Why We Just Wrote A $50,000 Check To Our Customers

Five years after we launched our first product, we introduced two in close succession. We’ve been developing our second product, &PILLOW™, for over a year; our third product, &SHEETS™, has been in development since last summer.

Setting prices at Tuft & Needle follows a simple rule: we charge what we need, not what we can. The process is pretty straightforward. We start with what it costs to make a product; then we consider all expenses associated with selling that product (i.e. shipping or customer service). Finally, we consider a fair profit to make on each sale.

Unlike other companies, we don’t start by asking “What is the most that people are willing to pay for this product?”

One of the challenges of our approach is the uncertainty associated with costs. When creating a product for the first time, many of the expenses are unknown or variable. In addition, at Tuft & Needle, when we first launch a product, we produce it in small batches so that we can iterate more easily. However, this is more costly.

When we set the price of our pillow at $100 in February, we didn’t expect we’d be changing prices so quickly. It’s been only two months, but we’ve decided to drop the price of the pillow by $25.

When we built our price with a bottoms up approach of charging what we need, we didn’t consider whether some of the costs we were including in the product were necessary. As an example, we were able to save significant cost by changing our packaging.

In addition, we over-estimated the cost of returns and manufacturing. The manufacturing costs in our initial model were based on small batch development, not what we would pay our factories when we were selling thousands of pillows per month.

This is only the second time we’ve ever set the price of a product. We’re young and still learning.

It was easy enough to update our website and print collateral to reflect the new price, but then we were left with the question of what to do with everyone who paid $100 for a product that now costs $75.

We broke our options down into three experiences we could provide to our customers.

The “Not An Option” Experience

While we wouldn’t even consider this option at Tuft & Needle, we feel it is important to identify what an extreme experience would be (in this case, a really bad one): we could remain firm in our policy and not offer a refund to customers who called in and noticed the price decrease.

We would chalk it up to policy and say that if we gave it to one customer, we’d have to give it to everyone.

This is a bad idea for so many reasons. Even if we convinced ourselves of the virtues of not refunding customers, we offer a 100-night return policy. Customers could simply return the pillow and buy another one, which would cost us more than just crediting customers $25.

More likely though, the customer would return our pillow and buy someone else’s. They’d probably throw in a bad review while they waited for the refund to appear on their credit card.

Companies that hide behind their policies are behind the times. Providing a good experience is essentially a commodity at this point. Everyone is doing it, and those who don’t are punished. This is good news for consumers. It’s safe to say we all want to live in a world where companies treat us with fairness and empathy.

The “What Most Companies” Do Option

A more realistic option is doing what most companies would do. Rather than call attention to their price decrease (like by writing an article), they would deal with customers only if and when they write into the customer service team.

Essentially, the policy becomes taking care of those who reach out after noticing the price decrease.

Again, this option is fraught with issues. For starters, how fair is it to the customers who don’t notice the price increase? This is a bit opportunistic as well. Instead of bearing the full cost of the change, you only need to pay a small fraction to those who speak up. Finally, this option puts the work back on the customer (never the best experience).

Imagine if you called us up, pointed out the price difference and asked for a credit. What would make you more upset? If we said no, or if we said yes? Of course you’d want the difference in price, but it’s a bit unsettling when you hang up the phone and say to yourself “What if I didn’t call? What if I didn’t notice the price increase? Were they just going to keep that money?”

The biggest problem with this approach is that it fails to build trust. We all know about the importance of trust in relationships with people, but even relationships with brands require trust.

The “Tuft & Needle” Way

As it was becoming clear that we would be able to drop our prices by a significant amount (25%), the team immediately started asking the question of what we would do next. We did not ask what we would do next from a marketing standpoint, since we had a lower price with which we could advertise the product. And we did not discuss what we would do next to update the website and our collateral to reflect the new prices.

The first thing we discussed was what we’d do for the customers who were so loyal to us. The customers who were early adopters of this new product.

The starting place during our conversation was the “What most companies do” option. It quickly evolved into something greater.

Two of the values we always find ourselves coming back to as a company are fairness and transparency.

To address fairness, we wanted all customers to have the best experience possible—not just those who noticed the price increase and had the time to reach out to us to request a refund. Letting luck determine who got great service didn’t sit right with us. That meant proactively refunding all customers who paid the older prices for our pillows and sheets.

To address transparency, we wrote this article. We understand that some people may not care to know how this happened, or what we are doing in response. But our default is transparency. No one has to read this, but for those interested in how we do business, we write articles like these.

We don’t want to treat our customers as just customers—we want to share the journey with them. We want our customers to give us feedback, so we can learn and grow as a company. But we recognize that for them to share, we need to show some vulnerability.

Our customers shouldn’t pay more because we learned a lesson

Some companies may be fearful of setting an unrealistic precedent with their customers. What if the next time we want to refund customers, the cost is millions of dollars? Will we still want to stick to our values then? Will our customers demand the same treatment?

The truth is, we don’t know. We can’t promise we’ll always be able to do the same thing. As a company, we need the ability (financially) to continue making great products and keep living our values.

This approach doesn’t extend to each time we change prices. If our pillow or sheet prices decrease in the years ahead, we won’t be refunding these customers again. If the price of the pillow is higher this year than next year, it simply reflect what our costs were at that time. In this instance though, the price change was so acute, and so soon after the product launch, that it warranted a correction for our customers.

In fact, some of our customers who bought our pillow in retail stores last year paid $85. In this instance, we decided against refunding them the $10 difference. When those products were made, our costs were higher than they are now. The price they paid adhered fairly to our strategy of charging what we need, not what we can.

In the end, we don’t believe the right question to ask is “Will we be able to do this again?” The right question is “Why did this happen in the first place?” We need to solve this by learning from situations like this and moving forward, not by punishing our customers.

Why were we willing to give up so much money in the name of great service?

First and foremost, this was the right thing to do. Even if we didn’t care, this saves our team and our customers a lot of wasted effort. Automatically processing refunds took a couple hours of preparation and execution by a few team members and saved a lot of stress and energy.

But there is another reason. As a company, we do our best to avoid cognitive biases. The human mind is wired to fear losses more than value potential gains. In other words, if you asked your team for $100 to spend on marketing (potential gain), you’d get a warmer response than asking to refund $100 to customers (potential loss). This would be the case even if the reward for providing this exceptional service was greater than the potential return of marketing.

Although it’s still less common than it should be, it shouldn’t come as a surprise that providing exceptional service stands to create greater financial gains for your company than marketing. Running a few hundred more TV commercial spots is not going to differentiate your brand—just about every one of your competitors also advertises. But if every one of your competitors provides bad service (or even average-good service), you stand to profit handsomely from your decision to be an outlier.

We believe that a company can be both humble and driven. Just because we set our prices incorrectly initially and lowered them, doesn’t mean we are not interested in making a profit and growing our brand. We won’t go as far as to say that providing a great experience has single-handedly led to the success we have achieved, but we’re optimistic that it might be a major factor.

Even if decreasing prices wasn’t the “right” thing from a business perspective, it was the right thing in the mind of our team. We believe in putting our values before our short term metrics. Maybe this will slow us down and allow our competitors to swoop in and steal our market share—maybe to some degree it already has.

We don’t want to operate as a company that is fearful of the worst: what our competitors might do, whether or not our customers will understand the next time. We are optimists and believers in doing business a different way.

Our sincere hope is that when our customers find out that they’ve been refunded $25 for a Tuft & Needle product that they have been using, and loving, every night—and when they find out why—they really won’t be surprised at all. We hope they say, “Yep, that’s how Tuft & Needle treats people.”