Interest Free Credit (IFC) is a finance product used by retailers in the furnishings market, and according to Brendan Abbott, new business manager at retail finance specialist Ikano Financial Services, it's a product that retailers shouldn’t ignore.
Here, he looks at how IFC can increase sales and spend for big ticket retailers, and shares a case study that examines how Ikano successfully utilised IFC for a furniture and home wares retail client.
Interest Free Credit is where a customer makes a purchase via a credit agreement and pays no interest on that loan for a fixed period of time. Giving someone the option to pay in fixed monthly instalments at no extra cost is a huge advantage in the current market place. The changing dynamics of the global retail market space are affecting customer shopping behaviour, and more and more consumers understand that they have the power to purchase on their terms - more than that, they expect it!
This means that many retailers are having to re-think not only their business forecasts, but also their business models.
There are many factors that influence a consumer’s decision to purchase. The basic elements of product range, quality and availability still apply, but increasingly consumers are seeking better service and easier ways to pay. Research tells us that finance availability has a significant impact on their purchasing decision and spend behaviour, and over 70 per cent of customers that we recently surveyed told us that they actually planned to use finance.
Typically customers have traditionally used credit cards to purchase higher ticketed items, leaving little credit for anything else, hence why interest free loans have so much appeal. With no additional costs to consider, they allow customers to spread their payment over a term that suits their budget.
So what's in it for furniture retailers?
To begin with there is greater customer conversion. Our research has shown that 40 per cent of customers make their decision to purchase based upon the fact that IFC is offered, so it’s easy to see that it could mean the difference between closing the sale and losing the customer to a competitor that offers IFC.
The fact that certain people will only entertain retailers who offer finance, means that it also increases footfall and all of the incremental sales it could bring.
Dependent on the IFC threshold, we have found it can increase the average transaction value for customers too, with IFC customers spending up to three times the amount of those not purchasing using IFC. Used tactically, IFC can provide the perfect selling tool. It allows the creation of high margin room-sets and bundle deals offering warranty and added services for a fixed monthly fee, which works for both customer and retailer.
Like all finance products, IFC allows retailers to accumulate a wealth of data about their customers, which helps strategically in both the acquisition and retention of those customers. The knowledge of a current customer base can be used to tailor an approach or target specific prospect groups, and help retailers to recognise changing circumstances for customers - which also helps with marketing strategy.
We have also found that where credit is offered there is a direct correlation in increased sales. This can be up to 80 per cent, whilst also delivering incremental sales and higher sales margins.
Here's how IFC achieved incremental sales for one of our clients.
We wanted to prove to one of our retail partners that the cost of offering finance to customers was outweighed by the uplift in incremental sales and higher profit margin that IFC would deliver.
We recommended that a trial be conducted to drive IFC in a test region and deploy a control to accurately measure success. The objective was to demonstrate that sales using credit would not lead to a negative profit margin.
The criteria for the test region stipulated that it be contained to help strip out other factors that could influence the performance of the trial. To that end, a sister store in close proximity with similar competition, year on year sales and catchment customer profile was used. The trial itself was held over 16 weeks and was supported by in-store POS and local marketing, and the test region was encouraged to attract and convert as many customers as possible onto IFC. We provided weekly reporting to show the effectiveness of the trial.
The trial revealed pleasing results, with penetration increasing by eight per cent, and as a result there was an 18 per cent uplift in incremental sales. The trial store profit margin increased by 15 per cent, and the volume of customers also increased by 55 per cent.
The trial was a success and enough to convince our retail partner that increased credit penetration results in incremental sales. The retail partner now operates at higher credit penetration across its business.
Ikano is an international company, which was originally part of the home furnishing company IKEA, founded by Ingvar Kamprad. Ikano Group now runs operations in the areas of asset management, finance, insurance and real estate. In the UK Ikano offers loans direct to consumers as well as delivering credit, loyalty and marketing strategy programmes to several large retail partners. Its clients include IKEA, DFS, Harveys, Bensons, New Look, Jaeger, Karen Millen and Vision Express.