Why Amazon and Jetblue Give Refunds, No Questions Asked

For about two decades now, beginning roughly with the appearance of the Worldwide Web in the 1990’s, a fierce competitive battle has raged around delivering a better individual customer experience, one customer at a time. In most industries today all the high ground has been taken, and few companies can distinguish themselves any more simply by treating different customers differently, or by remembering individual customer preferences from transaction to transaction. In the competitive battle to deliver a superior customer experience, these kinds of things have become table stakes.

But there’s still one customer-oriented function that nearly any company could use today to demonstrate the superiority of its own customer experience:  Refunds.

No company really likes to give out refunds, of course. Issuing a refund, after all, amounts to admitting failure with a customer. Striking out. Throwing in the towel. Crying “uncle.”

And refunds are costly. When you sell a product or service to a customer, you generate revenue from the sale, and some portion of that revenue amounts to profit, which improves your bottom line. But when you issue a refund, often 100% of the refund will directly reduce the bottom line.

So minimizing the cost of refunds has driven businesses to erect obstacles, such as requiring customers to produce paper receipts, or to pay re-stocking fees, or to call in by phone, rather than engaging in an online session. 

Nor will most companies provide a refund unless the customer actually requests one, navigating first through whatever obstacles have been put up to minimize their success rate. We marketers even have a specific term to describe the amount of profit saved by not issuing refunds that customers would otherwise be entitled to. We call it “breakage.” When something goes wrong and a customer is entitled to a refund, “breakage” represents the percentage of refunds that are not successfully claimed by customers, either because they didn’t know about it in the first place, or forgot about it, or didn’t qualify for it, or didn’t know how to claim it, or just didn’t want to go through the hassle.

A few months ago my family’s internet and television signal was on the fritz one evening and when I called the cable company I got a recorded message saying there had been a disruption in our area and service would likely be restored sometime after midnight. The next day I called them to be sure my bill that month reflected a credit for the previous day, when the service was out. The service rep confirmed the service had been out in my area, and that my account would indeed be credited, no problem. Out of curiosity, however, I asked him whether his company had already planned to give me this credit, since they knew I was one of the households that experienced the outage. His answer: “No, we only give refunds to those who call in to ask for them.”

The cable company is minimizing the cost of issuing refunds not by denying them to people who are entitled, but simply by requiring people to call in first. So out of every 100 refunds that might be due, it’s likely that only five or ten will actually be paid, amounting to a breakage rate of 90% or more.

Now contrast this cable company’s reluctant refund policy with JetBlue’s policy. Not long ago my flight on JetBlue was several hours late, inconveniencing all the passengers. But as we left the plane we were each handed a memo explaining that we were due a refund for the late flight, which had been the result of a mechanical problem, and JetBlue’s policy was to issue refunds for such a delay. The amount of each customer’s refund, the memo said, would depend on how much the customer had paid for the ticket and whether they had paid in dollars or in True Blue points (the airline’s frequent flyer currency). But don't worry, the memo continued, JetBlue already knew who every passenger was, they knew how each of us had bought our ticket, and they were automatically going to credit our account with the proper amount. (Breakage: 0%.)

Or consider Amazon’s recently implemented refund policy, which is to issue refunds to customers even before they ask. As CEO Jeff Bezos explained in his 2013 letter to shareholders, it used to be that when a customer called in to ask for a refund, perhaps because a streaming movie’s playback was jumpy, or the customer didn’t get the lowest available price for a product, the agent handling the call would first check the computer to verify the customer’s claim. The computer would know whether the movie didn’t stream well, or the price wasn’t correct, and if the customer’s claim was valid the rep would issue a refund immediately. But if that’s the process, Bezos reasoned, then why make the customer call in at all? If the computer already knows that a refund is appropriate, why not just issue it immediately? (Breakage: 0%.)

Amazon, JetBlue, and other truly customer-oriented firms don’t try to erect obstacles in front of the refund process in order to maximize breakage. They try to minimize the breakage in order to streamline the customer's experience. For a 20th Century marketer, concerned only with quarterly sales and profit, breakage represents “free money” for the business. But for a 21st Century marketer, trying to maximize the loyalty and value of its customers, breakage represents friction in the customer experience. 

So here's my suggestion: If you want to gain a competitive advantage in your business category, even when everyone is already focused on the customer experience, you could probably do this by trying to minimize the breakage, rather than maximizing it. Make sure your refunds policy is customer-oriented, rather than company-oriented.