Click to Print

Creating a Refund Policy

Budgeting for unhappy customers
January 1, 2000
URL: http://www.entrepreneur.com/article/35868

Q: I run a small party planning business. For the first time ever, we're going to accept credit cards. The credit card company requires that we provide them with our refund policy. I've searched the Net for some sample policies but haven't found anything. Can you help?

A: Of course I can help! I recommend a refund policy that goes like this: 100 percent satisfaction or 100 percent money back.

Why not? If you're great at what you do, why not promise 100 percent satisfaction? Vow to resolve every customer complaint to the customer's complete satisfaction, including a full refund if that's what it takes. (By the way, your credit card company will love this policy.)

When you put together your budget, add a category labeled "Customer Satisfaction Costs." This is an expense category-money (dinner tickets, carpet cleaning and so on) that you give to the customers to make them happy. This won't be more than 1 to 2 percent of your total sales. Some folks are just bad customers. They'll try and get something for nothing and may take advantage of this policy. But the bad apples never amount to more than 2 percent of all your customers. Expect some bad apples and budget them in. You don't want to craft a complicated return policy for that bad 2 percent.

If you're refunding more than 2 percent of your sales, then you have a service or production problem that needs your immediate attention. Take every customer complaint very seriously. Thank the customers who let you know that they're unhappy. Ask questions. Try to find out what happened. Ask them how you can make it better. Then do as directed.

Don't become defensive even if you feel like you may be getting the short straw. If you make the customer "wrong," you always lose. However, craft your words carefully when you offer a refund. Otherwise, it will sound like you overcharged in the first place.

Try this response to a customer complaint, "Our intent is to create a product (or service) of exceptional value. I apologize that we've failed to do so in this situation. What will it take to make this better for you?" Then do what they say. Remember, any refund policy that depends on the legal system is a loser for you and your customers. The big winners in the courtroom are usually the lawyers.

Of course some companies have more on the line financially in regards to direct costs (a building contractor, for instance.) In those cases, it makes sense to build payment points throughout the production process to keep cash flowing and to spot dissatisfaction before the job is finished.

The point is, keep it simple. If they don't like it, they don't pay.

Author Ellen Rohr nearly starved in her family's small contracting business-until she learned how to manage money. "Do what you love, certainly," she says, "but the money won't just take care of itself." Ellen's pricey college education didn't prepare her for real-world business. "Financial business basics aren't that difficult...but where do you learn them? Unfortunately, business literacy isn't taught in school. I teach the basics and take the mystery out of making money." Ellen's mission as an author, columnist and seminar leader is to help people make a living doing what they love.


The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.