Small Business and Startups: Tips for Reducing Refunds

How often does your business have an opportunity to increase bottom-line profitability, improve customer retention, and generate positive word-of-mouth with a zero-dollar investment in marketing or advertising? This huge opportunity is right under your nose and you probably don’t even know it. “What is it?” you ask. “Why is my nose so large?” you wonder.  It’s easy – simply spend the next month focused on one thing: reducing your refunds!

Most businesses, large and small, have a formal refund policy and yours probably does too. Whether your policy is to offer an unconditional money-back guarantee, to accept returns within 30-day window, or to charge a restocking fee, chances are that last month a larger-than-desired portion of your customers chose to ask you for a refund. You may not have been smiling on the inside when you gave the money back, but you knew that you had to and for a good reason. A strong guarantee policy gives your customers the comfort they need to buy whatever it is that you are selling. As consumers we are much more likely to part with our money if we know that we can get it back should we be unhappy with the purchase.

How much of an impact will reducing refunds have on your business? The math is pretty simple: Imagine a small business with gross revenues of $100,000 and a profit margin of 20%. If this business has a refund rate of 10%, the annual net-profit would be $18,000, right? Now imagine that this business is able to cut its refund rate in half. Suddenly instead of losing $2,000 from the bottom line, they have effectively improved profits by $1,000 – a gain of almost 6%! And (best of all) they were able to do so without spending an extra dollar on marketing or acquiring a single new customer. Instead, they have made a customer happy who otherwise might have never returned, and they have dramatically reduced the likelihood that someone will be out there yammering all sorts of negativity on Twitter, Facebook, or Yelp! Lots of wins there…

Here are a handful of things you can do right now to reduce your  refund rate and add dollars straight to your bottom line!

1. Offer an unconditional guarantee. This may seem counter-intuitive, but the first step in reducing your refunds is making it crazy-easy for a customer to get one. First-time customers in particular are looking to do business with a company they can trust and there is no better way to prove your trustworthiness than by clearly advertising how you stand behind your product. Keep your guarantee policy front and center; make it easy to find and easier to understand and you will have taken a huge first step towards building a customer relationship based on trust.

2. Be available. Great customer service reduces refunds rates and the first step in providing that service is to make yourself available. Help your customers to find you when they need you and to contact you using a channel they prefer: email, web-form, phone, chat, FAQs, and long hours are critical components of great customer service as are fast and friendly responses to a customer contact. Try to limit the use of auto-responders and canned responses and try to answer every support request within hours, not days. A customer who is made to wait for an answer to a questions is multiple times more likely to ask for a refund than the customer who received that prompt and helpful reply.

3. Be honest about your product. One important way you can reduce refunds is to set customer expectations early. By providing a detailed description of what they are buying and helping them to understand your product or service will go a long way towards creating satisfied customers. If you are a web-based business make sure you have How-it-Works page that is easy to find and clear in it’s descriptions. If you are selling a complicated product or service, provide Educational content like videos or slide-shows; these can go far in helping a user easily understand the process.

4. Engage early, engage often, engage after. When a customer walks into a store, a great merchant will make a point of saying smiling and “Hello, can I help you?” At a restaurant, a good manager will make the rounds of the tables, greeting customers and asking them, “How was your meal? How is the service?” This kind of personal attention is very meaningful to customers and can be applied to any type of business across all industries. Engagement can be take even further, though. Using great help-desk or phone software can improve a customer’s experience by facilitating communication; regular emails and newsletters can build strong relationships; and simple surveys can help you to understand what customers like or don’t like about your product or service. Social media tools such as Twitter and Facebook can be leveraged to offer and exchange value between you and your customer, too.

5. Ask them why. We have learned over time (and plenty of refunds) the value that can come from a better understanding why a customer was unhappy with our company or their project on crowdSPRING. We regularly survey our customers to ask specific questions about our website, our offerings, and our community. When a customer requests a refund we always try to find out specifically where we went wrong and to do our best to address any issues in the hopes that a new customer will have a better experience.

6. Drill into your data. Lastly, use the data you collect (you do collect data, right?) to look for patterns that might help you to prevent the next refund request. Is there a type of customer that is more likely to refund? Is there a product within your line that has a higher percentage of returns? What about the time of day? The location of the store or the customer?  The idea is to find ways to identify potential issues before they become a refund; if you can identify patterns you can take additional steps to engage or educate to reduce the likelihood that a new customer will become an unhappy customer.

Photo: Flickr/Robert Mautz