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An old idea—house credit—plays a new role in 21st Century shopping.
It’s a strategy as old as retailing itself: The more products, services and purchasing methods retailers make available to customers, the more opportunities to generate sales and fatter profit margins.
For many retailers, one of the more attractive and potentially profitable services has been some form of proprietary or alternate financing. That was true in the early 20th Century as retailers’ house credit evolved into house credit cards. And it’s equally true in the early 21st Century as online retailers seek payment options beyond multi-purpose credit cards. “We want to offer customers as many ways to purchase as possible,” says Diane Irvine, chief financial officer of BlueNile.com Inc., e-retailer of jewelry and gifts.
BlueNile is one of a number of online retailers who have found ways of accepting payment beyond general-purpose credit cards. Their goal is to serve the 25% of consumers without general-purpose cards such as Visa, MasterCard, American Express and Discover, and to attract shoppers who would rather make a purchase-particularly of high-ticket items-on an account other than a credit card that may already have a high balance and a lofty financing rate. “Alternative forms of payment can reach new customers and help some of them over a price barrier,” says Duif Calvin, a retail analyst based in San Francisco.
The Sears lesson
But while it often sounds great and looks good on paper, a move beyond a retailer’s fundamental operations-such as offering credit-can lead to unexpected problems and put a critical merchandising strategy out of focus. Retailers need look no further than the July sale of Sears, Roebuck and Co.’s long profitable though troubled credit card program to Citigroup Inc. Sears had engaged in an aggressive attempt to sign up more cardholders, but the growth resulted in an overextended program marked by a large number of delinquent accounts. Now, Sears does not even own its proprietary card program; it, along with Sears’ MasterCard portfolio, are in Citigroup’s hands.
Analysts say there’s a lesson there for all retailers. “You have to be highly skilled and possess the appropriate technology and infrastructure to offer your own credit ,” says Kent Anderson, president of Macys.com, whose private label Macy’s card is issued through Federated Accounting and Services Group, an arm of Macy’s parent Federated Department Stores Inc. “It can be exceptionally painful if you don’t.”
The advantages of offering credit directly to consumers has long enticed retailers for reasons that extend beyond increasing sales by putting more purchasing power at customers’ disposal. In-house credit programs could provide a wealth of customer data as well as revenue and profits gained through financing. Whenever a store customer pays with a proprietary credit card or other house financing, the merchant can learn, record and later leverage information on the customer’s shopping behavior, data not available if a customer pays by cash or general-purpose credit card.
Yet, as Sears showed, proprietary credit programs are rife with hazards and can meet with spectacular failure. As a result, fewer retailers today are turning to proprietary programs as part of a revenue-boosting strategy. “In 2001, a lot of retailers were looking at house credit,” Calvin says. “But after they saw Sears having a problem, many said ‘We’re not sure we’re capable of doing this.’”
Moreover, many retailers have long avoided offering any form of house credit because they prefer to interact with their customers only as merchandisers, not financiers, she adds. “Retailers are concerned about their long-term retail relationships with customers to get them used to shopping with them,” Calvin says. “So they have tried to avoid having the reputation of financial services companies that mine their purchasing data and sell it to other companies.”
Keeping the relationship pure
The online world, meanwhile, puts alternate financing programs in a new light for retailers. Unlike in brick-and-mortar retail, where proprietary credit programs open the door for merchants to connect a customer’s name to shopping behavior, the online world doesn’t need such help. Because web merchants must gather a customer’s personal billing and shipping information to complete a sale, they don’t stand to gain much in the way of customer data through the use of house credit. “The online channel is the least in need of additional information from customers to establish long-term relationships,” Calvin says. “So online merchants don’t need to push house credit online.”
Still, online merchants have discovered benefits in proprietary credit, such as customer loyalty and higher average orders, and so some are building alternate credit programs as part of a customer service strategy. Furthermore, retailers who are trying out new payment systems are finding they also bring in new customers.
Irvine says BlueNile’s programs that offer customers special terms not available to customers paying with general-purpose credit cards have helped drive sharp increases in BlueNile sales in recent years. While the online jewelry industry’s overall sales in 2002 climbed 20% over 2001, BlueNile’s sales over the same period surged 48%, Irvine says. She adds that they’re on pace this year to top 2002’s sales by more than 80%.
BlueNile has made financing a key part of its overall customer relationship and selling strategy. For instance, BlueNile provides special payment terms on purchases of $750 or more. It figures that that minimum will serve to assist most customers making a special purchase they might not want to add to one of their existing general-purpose revolving-credit cards.
Through financing backed by MBNA America Bank N.A., a major consumer lender and a leading credit card issuer, BlueNile offers a line of credit under which customers can take up to 60 months to pay off a credit balance at a rate as low as 9.99%, or take up to 90 days to pay off a balance with no interest.
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