To Refund or Not

By Bruce Johnson
14 May 2002

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It's amazing to me how even the simplest business principals seem to escape smart programmers.

For example last week I was asked, by a very competent programmer, why he should allow a customer a refund. In the programmer's opinion the product was good enough. The documentation was good enough. And the examples were sufficient. Thus if the customer bought the product there should be no good reason for a refund.

In this article I'm assuming that you sell a software product, which can be manufactured (i.e. copied), and shipped, for next to no cost. Back to the example.

Let's consider the two possible cases that spring to mind. 

1) This is the one that most programmers think of first. And some programmers only think of this one. This case is of course the Piracy problem. Or as I like to call it, the Big Bad Wolf client. He bought your stuff, kept it, and then asked for a refund. He gets his money back, and gets to keep the product.

This is of course a real problem. But consider the actual balance sheet. The programmer has lost nothing (since the software cost nothing to copy in the first place). All he has lost is the opportunity cost of a sale - i.e. would the programmer have bought it anyway. Morally the Wolf has won a free copy. (Incidentally if the person is re-selling the product then the refund issue doesn't apply since the pirate would be happy to buy a legal copy in the first place.)

Incidentally programmers who ship their product as source code, or just templates, feel they are more at risk than others. They're not. A pirate doesn't care how your code is shipped. 

However let's consider the other side of the coin.

2) The customer bought it in good faith. It didn't do what he expected. Or it doesn't work in his situation. Or for some reason it was unsuitable. Maybe the client is a real doofus and it's all his fault that it's failing. Nevertheless, at the end of the day the client perceives the product as "not useful." So he asks for a refund. He might even be well outside the refund period.

Now the programmer is asked the question. Does he allow the refund, or reject it? Assuming the customer is legit, if the programmer says no, then he gets to keep the loot, say $199 as an average price. But he will never sell to the customer again. Simply put, the customer will chalk it up to experience and will sub-consciously, or consciously, avoid the supplier. Their first experience was not a success and hence they're not going to make the same mistake twice. This lesson may even flow over to other non-refundable products.

So for $199 you've basically removed this customer as a prospect. And this isn't just any prospect either. He's one that has shown a willingness to actually pay cash for one of your products. As any marketing person will tell you, a customer who pays once is hot property who should be looked after - cultivated - and sold something else! But for $199 you've dumped this guy.

And what about the customer? If you're lucky he shrugs his shoulders and moves on. If you're unlucky he belongs to a user group. Or a news group. The next time your product comes up in one of those "what do you think about ...." questions, he's right there with an answer. Which answer would you prefer?

"I paid for it. Got ripped off. Couldn't make it work." or

"I tried it, but it didn't suit my situation. Support was good though, and I got a refund."

If you're really unlucky the person has a grudge against some other developer, who didn't offer a refund and takes it out, publicly, on you.

So what are the options when you're asked for a refund?
a) Pirate. I lose nothing. He pulls a fast one. He wins; or
b) Customer. Potential long term turnover? Potential bad publicity.

Yes pirates do exist. But so do customers. If you assume everyone is a pirate then you chase away legit customers. You may have the moral victory some of the time, but you also have the economic loss at the rest of the time. 

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