Case Study: Money Back Guarantee; No Questions Asked

TradeSmart Inc. operates 1,200 discount electronics stores throughout the United States. TradeSmart has been quite successful in a highly competitive industry, primarily because it has been able to offer brand-name products at prices lower than can be found at other discount outlets. Because of its size, TradeSmart can purchase bulk inventory directly from manufacturers, and the economies of scale it derives from such purchases can be passed on to consumers in the form of lower prices.

In addition to low prices, TradeSmart offers an extremely liberal product return policy. Customers are permitted to return products for virtually any reason and with little regard to the time period covered by manufacturers’ warranties. In fact, just a few days ago, a customer returned a digital pager that was more than two years old. TradeSmart gave the customer a full refund, even though the pager appeared to have been run over by a car, which, if true, clearly would have voided the manufacturer’s warranty. In another instance, a customer was given a refund when he returned the camcorder he had purchased three days earlier to record his daughter’s wedding festivities. The customer could not describe the camcorder’s malfunction—he said “it just didn’t work right.” The customer refused an offer to replace the camcorder; instead, he insisted on a full refund, which he was given.

The manager of the customer relations department suspected that the customer had “purchased” the camcorder intending all along to return it after his daughter’s wedding, but TradeSmart’s return policy does not dissuade customers from this practice. According to Ed Davidson, vice president of customer relations, TradeSmart is willing to stand behind every product it sells, regardless of the problem, because the company believes such a policy is needed to attract and keep loyal customers in such a competitive industry. The company’s motto—“Customer Satisfaction Is Our Business”—is displayed prominently throughout TradeSmart stores.

With such a liberal return policy, how does TradeSmart keep its prices so low? Actually, TradeSmart ships the returned products back to the manufacturers as defective products, so the return costs are passed on to the manufacturers. According to the manufacturers, only one out of every six products returned by TradeSmart actually is defective. But when the manufacturers complain about such returns as used products or products that have no mechanical problems, TradeSmart reminds them that the company does not have a service department, so its personnel are not knowledgeable concerning the technical circuitry of the products—the products are returned to the manufacturers with the customers’ complaints attached. TradeSmart’s inventory manager would contend that the company does not intentionally deceive or take advantage of the manufacturers’ return policies and warranties.

Questions I have:

1. Should I agree with TradeSmart’s return policy? Is it ethical?

2. What action should I take if I were one of TradeSmart’s suppliers?