If your product or service fails, what can the customer do about it? If you said “I don’t know”, try again. One of the biggest fears customers have is not being able to return or exchange an item if it doesn’t work. Companies like Hewlett Packard are infamous for their friendly customer service and their excellent recourse policies. Stories about scanners not working with new computers abound on the internet, the difference with HP is they do something about it. If a product does not work they simply send you a new one.
In some cases it is easier for large corporations like Hewlett Packard to offer great recourse policies, but it can be just as simple for small businesses also. Assuming that you only sell quality merchandise that does exactly what you say it does – giving a free one to a customer in the off chance one breaks is not such a bad idea. The thing to remember here is not the money you may be losing on giving away a new product, but the marketing potential of that one happy customer. If that one person tells 3 friends and one comes in to purchase a product – are you really out anything?
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Sources:

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Marketing Without Advertising: Easy Ways to Build a Business Your Customers Will Love & Recommend 6th Edition by Micheal Phillips & Salli Raspberry, Published by NOLO Small Business Essentials 2008