Focus on Consumer Credit: Stakeholders say consumer credit financing can boost sales up to tenfold - Oct 2021
By Jennifer Bardoner
The “buy now, pay later” model has been shown to boost ticket sales, but the flooring industry has been slow to adopt finance programs that let customers spread out their purchase cost into manageable monthly payments. Retailers without consumer financing could be leaving thousands of dollars on the table with each purchase, according to those using these systems-and that was before spending on home improvement grew by nearly 3%, to $420 billion, in 2020, according to Harvard University Joint Center for Housing Studies researchers, who also note that another 4% growth is anticipated for 2021.
BUILDING SALES AND LOYALTY
“When it comes to home improvement, offering financing options can move consumers from a frame of mind of ‘What can I afford?’ to ‘What do I want?’” says Jason Farmer, vice president of advertising, branding and payment solutions for Synchrony, which partners with retailers across the country to offer consumer financing options. “In a recent survey, Synchrony found that 75% of home improvement dealers said that offering financing options increased their average sales tickets. And 65% said that the average sale increased by approximately 10% to 30%.”
Many, like retail members of CCA’s buying groups, utilize revolving credit programs in the form of a branded credit card, offering an unsecured line of credit that can be tapped again and again for purchases, driving store loyalty and sales over the long run as well. An article by national debt services provider Americor reports that more than 60% of consumers shop more often with retailers with whom they have a store credit card, and they’re also more receptive to communication about events and promotions by that retailer. And a 2019 article by global e-commerce provider Scalefast quantifies it as roughly four additional store visits per year per cardholder.
Whether looking at the short or the long term, branded credit cards are big business. Private-label credit card payments, which account for an increasing percentage of all credit card payments, according to the Federal Reserve, have grown 12.7% per year by number and 11% per year by value from 2015. The 2019 Federal Reserve Payments Study put them at a value of $340 billion in 2018, the latest data available.
“Our average ticket for financed purchases is as much as three times the average credit card purchase,” says Keith Spano, president of CCA’s Flooring America, Flooring Canada, International Design Guild and The Floor Trader. “It’s not unusual for consumers taking advantage of consumer financing to not only buy better goods, but to add one or two rooms onto their original purchase.”
Spano says that 85% of CCA’s member retailers take advantage of Synchrony’s financing program monthly-and that customers have come to rely on it. “Consumer financing has been an integral part of the sales process for CCA members for as long as I can remember, but the pandemic has certainly bolstered our members’ use of consumer financing as our consumer has come to expect it,” he says. Farmer points to Synchrony research that found that 40% of flooring customers surveyed always seek financing options for large purchases, and that roughly one third of Synchrony cardholders would walk away from a purchase if financing wasn’t available.
CONSUMER CREDIT STRATEGIES
The opportunity to pay down the purchase price as opposed to being beholden to the amount in your bank account when you decide to buy often comes with high interest rates for the consumer, and retailers similarly don’t get the luxury of this option for free. Though major branding partners like Shaw often buy down the cost for retailers, whose combined volume can net them competitive rates from the outset, it’s worth noting that “competitive” can be a nuanced term.
“As the manufacturer, we partner with a provider to consolidate the consumer financing volume of a large group of our customers, in order to provide access for our customers to a lower-cost financing solution,” says Alan Hundley, vice president of corporate finance for Shaw Industries. “The more volume we can add to the program, the more affordable it becomes for everyone. We do have occasional promotional rates using our own funds [to supplement the cost].” Hundley adds that discounted rates specific to Shaw’s brands as well as overall purchases, as cards can typically be used on any merchandise at a participating retailer, “have helped us drive acceptance and use of the program.”
The expanding pool of financial partners has led to increased competitiveness overall, Hundley notes. “We noticed that flooring retailers really weren’t using this to the extent that other retailers, such as mattresses and furniture, were using it, and we felt like cost was one of reasons,” he says of Shaw’s decision to transition from Synchrony to Wells Fargo for its financing program starting in 2019. “There was one main provider in the industry at the time, and we just really didn’t feel that was giving the industry enough competitiveness around rates. So we brought another competitor into the mix.”
Dal-Tile director of sales Tony Wright also cites affordability as a potential hurdle to utilization of the program-but on the side of the consumer, which led Dal-Tile to launch a new financing program through Service Finance at the beginning of the year, augmenting Dal-Tile’s (and parent company Mohawk’s) existing revolving-credit option through Synchrony.
Modeled after installment loans, often used to make car purchases, the new program offers a fairly low fixed-interest rate (6.99% to 9.99%, based on the program or lending product used) and a longer payback window. Common revolving-credit consumer promos like six or 12 months deferred interest can still be unrealistic for many buyers, he says, and the cost to the retailer “rises significantly” when revolving-credit contract terms are stretched to make it affordable for the consumer.
“With a revolving credit, typically what you see offered in the flooring industry is 12 months deferred interest,” Wright says. “But think about it, $10,000 divided by 12 months is $833 per month. Most homeowners don’t have that in their budget.” By giving purchasers up to ten years to pay back the cost, which can be upwards of $15,000 for tile-“the most expensive flooring option sold by retailers,” says Wright-customers may be even more likely to spend more on that one-time purchase which, unlike a car loan, is unsecured, offering buyers greater ease in qualifying for funding.
Wright says customers often come in with a set budget that is too low based on what they want, and end up subtracting items or moving to lower-end products in order to keep that budget.
“When given an affordable payment option, whether revolving credit or long-term financing, customers are more likely to move ahead without compromising on what they want,” he says. “For some customers, a 12-month deferred-interest plan is the right answer, and for others it might be a 60-month equal-payment plan. Being able to offer the consumer affordable payment options that fit their particular budget is a key factor in closing the sale.”
In Dal-Tile’s pilot of the new program, ticket sales were as much as ten times higher, though he expects the longer-term effect to average out to three times higher than non-financed purchases. Currently limited to the brand’s roughly 300 Statements Elite partners-though not to Dal-Tile products-the program offers another tool for qualified retailers when combined with the company’s established revolving-credit financing through Synchrony, possibly allowing a customer to start with an installment loan and then transition their balance to their Synchrony account. Synchrony’s promotional terms-with payment/deferred interest, equal payment/no interest and fixed payment/with interest-can be anywhere from six to 60 months, says Farmer.
“It’s proven out in many, many, many studies that given a longer term to pay, consumers spend considerably more money,” Wright says.
To some extent, however, it will always come down to the sales associate and their pitch. Both Synchrony and Wells Fargo offer onboard training and ongoing resources.
“We partner with the provider to assist with marketing materials, advertising, training and technology to enable the program within our customers’ sales process,” Hundley says. “I have been heavily involved with all our retail customer incentive programs over the past five or six years, and, from my perspective, this program is by far one of the best tools we offer our customers to grow their business and to improve their profits.”
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