Preorder Risks & Advice
Have you ever seen a product you can't wait to buy? You look at the product and you can already picture yourself wearing it, playing with it, or how it will make your life a little bit better! So what do you do? You jump to grab your wallet / purse and place a preorder! *throws down money in excitement!*
HOLD UP! - STAHP! - NOPE! - *Ooooooof*
There are many risks to preordering products that sit in the shadows. You often see a product that looks amazing and it may be extraordinary! However, there are some risks that should be considered before you participate in a preorder.
Below are a few critical risks and fundamental principles of preorders you should know and be able to answer before you place a preorder on a cool product or in many cases a cool product idea (concept) that hasn't been manufactured or funded.
How reputable is the company?
One of the first things to consider is how long the company you plan to preorder a product from has been in business. Below is a list of other reasonably easy items to find and check with a quick Google or skimming the website; if these items are not easy to find, CONGRATULATIONS! You found your first Red Flag as to why you shouldn't place a preorder!
Verify & Check:
- Founding Date
- Active Trademarks
- Active or Inactive Lawsuits
- Clear Customer Service Contacts
- Company Social Media
- Company Reviews
- Do Friends Know Of The Company
- Product Pricing Is Similar to Industry Pricing
- Clear & Grammatically Correct Language
- Original Un-watermarked Images
Does the company move a lot of product volume?
Take a look at the volume of social media chatter the company has in comments and replies across all platforms. Often you will find photos of products and unique experiences by previous customers posted publicly. Avoid reading reviews on the company website directly. Company direct reviews are generally curated reviews for new companies and will give you the wrong impression; however, you can usually trust well-established company website reviews.
Next, consider social media following and measure the company's level of representation across all media platforms. A third method to calculate company product volume is to look up shipping manifests that use the company name. Not all companies are big enough to ship containers of product, but shipping manifests are a relatively reasonable indicator of a developed company.
NOTE: Many companies in 2021 don't warehouse their inventory directly. In this case, you may have to rely on social media and customer product photos to gauge company product sales volume.
Is your money protected by the company's Terms & Conditions?
Did you read the "Terms and Conditions" on the website? You will often find clauses that speak to what will occur if the preorder falls through. In this T&C text, a company can call out that your preorder money is non-refundable even if the product fails to be delivered. This clause is essential because if you agree to this clause when placing your order, it will be hard to get your money back from your payment processor as a charge-back, as this agreed-to contract voids your rights.
NOTE: The more precise and clear the contract is declared, the less ability you have to fight against it under the law and this includes your banks promises that have asterisks to their "No hassle*" claims.
Is your money protected by PayPal or your Credit Card?
Many credit cards have clauses that if you spend money on a product or service that fails to deliver, your money is protected, and you may receive a refund. Be aware that "Credit Card Charge-back Guarantees*" is NEVER a blanket clause even on American Express cards. Individual transactions can be extremely difficult or near impossible to charge-back depending on the terms agreed to before making your preorder purchase.
There are also cases where a bank will refund your money to keep your business, even if the bank cannot collect on the money lost to the merchant you have placed the claim. The reason for this gracious refund coverage depends on the purchase amount (the higher the amount, the less generous the bank), as a credit card company makes money every time you use the credit card. Banks make a profit from transaction fees in addition to credit card interest. In short, credit card companies are swimming in money, and sometimes you get lucky, and they cover the charge anyway.
TLDR: No-hassle refunds are not guaranteed for every transaction regardless of credit card promises.
Why is the company doing a preorder in the first place?
Three Common Explanations:
- The primary reason any company sets up a preorder is that the company issuing the preorder does not have the funds to create, manufacture, or order the product.
- The second reason a company may issue a preorder is to feel-out the market hype quantity for a new item with an unknown demand. If a company orders too much of a product, it has to eat the sunk cost (money spent). A more technical way of explaining this risk is that unknown demand can lead a company to over-order a product burning significant company cash-flow with no ROI. Depending on the funds available to the company, an investment failure or miscalculation of market demand for a product can lead to a company going out of business (bankrupt)
- The third reason is to maximize sales and anticipate great demand. Preorders are frequent by large companies to sell items such as phones, consoles, and video games. The preorders we are addressing in this article are specifically regarding new startups & smaller businesses.
What are some of the "Red Flags" to look for regarding preorders?
- Preorders should occur over a very SHORT duration of time. The longer the preorder, the more likely the money will not be returned, and the product will not be successfully manufactured OR delivered to all preorder participants.
- Serious preorders have bonus incentives. There should be a reason you are preordering the product other than because you want it. What else is the company providing you for funding the development up-front? Many preorders that don't supply a reason to initiate a preorder are not well-established.
- The timeline of the product delivery from the dates of preorder is not clearly defined. The looser the preorder delivery dates, the more likely the company does not have established manufacturing and sourcing contacts, funding, or understanding of these product development processes.
- Does the preorder startup state upfront how it will handle your money in addition to refunds? If the company is not transparent on refunds, you may want to wait until the product releases before buying.
- Does the company have a successful track record of issuing preorders, or is this the first? Newer the company, the greater the risk to you, the customer!
Be SAFE out there kiddos!