What is store credit and should you offer it?

As a small business owner, returns can be a headache. While customers are well within their consumer rights to make a return, they can be costly and inconvenient for your business.

One way of helping to alleviate this is by offering store credit instead of refunds. Store credit isn’t a new concept, but if you haven’t considered it before, now might be the time to try incorporating it into your returns policy.

In this guide, we’ll take a look at exactly what store credit is, and how you can utilise it as part of your sales strategy.

What is store credit?

Store credit is currency offered by a store to a customer. The merchant gives them a specific value in store credit, which can only be spent at that store.

Store credit isn’t a new idea – it’s been around for generations. From newsagents signing a slip of paper to authorise store credit to the more technologically advanced use cases we see today, store credit has long been a staple of retail.

When is store credit offered?

Store credit is usually offered when a customer returns an item to your shop or online store.

Rather than offering a cash refund, a merchant offers the value of the item in store credit instead. This keeps the money within the business when an item is returned, and encourages future purchases from the customer.

It’s up to you to create a clear returns policy that states when a customer can expect to receive store credit instead of a cash refund.

For example, you may decide to offer it to customers who:

• Are outside of the refund window
• No longer have their receipt or proof of purchase
• Are returning non-faulty items

Store credit isn’t just offered as part of the refund process, however. You can offer store credit as part of a promotion or as a loyalty reward once a customer has made a certain number of purchases or spent a specific amount at your shop.

Store credit can also be offered as a financing option for people who shop with you regularly. Even a gift card is technically a version of store credit, as this is essentially somebody purchasing store credit to give to somebody else.

No matter when you decide to offer store credit, make sure the policy is communicated clearly to customers when they make a purchase.

How does online store credit work?

There are various types of store credit that you can offer customers, such as gift vouchers or a store credit card. But what about online store credit? Can you offer store credit to online customers?

The simple answer is yes. Store credit isn’t just for people who are physically shopping in your bricks and mortar store.

For online customers, the store credit balance is recorded within their online account, which means that when they shop on your ecommerce store in the future, the balance is already linked to their account.

Customers can use their account to check their store credit balance and make a purchase.

How to offer store credit

Once you’ve decided when you want to offer store credit to customers – for example, when they make a return under certain circumstances – you need to figure out how you’re going to do it.

For physical stores, the most common way to offer store credit is to provide customers with a store card. This card will be pre-loaded with the specific amount of store credit you are giving them, and will sometimes have an expiry date too, for example, 12 months from the date you give it to them.

Unlike regular payment cards, these store cards can only be used with your business. Often, store cards will be connected to the customer’s account, meaning both the merchant and the customer can easily keep track of how much credit they have left to spend and when they need to spend it.

The benefits of store credit

Even some of the world’s largest retailers offer store credit, and for good reason. There are plenty of benefits – let’s take a look at the key ones.

Less revenue loss

The most obvious benefit of offering store credit is the reduced revenue loss your business will face.

While retailers are legally obliged to offer refunds – that is, for faulty items or items bought online, if they’re returned within a certain timeframe – and you want to offer a flexible and professional service to customers, refunds can be costly, especially if you are then unable to sell the returned item.

Offering store credit for returns that don’t legally require a refund ensures the money stays within your ecosystem and reduces the impact on your bottom line.

Increased customer loyalty

Store credit offers customers an incentive to return to your store and make another purchase.

If you can offer a great experience when they return to your store to spend their store credit, the chances are you will turn them into repeat and loyal customers.

Inventory management

Store credit can also be a good way to manage your inventory. When a customer has store credit to spend, it means they can make a purchase even if they don’t have the cash flow to do so right now.

This means you have more chance of selling your items and will be less likely to resort to sales and price drops to clear your inventory.

The disadvantages of store credit

While store credit can be hugely beneficial to businesses, it’s important to factor in the possible disadvantages too.

Reduces cash flow

Store credit can impact your cash flow negatively. This is because when a customer spends with store credit, they are using money that they have already paid to your business. This doesn’t have to be a huge problem, you just need to be sure to manage cash flow effectively and prepare for store credit payments.

Fraud risks

While fraud risks are minimal, they are there and do need to be considered when thinking about offering store credit to customers.

Store credit databases, just like any databases, can be accessed by hackers, and so it’s important to be on the lookout for fraudsters using fake documents to claim store credit.

Customers May Prefer Cash

Chances are, most customers will probably want a cash refund and offering store credit may leave them feeling frustrated.

If they think their chances of getting a full cash refund in the future are slim, there is a chance that they may choose to not shop with you again in the future.

Final thoughts on store credit

Store credit isn’t just another part of the retail process; it can be a hugely beneficial way of retaining customers and boosting your bottom line.

It’s a particularly great option for small businesses that are worried about the cost and impact of refunds, allowing them to continue offering a great customer experience without a hit to profits.

By incorporating store credit into your retail policy, you may even increase your small business’s revenue and profit margins.