a customer has a complaint.

Nordstrum (a high priced retail store in the United States) has a return policy which is legendary (classic tyre story, blog with stories and the official policy – notice no time limits). Marks & Spencer in the UK used to be very good but they’ve tightened their policy in recent years.

Unfortunately some people will take advantage and abuse the system. Talk to a fashion retailer and you’ll hear stories of returned party dresses which have obviously been worn.

The numbers may not be as big as you think but a guarantee policy needs to be tested for financial sense and it fits nicely with direct response marketing techniques like direct mail where you have control over how many get the offer.

A – Establish your baseline for product profitability.

B – Establish the extra profit earned from high conversions which come from having the guarantee.

C – Establish the cost of meeting the guarantee

Provided B is bigger than C, your guarantee is profitable.

It will also make you feel better about taking a more forceful approach to your marketing and sales. You’ll push further into the benefits because you know you are taking the risk and protecting your customers.

Types Of Guarantees

  • Satisfaction guarantee – or your money back
  • Performance/outcome guarantee
  • Conditional guarantee – prove you tried and acted in good faith
  • Try for yourself and pay in 30 days
  • Better than money back – refund and keep, double money back
  • Basics – long time period, easy to claim

You have a number of different guarantees to choose from to help convince your prospective customer to get off the fence and give you a try.

The basic satisfaction guarantee is not specific but says “If you’re not happy with your purchase within the first 60 days, for whatever reason, we’ll pay your money back. Our commitment is to total customer satisfaction.”

This has the advantage that it puts the buyer in a place of feeling in control. There are no hoops to leap through.

The performance guarantee or outcome guarantee goes a big step further – it promises that the problem the product is bought to solve will go away. “If you don’t lose 14 pounds or more within the first month on our diet and exercise plan, then we don’t believe we deserve your money. Just ask for your money back and you’ll get it.”

It’s a very strong and appealing guarantee for the customer since it is linked to the end result although it is more difficult for the seller to control. Often the benefits from a product or service depend on the customer taking the rights actions and not doing the wrong things.

The exercise and diet plan only stand a chance of working if the customer follows them.

For an information product with no cost,  the extra sales should more than make up for any claims. But for a personal trainer and dietitian who is spending valuable time working with clients and perhaps providing food, the three chocolate bars and trip to McDonalds each day by the customer are a big problem and show a lack of commitment.

This is why some products offer conditional guarantees. Prove that you’ve acted in good faith by doing X and Y in the first 30 days and if you’re not convinced about the benefits, you’ll get your money back.

Conditional guarantees sound fair – both sides need to play their part – but those emotionally looking for a magic pill (even if they accept logically it doesn’t make sense) will be put off by a conditional guarantee.

One reverse the risk strategy which has been very popular in the mail order business is “try it for yourself for free for 30 days”. The idea is that if you don’t return it, then you will pay.

Nightingale Conant do this with their audio training. You receive a sales letter, think that sounds interesting, ask to try it… and then, if you’re like me, not listen to it in the 30 days, feel guilty and pay.

There area  couple of psychological tricks going on here.

First, once you have something in your possession it becomes yours and you don’t want to give it up. You’ve taken ownership and keeping it seems more valuable.

Second, returning a parcel is a bit of a pain. You may have to find new packaging, pay for postage which, because it’s by weight, you’ve got no idea how much it will cost until you take it to the Post Office…

You may have a cash collection problem – 10 to 20% of people may need serious reminders about meeting their commitment to pay and some won’t. It’s irritating but looking at it financially if the extra profit you gain is greater than the cost of supplying the products you haven’t been paid for, then you’re winning.

A quick bit of accounting using Nightingale Conant as a convenient example.

Sales price of CD set £40

Cost of CD set and postage £10.

If the customer never pays, it’s called a bad debt and will go through in the accounts, usually in overheads as a £40 charge.

This is misleading.

Just looking at that one transaction in isoaltion

Sales £40

Cost of sales £10

Contribution £30

Bad debts £40

Loss on sale £10

If you get two extra sales by offering pay nothing for 30 days, and one pays and the other doesn’t, then you’re gaining £30 contribution on one and losing £10 on the other so the net gain is £20.

With these numbers , then for every 4 units you sell, you’d need an average of 3 or more who don’t pay for it not to make sense financially.

An alternative to “pay nothing for 30 days” which also sounds great is a “better than money back” guarantee.

This comes in two forms:

  • Buy it, try it and if you’re not happy, keep what we sent you and we’ll refund your money – useful if the item has no return value or even worse a disposal cost or if you’ve agreed to pay for the return. Variations on this are return the main item and keep the bonuses as our thank you for giving it an honest try.
  • Double your money back – if you are not happy with your purchase, return it and we will give you your money back and double it to show we are genuinely sorry for letting you down.n It make not be double your money but a fixed extra payment e.g. $50 dollars.

As you can see, there are a lot of options to consider when creating your guarantee but here are a few general guidelines.

  • The longer the better – 14 days, 30 days, 60 days, 180 days, 365 days, lifetime. First it shows more belief in your product and second, it takes the pressure off the customer. 14 days or 30 day guarantees may get a note in the diary to decide if a claim should be made or not. 365 days is difficult to put in the diary and lifetime impossible because you don’t have an end date.Again this is something to test.

    You want certainty in your finances and it’s nice to know that the money is yours and you can pay your joint venture partners.

    Second, your payment processing may create restrictions. For example at the moment PayPal has a 60 day refund policy where buyers can claim refunds automatically and refunds are made without any commission charges.

  • Make your guarantee easy to claim – be open and upfront about what to do and keep the conditions easy. You’re probably used to stores insisting on till receipts, even for items with own brand labels still attached and you may have wasted hours looking for a receipt you’re sure you kept but not sure where.Some guarantees are so condition intense, they appear to have been written by the sales prevention department and designed to put customers off returning stuff.  They’ll succeed by stopping the customers from buying.
  • You want your guarantee to sound special so give it an exciting name. I’ll keep an eye open for examples.
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