You've done the best you can to ensure your product or service is great, but still, sometimes you receive refund requests. (Maybe a lot more often than you would like.)

Unfortunately, customer returns and refunds are part of business life.

But what if you could turn lost revenue from refunds into profits?

To my surprise--and hopefully yours--it's possible. The following strategy comes from Michael Maven, author of The Scientific Marketing Codex and Get Better Customers Now, and a strategic marketing expert at the profit growth advisory firm Carter & Kingsley.

Here's Maven:

Venture capitalist portfolio and private equity backed companies ask us to help them grow their profits. Many are cash-rich companies looking to develop an edge over their competition. Yet an alarming number of them make errors, most of which can be fixed.

But sometimes we need to look for more creative solutions.

Here's one we used recently to turn refunds from 100 percent lost revenue to newfound profits. Follow along and I'll also explain how you can immediately use this strategy in your business to see a boost in measurable profits.

Here's how we did it.

Background

A client didn't realize its refund rate was considered higher than the industry average. Before we worked on reducing these refunds, we wanted to test and see if it was actually possible to turn the customer refunds into profits.

Initial Diagnostics

Our client was in the education and learning market; it sold informational materials. It was a "front loaded cost" business, in which most of the investment goes in early to create the content--after that it didn't cost much to make copies of the products and fulfill orders.

The client was able to price its products high enough to create a healthy margin per sale. The "curriculum" aspect of the products also resulted in customers with a high lifetime value.

One thing the client didn't know was that its refund rate on a core product was higher than it should ideally be. We were able to recognize this quickly. But we knew that fixing the root cause of the refunds would involve lots of digging and be a long-term project.

In the meantime, we needed a fast track to a profitable solution; then we could work on removing the root causes of refunds.

Facts and Figures

Our client sold an educational course that came with custom-built software that automated some of the manual work involved in course progression.

The course and software sold for $3,000. It was a luxury package as far as the physical product went (gold-foil block print, embossed logos on thick high-gloss card stock, premium media, etc.) That meant it cost $50 to fulfill.

So when our client received a refund request, it had to return the entire $3,000 (ouch), and even worse, it lost the additional $50 it had cost to fulfill the course.

The Marketplace

Of course, no business likes losing money. So we looked at the landscape of the marketplace as we tried to change the refund dynamics.

We found a few competing companies. One of them, Competitor 1, sold a similar educational course at the same price. We then looked at review sites and related forums and found that Competitor 1 had a great reputation in the marketplace.

Since our client and Competitor 1 were in a similar market, we felt safe assuming Competitor 1 had an advertising and product fulfillment cost similar to our client's. So we calculated that Competitor 1 had a gross profit per sale of $3,000 - $50 = $2,950. (This type of margin may seem high but is fairly normal for information products.)

The other thing we looked for with Competitor 1 was an affiliate program. (This is another common feature of the sales process for information products.)

Affiliate Model Explained

An affiliate program helps a manufacturer sell more of its product, at very low risk. Because of the high margins, informational product affiliate programs can be lucrative.

Here's how it works:

A manufacturer sells a product for $2,000. It has a 50 percent commission on all affiliate sales. Jeff becomes an affiliate. He then refers Michael to the manufacturer's website or business. If Michael buys from the manufacturer, it gives Jeff $1,000 for referring Michael, the full-paying customer.

This works because there is no advertising cost and hardly any risk for the manufacturer. Jeff makes $1,000 and Michael gets a great product.

In our client's case, Competitor 1 offered an affiliate commission of 50 percent on its $3,000 educational course. So if our client was able to refer a buying customer, our client would be paid $1,500 (50 percent of the $3,000 course).

We Looked at the Facts

As full-time affiliates in a previous life, we understood the affiliate model very well. Our client had:

  • A person who was willing to spend $3,000 on an educational home study course
  • A company that would pay our client $1,500 for a new customer
  • An advertising cost of $250 to acquire a new customer (via this specific advertising medium)

Here's How We Made Refunds Profitable

Our client offered a standard 30-day money-back guarantee. We boosted this guarantee and made it the strongest in the marketplace.

How?

We started telling our client's customers that if they didn't like the product they bought, our client would buy the product from Competitor 1 for them instead!

This is a great new customer-centric deal. It lowers the risk for the customer. It's also a much better offer, because it potentially lets the customer try two similar products for the price of one.

At the same time, we reached out to Competitor 1 and set up an affiliate deal in which we could manually refer customers to the company. Of course, Competitor 1 was happy for the extra business we would send it. (At $1,500 per customer on the front end, which is 50 percent of the full purchase price, who could blame the company?)

Here's where the magic happened...

Every time our client received a new refund request, we simply had it ask the customer if the customer wanted to take the client up on the new guarantee. We also made it clear that our client would be happy to buy the Competitor 1 product for the customer, as had been promised.

73 percent of all the people requesting refunds said yes.

Here Are All the Numbers:

These figures are for every purchaser requesting a refund who then took our client up on the new guarantee:

Revenue In:

  • $3,000 for our client's educational course
  • $1,500 in affiliate commissions (paid by Competitor 1 for sending it a new customer)
  • Total revenue = $4,500

Costs:

  • $50 to fulfill the client's educational course
  • $250 in customer acquisition costs
  • $3,000 to buy the Competitor 1 course for the customer who asks our client for a refund

Total profit per refunding customer: $1,200

So What Did We Just Do?

Previously, when a customer was refunded, our client lost $3,000, or 100 percent of the product price. It also lost the fulfillment cost of $50. So the client was $50 in the red for each refund.

We created a new offer that gave the customer more value with less risk. Customers were now able to take advantage of a guarantee in which they could get a refund and also try out a competitor's product at no extra cost.

Our client made $1,200 for each of these refunding customers who took it up on the guarantee offer.

How Can You Apply This in Your Business?

Are you having problems with refunds? If so, your long-term goal obviously is to determine what are the customer objections and friction points and fix those issues. There are plenty of ways to attack those problems and reduce refunds.

But that takes time.

Until then, see what your competition is up to. Does it have an affiliate program you can use to send it new customers? If not, pick up the phone and tell your competitor who you are and what you want to do. It will mostly be happy to accept new customers from you and pay you a percentage of the price.

If that doesn't work, get creative. Offer to get the competitor new customers at a fixed price. (It's pretty much the same deal, but the offer is different and can make the competitor change its mind.)

If you still have issues or your competitor is still hesitant, then offer to give it the first few customers for free so it can take your program for a trial run.

Sure, that might sound pointless, and it will cost you some money up front. But it will be worth it to hook your competition into seeing you have high-quality buyers on hand (your customers will all buy the competitor product since you will be purchasing it for them).

This will build trust and a relationship, and then you can go back and structure the original affiliate offer.

Finally, if you're still having difficulty--or it it pains you too greatly to give a competitor additional business--think a little broader. Find a related service instead of a direct competitor. Offer to give it your customer as a lead--I guarantee it will take you up on it.