Is there an e-commerce solution for wordpress which will allow a shop with an onsite blog?
If so, what are the options and is there generally one thats considered the 'best'?
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Try WP-eCommerce, it's quite supported and has themes designed around it!
I would most definitely NOT use WP-eCommerce, as every time I've worked with it I've spent more time attempting to debug or fix it than actually using it. It's not supported (unless you're willing to pay for support), and they will charge you to fix their own sloppy coding errors. Until they rewrite it from the ground up, avoid it like the plague that it is.
Also, as The Z Man recommends, WooCommerce is definitely awesome.
I can definitely recommend WooCommerce as it's pretty solid and getting more and more theme support outside of just WooThemes. Have also used WP-eCommerce but didn't have as much trouble as others have indicated. Everything like this is always case-by-case anyway, depending on your specific needs. The Shopp plugin is also worth a shot and seems to be pretty intuitive based on the little time I've played with it.
WooCommerce, Cart66, Jigoshop. All great plugins each with their own pro's/con's
Whichever Wordpress E-Commerce platform/plugin you use, make sure you are PCI Compliant (something many site owners are ignorant of).
All of these plugins will allow you to use either Paypal or some gateway's hosted checkout page which places you in compliance but weakens the brand and discomforts the potential buyer (something you don't want to do right before they're about to give you their money). You can go the Paypal route, implement the PCI standards yourself (read: $$$), or use a hosted checkout page that offloads the PCI compliance. Check out this article about the complexities of PCI Compliance. Here's a snippet explaining the levels of PCI Compliance:
Even if your website does not store credit card data, if it transmits credit card data you need to complete the Self-Assessment Questionnaire C (SAQ C) in order to be compliant.
Credit card companies and merchants are cracking down on PCI non-compliance and the penalties are hefty. Here's the list of requirements on the PCI Security Standards website.
All that said, I would go with WooCommerce or Cart66 with their baked in Mijireh integration so that you can have a hosted checkout page (read: PCI Compliant) and have it look like your site (read: brand recognition and customer comfort).