Although I think your post is also wrong on an ethical level, which would supercede any business arguments, I'll engage the one you've presented anyway.

Upsetting users by misgendering them won't just upset those users, it also has the potential to upset their friends and family. You're not just upsetting them, you're upsetting their network. That 3% starts to look a lot bigger.

And if we consider market trends, facebook actually expanded their gender identifying process, rather than simplifying it. Facebook has probably more data than any other entity for the purposes of guessing, and yet they chose to allow users to self-identify anyway. That would suggest it's not a business-correct decision.