Returns have long challenged retail businesses. You’ve sold a product to a customer, but they later return to your store asking for a refund. The item lands back on your shelf and the money exits your bank account.
What if there was a better way to handle returns—all while increasing sales, keeping money within your business, and improving customer loyalty?
Store credit is value given to your customer to spend in your store, and can be offered in lieu of a traditional cash refund. By giving store credit, you are encouraging existing shoppers to spend more, preventing cash from exiting your business, and reducing the overwhelming volume of returns your team has to handle.
This guide shares how to incentivize store credit as a refund option in your retail store.
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What is store credit?
Store credit is a value that retailers offer customers instead of a traditional cash refund. Because the credit can only be spent at the same store, it keeps money within the business when products are returned.
How does store credit work?
Retailers that offer store credit give customers a dollar amount to redeem on future purchases from your business.
Unlike refunds, a store credit balance isn’t transferable to other stores or brands. It’s different from a sale or a discount, since customers get a gift card, loyalty reward, or store credit card that’s exclusive to them, and in most cases doesn’t expire.
What are the benefits of issuing store credit?
There’s a reason the world’s most successful retailers all use store credit: it offers flexibility and is a way to inspire customer spending and loyalty.
Here are the three main benefits of offering store credit in place of cash refunds.
Improve customer retention and loyalty
Store credit offers customers an additional incentive (on top of great products and customer experience) to come back to your shop. As one facet of a robust customer loyalty program, store credit gives you yet another tool to showcase to customers what their repeated business means to you.
William McGrath, CEO of Classy Woman Collection, says: “We offer store credit instead of cash refunds for two reasons: first, because it provides our customers with a more convenient and flexible option for future purchases. Second, because store credit incentivizes customers to shop with us again and helps us build long-term relationships with them.”
Encourage customers to spend more
Using store credit to encourage customers to spend more money might seem counterintuitive, but it works.
Studies have shown that credit cards make people spend more money. If a customer has $20 store credit, for example, they’re likely to spend above and beyond this figure, leading to higher sales.
Customers also feel better about spending more when stores offer a reasonable return policy. If you use store credit to allow for more flexible returns, you’re helping customers feel comfortable spending with you.
Lose less revenue to returns
Returns and exchanges can put retailers in a bind. You want to be flexible and provide customers with a satisfying experience—but returns mean lost revenue. Store credit helps avoid losing revenue to returns by turning those transactions into exchanges instead.
As a small business, it would be difficult for us to absorb the cost of a return at this time. We have decided that once we open our third retail store, we will then offer [traditional] returns.
Take apparel stores, for example. Fashion customers are notorious for ordering several sizes of the same item and returning those that don’t fit—a tactic called bracketing.
Offering store credit instead of cash refunds allows you to ease the burden of returns on your bottom line by ensuring money stays within the business. It also helps improve the customer experience with a longer timeframe or accept returns without a receipt.
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Common types of store credit
There are four main ways retailers issue store credit:
Returns and exchanges
When customers return or exchange merchandise, store credit is often offered in addition to (or in lieu of) a full refund. If a shopper returns a $29 dress, for example, you could exchange it for a different size and/or provide $5 in store credit to entice another purchase.
It’s a type of store credit popular with shoppers—half of shoppers have at least one unused gift card, with the average millennial $226 in credit.
Store credit cards, financing, and layaway
Any time a retailer extends credit and allows customers to pay at a later date, or incrementally, they’re issuing store credit.
Half of US shoppers say they’re likely to increase the number of buy now, pay later payments they make in the next three months. This includes Shop Pay Installments, which integrates with Shopify POS and allows customers to pay in smaller monthly installments.
Shop Pay installments is now 6.5% of our GMV. We've also seen a consistent increase in our average order value rate.
When a customer buys a gift card, they’re essentially purchasing store credit to give to someone else. They get a personalized discount code—either digitally or via a physical gift card—which they can pass on to a friend to redeem the discount.
Gift cards are also used to hold store credit from returns or loyalty rewards. Retail associates can scan the bar code of a gift card to redeem the store credit on a future order.
A customer loyalty program actively encourages previous shoppers to continue purchasing from your store.
LIVELY, for example, rewards repeat shoppers with two points each time they spend a dollar online or in-store. They earn $115 in annual store credit when they reach the second tier of the brand’s loyalty program.
How to use store credit to increase customer retention
There are all kinds of ways your store can leverage credit, but here are three important ones.
A study by Nielsen found six in 10 consumers have been making more environmentally friendly, sustainable, or ethical purchases since the COVID-19 pandemic.
A brand’s social responsibility mandate can come in all shapes and sizes, but they all have one thing in common: a financial commitment. That can be hard for smaller retailers to pull off.
By using store credit as your charitable contribution, your store can make more of a difference without directly impacting revenue. That could mean:
- Offering store credit to members, employees, or beneficiaries of nonprofits
- Donating gift cards to charities or causes you and your customers care about
- Asking customers which nonprofit they’d like to donate to at the checkout desk, and providing store credit to the one with the most votes each month
Donating store credit or gift cards is more realistic for many smaller retailers than donating cash, but it’s still important to take into account the increased costs.
Consider the recent success of direct-to-consumer brands like Rothy’s and Warby Parker. Those businesses have seen a ton of growth by disrupting traditional industries. They also all offer well-publicized referral programs.
Your store can do the same by incentivizing word of mouth. Offer store credit in exchange for any referrals that turn into new customers.
As McGrath says, “Offering incentives for customers who choose store credit, such as bonus points or discounts on future purchases, is a great way to gently guide your customers toward store credit options.”
Expand your return policy
Store credit (usually in the form of a gift card) is one way to add leniency and flexibility to your return policy. By replacing returns with store credit, you can offer a longer return timeframe and be more flexible about receipts and tags required—all while ensuring you don’t lose out on revenue.
Alexa Allamano, owner of Foamy Wader, says, “We detail in our return policy online that orders are final sale. Exchanges and size adjustments are always allowed, but due to the handmade nature of our business, cash refunds may incur a 25% restocking fee. That restocking fee often converts return requests into exchanges.”
What is store credit? An opportunity
Store credit is a lot more than just another format to process retail refunds. It’s a tool you can use to help grow customer retention and increase sales—all while keeping more money in your retail business.Shopify helps you find innovative ways to offer store credit that can set your business a notch above competitors. Issue gift cards directly from your Shopify admin, and browse a selection of Shopify apps that allow you to issue and redeem store credit at the checkout desk.
Store credit FAQ
Is store credit the same as cash?
No, store credit is not the same as cash. Store credit is a type of payment that can be used to purchase items from a specific store, but it cannot be used as a general payment method like cash.
What is store credit payment?
Store credit payment is a payment method that allows customers to buy items with a credit balance from a particular store. Previous customers can store the remaining balance and use it to pay for future transactions.
How do you use store credit?
When you have store credit with a retailer, you can redeem the balance on future purchases. If you’re issued $20 in store credit and spend $50 in-store, for example, applying the store credit means you have just $30 left to pay.
Can I get store credit instead of a refund?
This depends on the retailer. Some retailers offer only store credit instead of a traditional cash refund. It’s best to read the retailer’s returns policy before making a purchase.