Fog Creek Software
Discussion Board

90 Day Money Back Guarantee

Let's suppose for a second that I have developed a software package that I am going to sell for say $200. (Single User).  At any rate, I am offering a 90 day money back guarantee on this product (Simply because of my confidence in the product and to let the customer know that I stand behind it).  So, let's say a customer purchases the product (after they have downloaded and reviewed the demo).  I now have $200 dollars that I need to hold for 90 days.  What is the best way to do this?  (and don't say give it to me /bonk)  I would say put it in some type of an interest bearing account?  You don't want to reinvest or spend that money do you (at least not until you have been selling the software for 90 days and the rate of retention surpasses the rate of return)?

Not business savvy
Wednesday, June 4, 2003

As soon as you start getting regular orders this is a non issue. Very very few people will request a refund unless you do something very stupid, you should always expect to get more orders than refunds in any month.

Tony E
Wednesday, June 4, 2003

90 days is pretty short term.  I'd say you should just keep a certain amount hanging around as cash.  Most people aren't going to take advantage of the guarantee, even if they don't like the product.  You may quickly discover that you only need to hold on to some small portion of the previous 90 days income in cash to be prepared for any calls on your guarantee.

Many investment accounts are going to restrict you to a certain number of transactions per month, so if you have your money in a money market (which returns almost nothing these days) or a mutual fund, you may find you can only write a handful of refund checks each month.  Be sure to ask about that if you talk with a broker.  They may also demand that you maintain a high minimum balance.  These sort of accounts just weren't meant to be used as a checking account.

This is just my opinion, and I'm not an investment guru.

Keith Wright
Wednesday, June 4, 2003

Keep in mind it's "90 Days" until which the customer can't _ask_ for his money back. It's no gaurantee _when_ he gets it (as long as he gets it). (This gives you a bit of flexibility.)

Also keep in mind that "money back guarantees" are offered with the understanding that people don't typically exercise them when they are dissatified. To illustrate: Who typically has enough time in a month (for a 30 day guarantee) to evauate a (complex) software product?

90 days is fairly generous.

Wednesday, June 4, 2003

I offer a unconditional guarantee too. I keep track of how many open issues there are out there in a spreadsheet so I always know my maximum liability, and make sure to keep that amount on hand in the business account.

It's correct that very few people will ask for a refund, usually only because the program absolutely will not install or has some catastrophic failure to perform due to some weird issue with their computer. These folks would much rather you just helped them get the program working on their computer. When I encounter this situation, I apologize to them and extend the warranty guarantee until I fix their problem, maintaining a set of satisfied customers.

On the issue of unconditional full money back guarantees, it is something all software should offer.

X. J. Scott
Wednesday, June 4, 2003

Offering guarantees can change how you recognise revenue, or at least when you recognise revenue.  This isn't quite the critical thing for a private business that it is for a public corporation.

If you treat it strictly then its the customer's money until the deadline passes so it should be treated as an accrual in the accounts.  It isn't strictly necessary to hold it in a separate bank account but it can make things cleaner.

Its also worth bearing in mind that if you sell using a non-merchant electronic commerce account then you'll likely not see the money for 90 days anyway.

Simon Lucy
Wednesday, June 4, 2003

From an accounting perspective, it would be normal to book the money as income once the sale is completed.

What you would then have is an accrual for the folk that demanded their cash back. The level of this will depend on what levels of returns you think you will have.

What accounting package are you using? Most support these kinds of accruals. Its a bit like the way most businesses treat their debtors, and accrual for bad debts.

Standard, prudent accounting practice.

Wednesday, June 4, 2003

Keep in mind that you have a reasonable amount of time after the refund request to issue the check, so:
Jan 1 - Joe Smith orders your product, pays $200
Feb 15 - Joe Smith requests a refund
Feb 22 - Jane Doe orders your product, pays $200
Feb 24 - Jane's money goes to Joe.

Of course hopefully your sales volume will be such that it won't be that cut-and-dried, but that's the basic concept. The way it translates is that you simply maintain a cash reserve for refunds. An accountant could probably nail the recommended reserve to the penny, but it'll probably be something like 10-20% of your monthly revenues.


Wednesday, June 4, 2003

Actually the really prudent course is that you have to accrue the whole  of the sales, not just your predicted level.

Simon Lucy
Wednesday, June 4, 2003

*  Recent Topics

*  Fog Creek Home