How Effective is the Money-Back Guarantee?

June 15, 2010

We’ve all heard it before: “Try it risk-free — or your money back.” By now, the money-back guarantee has become a staple of the modern consumer relationship. It’s so familiar we often forget it’s there.

But one place it’s not usually found is Apple’s App Store. That’s because Apple takes 30% of each sale and keeps it — even if the developer refunds the full 100% to a customer.

It’s no surprise that most iPhone and iPad developers do not offer a money-back guarantee: it costs them too much money.

That is what makes the Omni Group special.

Omni builds successful productivity applications for the Mac — like OmniGraffle and OmniFocus — which it sells on its own online store. There, the return policy is simple: a 30-day money-back guarantee, with no questions asked.

But with the advent of the App Store, Omni had to decide whether they could afford the same policy for their iPhone and iPad apps. After all, they stood to lose 130% on a single return.

The question for Omni was: would the rewards outweigh their financial risk?

The Money Back Guarantee: A Short History

In 1868, J.R. Watkins created what is considered retail’s first money-back guarantee. He cooked natural remedies in his kitchen, bottled them in his woodshed — of all places — and sold them door-to-door from a horse and buggy.

Because customers were unfamiliar with him and his product, Watkins molded the bottles with a trial mark. Use the product down to — but not below — that mark, and Watkins would refund the full purchase price on his next visit.

In any sale, then as now, the risk is always with the buyers. They don’t know if the product is something they need — or even if it works. Being suspicious is just being smart.

But by removing the buyers’ risk with these techniques — and their muscle soreness with his liniments — Watkins also dissolved any hesitation about the purchase. This risk-reversal worked so well that his company is still in business, selling through Wal-Mart and in China. And Watkins Original Liniment — his first product — is still sold today.

As a consumer, buying a product sight-unseen does feel like a risk — especially online, when a blank field on an unknown site is asking for your credit card number. Richard Sears, founder of Sears, Roebuck & Company, faced a similar problem in 1888, when he began his mail-order catalog business.

Rural farmers in the late 1800s — surely a skeptical bunch — wanted the items in Sears’ catalog, but were naturally reluctant to send their hard-earned money off into the void. Many viewed it as a con, put on by an unscrupulous city slicker.

Sure, Sears wrote copy in a language the farmers understood and included photos of his headquarters and employees. The invitation to drop by and visit was a nice touch in an age when everyone in a small farming community knew everyone else. But if the farmers mailed off their money, could they trust that the product would ever ship, much less arrive?

To allay these concerns — and to reverse the risk — Sears offered a money-back guarantee and payment only on delivery, with a $1 good-faith deposit. The program was so successful that Sears’ company transitioned from selling watches and silverware, to appliances, bicycles, firearms, and furniture. By 1906, it was even sending entire houses by mail — or rather, by freight train, with each timber labeled for easy construction.

Watkins and Sears had identified the sources of a customer’s hesitation and answered them. By making the purchase risk-free, they also made the sale.

Stand Behind Your Products

A money-back guarantee shows that a company stands behind its products. It also gives an aura of trust and respectability. In recent years, such guarantees have been given by the Anaheim Angels on season tickets, by the rapper S.S. on his latest album, and by car-giants GM and Chrysler on models from their 2010 lines, to attract customers turned off by the government bailouts.

When GM made a similar guarantee in the U.K., they found that only 2-3% of the vehicles were returned.

In what’s considered a first for higher education, a school called Lansing Community College even offered a money-back guarantee on tuition. Attend every class, and if you don’t find a job within one year, they’ll give your money back. (I just wish my guidance counselor had steered me their way.)

Which brings us back to the Omni Group.

Without a money-back guarantee, first-time buyers might find buying the iPhone and iPad apps too risky. But with a guarantee, Omni was opening itself up to bigger potential losses.

In the end, the Omni Group decided to offer a 30-day money-back guarantee on their iPhone and iPad apps. They even posted product features and videos, so customers could make an informed decision before buying.

“So why are we doing this?” they asked in their blog. “Because we want to give you the same confidence in buying our App Store software as you have when buying our Mac software… Because we believe the benefit outweighs the risk.”

The jury is still out on just what their return rate will be. But really, $19.99 isn’t much to pay for the OmniFocus app. Skeptical farmers had once purchased houses sight unseen through the mail, after all.

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