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Reduce the Risk, Not the Price

Martin Grunstein provides us with his thoughts on risk reduction and how the consumer really wants risk reduction, rather than price reduction

In a business world where so many drop their price at the drop of a hat and then complain that margins are tight and it’s hard to make a profit, I find it strange that so few businesses give the consumer what they REALLY want when they ask for a price reduction, which is RISK reduction.

The money back guarantee, which is offered by EVERY business in this country (because if I’m not happy I’ll take you to the Department of Fair Trading and I’ll win because the system is in all favour of the consumer) remains the “forgotten value add”, yet one that is remarkably lucrative and at the same time very inexpensive to implement (unless you give terrible service and disappoint your customers on a regular basis).

Why is this so? Simple. Because most businesses look at the downside of the guarantee, not the upside.

The downside of the guarantee is “the ratbags are going to get us” and that is true, a very small number of people are going to exploit your money back guarantee. But guess what? The ratbags get you any way, whether you offer the guarantee or not! What about the upside of the 99+% of people who are impressed by the money back guarantee and NEVER TAKE UP THE OFFER? Presumably because the product or service lives up to expectations. Sadly, in this country we market at the people who are out to rip us off instead of the people who are putting money in our pockets and that’s just DUMB!

You want real world examples? I have plenty.

I was working in the nursery industry and one of the franchise owners had the misfortune of a chain store opening up right next door. He couldn’t compete on price (he was 30% more expensive) and he didn’t want to.

So what he did was he put up a big sign as an anti-opening sale that said “We offer a 12 months unconditional money back guarantee. If you buy a plant from us and it dies within 12 months, whether you kill it or the plant is faulty, bring it back and we will give you your money back or replace the plant free of charge”.

The franchise owner was really happy with how his sales went during the opening sale of his competitor that at the end of that six week trial period for the guarantee sign, he decided not to take it down and he left it up forevermore.

Now, here’s the point. After having the sign up for 12 months he analysed his business and he didn’t have to give any more refunds in the course of the year he had the sign up than he did in the course of the previous year when he didn’t have the sign up – yet his business improved significantly. Why? I’ve always said that business is about understanding human nature not tricky marketing – and human nature says that the value is in the offer, not the delivery. How many people do you know that are going to turn up seven months later with a dead plant demanding their money back? Very, very few, if any. That’s how many!

How do they sell puppies to children? You go to the pet shop or markets and your kid falls in love with a little dog. Now, if the pet shop owner has any brains he says “Your child obviously loves that puppy. Pay for it and take it home and if you’re not happy bring it back on Monday and we’ll refund your money and put it to death in front of your children” (that’s just a joke by the way, I don’t advocate euthanasia as a marketing strategy). Still, very, very few people bring the puppy back. They just want the reassurance that they can.

But the greatest suckers on earth when it comes to guarantees are golfers (myself included). You don’t believe me that golfers are the greatest suckers on earth, read a golf magazine. There are ads in golf magazines that say “If you don’t get a birdie on the first hole with this magic new golf club, we will refund your money” and these ridiculous ads work on us idiot golfers.

Why? Because the golf equipment companies know they are not selling golf equipment. They are selling HOPE TO THE INEPT! And people will pay a lot more for hope than they will for a golf club.

Let me share a personally humiliating true story that reinforces this point.

Many years ago my golf pro had a $500 driver in the window (that used to be a lot of money to pay for a driver). I was hitting the ball pretty badly but I said to the pro “I’m not paying $500 for a driver”. He replied that he had a trial club that I could have a hit with for 18 holes and if I didn’t like it I could return it and give someone else a go. As luck would have it I hit it really well and at the halfway break in my round I went into the pro shop and said “I’ll buy it”. The pro was walking out the back and I said “where are you going?” The pro said “I’m getting you a brand new one” I said “I don’t want a new one. This one works” (any golfer will tell you that’s normal behaviour). In fact, I’m not suggesting I am paranoid but I left the words TRIAL CLUB on it for two and a half years because while the thing thinks it’s a trial club, it knows as soon as it stops working it’s going back into the pro shop!

Now, the point I’m making is that the pro could have taken 20% off the price and I wouldn’t have bought the club but by giving me a free trial or unconditional money back guarantee I am very happy to pay full price once the product has demonstrated value.

Surely, this can apply to your business.

I was at Darling Harbour with my wife and children one Sunday and it was time for coffee (my wife lives for cappuccino). In a large food hall there were five places we could have bought a coffee. One of them had a sign that said something like “Best cappuccino in Darling Harbour or your money back”. VOOOM. That’s where we went. Now, this place was pretty full and the other four places were pretty empty.

I happened to ask if the boss was working that morning and, by chance, he was. When he came over I asked him how long he’d had the guarantee sign up for. He said “two years”. Then I asked him how many refunds he’d given in that two year period. He replied with a big smile “five”. I walked away, also with a big smile. That guy is clever.

His place is doing terrific and how many people do you think are going to sample all the coffees just to get a refund from him because his is not the best in Darling Harbour. The perception is that his coffee is the best because he puts his money where his mouth is.

Guarantees can extend to further than product performance. One of my clients in real estate guarantees communication during the sales process i.e. if we don’t return your phone calls within three business hours, we refund $200 of our fees every time we fail to do so. A building client of mine offers a “no surprises” guarantee i.e. if the cost of the project blows out through no fault of the customer (like changing plans), the builder pays the blowout. A grocery retail client of mine offers a “double your money back guarantee” on fruit, vegetables, meat and deli products because his competitor advertises a 100% money back guarantee. All of these businesses have demonstrated profitability improvements as a result of the implementation of the guarantees.

Think hard about your own business. Are you communicating the money back guarantee that you probably already offer to your marketplace? And are there some novel ways you can improve the perception of your business by guaranteeing what your competitor doesn’t?

In this ever increasingly competitive and price preoccupied world, let your competitor reduce his price, you reduce your customer’s risk.

This article was contributed by Martin Grunstein

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