For some merchants, store credit is something that is viewed with suspicion: the idea of customers having outstanding purchasing power that may at any point in time be redeemed without a positive cash flow for the merchant to offset the purchase of stock. It can be viewed as adding another element of uncertainty into the business model, another layer of complexity, another factor that needs to be taking into account.
Yet more and more companies are making extensive use of store credit and not just in the traditional manner of in-store credit as an alternative to a refund for goods returned. So what is going on and what does it mean for the e-marketplace?
ORIGINS AND TRANSFORMATION
The idea of store credit is not new. For traditional ‘bricks and mortar’ stores, store credit evolved as a means to allow customers to return goods that were not eligible for a refund in a way that minimised adverse impact for both merchant and customer. In essence, store credit was a note stating that having returned an item, the customer could now purchase a separate item and have the value of the original purchase taken against the new item’s purchase price.
For e-commerce, the principle is much the same – when goods that are not eligible for monetary refund are returned, a store credit can be given, only instead of a physical receipt that the customer has to carry around, credit is loaded to their online account or a voucher code for the amount of credit is issued.
WHY USE STORE CREDIT?
When a customer is returning a product, for whatever reason, they are not going to be happy. Returns amount to around 30-35% of all products that are ordered online, according to ReadyCloud, with – across all instances of e-commerce returns – some 65% of them being fault of the retailer. If a refund is issued, the customer can spend the sum in whatever way and, critically, with whomever they want. This clearly opens up the possibility of a huge amount of business that the merchant is potentially going to lose through the returns process. With a refund, the merchant has to fight to win the customer’s business all over again – and has to do so from a position where the customer has a potentially negative sentiment towards them.
Store credit helps to mitigate some of this and is a critical tool in ensuring continued customer loyalty. Unlike a refund where the customer would be able to spend the returned sum with any retailer, store credit means that the customer has to spend that sum with original merchant. This ensures that the merchant is guaranteed another opportunity to create a positive impression with the customer and results in the relationship with that customer continuing. Because customers have a greater tendency to shop with retailers they already know and have purchased from, using store credit means that purchasing relationship is maintained between the merchant and customer, and that the opportunity for another merchant to break into that customer’s purchasing patterns is diminished.
Clearly if goods are damaged, under warranty, sent by mistake or within statutory rights periods or requirements, then replacement or refund may well be the appropriate course. But what about customers who are returning goods for other reasons? The purchase has already taken place, the merchant has already received payment and to issue a refund means cash will have to come from the merchant, impacting cash flow, net sales, profitability and so on. Store credit helps to work around these issues. By issuing a credit for use only within the merchant’s e-store, the merchant guarantees that that amount of expenditure is ‘locked in’ so that there is no net change from the merchant’s previous position (the returned product counting as an asset to balance the liability of the issued credit.)
Returns and refunds policy has a major impact on the willingness of customers to purchase from a merchant; one study from TrueShip found that 60% of customers review a sales policy prior to purchase while a 2016 University of Texas-Dallas study found that lenient return policies increased purchases and reduced return rates. Enabling store credit is a major part of having a fully competitive returns system and in helping to minimise the adverse impact for the merchant.
OTHER USES OF STORE CREDIT
Store credit also has other uses. It allows the buyer to purchase a good or service from the merchant on a future date, for example through a gift card. However, for the merchant, the cash receipt comes sooner than the actual product related purchase, thus enabling the merchant to in effect an additional cash amount have for the extra time in between the two dates.
When operating a store credit system, there is also the possibility for the merchant to use the system to encourage additional purchases, for example by giving the customer additional credit to encourage sales during a particular period or credit against the purchase of a particular product. Store credit also enables the merchant to offer what is in effect a discount on a particular product even if a sales agreement with a supplier stipulates that the price cannot be discounted.
MAGENTO STORE CREDIT
One of the issues for any merchant who is thinking about offering store credit is how such a system can integrate with their pre-existing operations and how much of an additional overhead – be it in terms of cost, time or other resources – it will require. Fortunately, for Magento users, the answers are ‘very easily’ and ‘not much’.
An effective extension has to be able to offer store credit rather than money refund and allow additional credit to be added from the back end (for example, for birthdays or for other promotional reasons that the merchant may wish). It may also work as an account where the customer can keep a virtual credit balance. In this way, the customer can purchase additional credit – in effect refilling their account. These accumulated credits can make purchases easier as it means there is no requirement to enter payment details during each checkout session, and where the customer has to use public computers there can also be the added benefit of greater security.
Having store credit allows purchases to be made simply, speedily and with just a few clicks of the mouse. Importantly, the store credit extension must also be able to be integrated with other parts of the system that are intended to encourage customer loyalty – such as integrating with rewards programs and effective return operations.