Seeing a rack of gift cards, for dozens of local and chain stores, at the local pharmacy the other day got me wondering - what’s the model for making money on those?
I can see some possible sources of profit -
Cards that are never cashed
Incremental sales to the recipient (gets a $100 gift card but ends up spending $125 they wouldn’t have)
Some cards ‘depreciate’ in value if unused
There must be some cost associated with the distribution and sale of the cards (third-party vendors like my pharmacy, charge-card fees, etc.)
And I’m sure I’m only seeing part of the picture.
But what is the breakdown on all the profits and costs? Are these cards very profitable for the seller? The way they are proliferating there must be a significant financial incentive.
Even if the recipient of gift card uses its exact value, they will still have bought something at the store (or whatever) that it applies to that they probably would not otherwise have bought, so the store gets the profit from that sale. Selling a card amounts (at worst) to an actual sale of some item.
Also, of course, as you mention, most of the time nothing the recipient wants will exactly match the value of the card, so either any unspent portion is pure profit, or the recipient spends even more money in the store than the card is worth.
Without having the fine details, but some limited experience, you pretty much answered your own question. Depending on the industry, vouchers and gift cards have very low redemption rates. You’re spot on with the ancillary revenue, as well. Consider: John has a $100 gift card. Is he likely to buy exactly $100 worth of goods? No. He’s more likely to buy $90 and lose the gift card after, or buy $110 and spend $10 more than he otherwise would have. Gift cards are fantastic for retailers – your friends are essentially committing you to shop at that store rather than at a competitor, if you shop at all. If Circuit City has a DVD for 19.99, but Best Buy has the same for 24.99… it doesn’t really matter what the Circuit City price is to most people, if they have a $20 Best Buy gift card.
Unless a third party processes gift cards for the vendor, the costs of accepting the card are nil since they’re just plastic vouchers.* As for printing costs, if ordered in heavy bulk (as is often the case), they’re often under a penny each. Costs rise for smaller orders, which is why smaller merchants are fond of the Gift Certificates, whereas WalMart can offer you hundreds of designs for a card.
*ETA: By nil, I mean negligible. The only actual cost to the vendor (if he/she already has a POS set up to accept swipe cards) is the cost of maintaining the database of card value. Which is, in the long run, close to nothing.
Same as it is for making money off cash, checks, or credit cards. That is to say, the primary purpose is not to make money off of it, it is merely the means to transfer money. Gift cards are no different, the only difference is that goods that the store trades for the money aren’t given to anyone until the gift card is redeemed. There’s a separation in time, but they are otherwise identical situations.
Now on top of that, there are some ways to make additional profit with gift cards as others have pointed out, but that’s almost a sidenote. Any method of payment that gets people to give you money is good for the store.
One more thing is that it gets the store cash today for a purchase to be made some time in the future. They get an interest benefit (or need to borrow less) from the time that the gift cards are outstanding.
Does anybody know how profits from gift cards are measured by retailers?
Since they haven’t exchanged goods for the money yet can they count it as money made?
Or does all of the money made selling gift cards go into an independant account (which the company can make interest on) and when people redeem their cards the money is then withdrawn and counted as profits?
Or even if just a few cents are left on a card after it’s been used. It can be a hassle to ask a retailer to swipe a card just to use up the last $0.14 on it, so often it doesn’t happen. Bingo. Someone (the person who purchased the gift card) just gave the retailer $0.14 in pure profit. Multiply that a couple of (hundred) thousand times and it adds up to a lot of money.
I’m not an accountant, but I’ve studied some accounting.
At the moment that the gift card is sold, the money has been exchanged for a debt. So, the account with “Cash on hand” has gone up by $X, and correspondingly an account with “Unredeemed gift cards” has also gone up by $X. One is an asset, the other is a liability, so no profit has been made at that point. They only realise a profit when either,
(1) the gift card is exchanged for a item being sold, or
(2) the gift card expires.
They might also count as profit the virtual interest on the money held in gift cards.
It’s my unofficial observation that yet another benefit is that a gift card, aside from binding the buyer to that store, diminishes the incentive to only buy a bargain item. If I have a gift card it seems less painful to splurge on something I would not otherwise ordinarily buy–often items which are higher margin for the retailer.
By that logic, gift cards must be a great deal for companies. They are always sourcing good sources of credit to keep their businesses running. If 10% of gift cards are never cashed in then we are dealing with a negative interest rate here - I bet they don’t get that in the regular credit market!
I think that besides this a lot of the benefits are less easy to quantify, much like the advertising budget. Many people may never have bought anything from your store had Aunt Edna not sent you a gift card. As other posters have said, their buying behavior may change (less likely to comparison shop, more likely to buy expensive items, etc).
All in all, it is no wonder they are so ubiquitous these days - there are many ways that they can help a company make a profit.
Most gift cards don’t expire, and nowadays many (most? all?) states have laws against the practice. So technically that outstanding debt is out there forever, but if it’s never redeemed it doesn’t matter much when you already have the gift card purchaser’s money in the bank.
So how does it work with Mastercard gift cards then? I was going to get one for my friend last holidays, but then I read the fine print and there was a $3.95 ‘service charge’ on the card, even the $20 card! Is that the credit card company taking its cut? Why on earth aren’t the fees proportional to the size of the card? That fee dissuaded me from buying the card.
Gift cards may be prohobited from expiring but as I mentioned in the OP some (the Solomon mall-chain for one) start charging a monthly fee after some period like 6 months. So, if left in the drawer they do for practical purposes expire.
Gift certificates are a related issue. Many restaraunts here in MA had something like a 3-year expiration period until the state manadated a minimum of, I think, seven years. I don’t know if that encompasses gift cards also. Other than being a plastic card with a magnetic stripe vs. a piece of paper, they same a lot alike to me.
You also have to consider sales versus revenue. A company can claim that sale at the time the gift card is purchased, but the revenue is deferred. They can’t claim the revenue until the card is used or expires. So in the cases where expiration dates are allowed, that’s so the companies can finally recognize the revenue on their books.