In our last blog, we revisited the topic of gift cards and unveiled some interesting tidbits found in a recent report about the gift card industry. In short, gift cards are providing retailers with massive amounts of revenue. And a significant chunk of that revenue comes from selling cards that never get redeemed. It’s known as “breakage”, which refers to the amount left on a gift card that doesn’t get used.
So, it should go without saying, that the selling of gift cards is a wise choice for retailers all over North America. Gift cards bring in billions of dollars for companies all over the continent each and every year. And they continue to be sought-after as the most requested gift each and every holiday season. They are easy to shop for and very easy to use! So, how can you go wrong selling them to your customers?
Here are three reasons retailers are in love with gift cards:
1. They provide businesses with interest-free loans. As we mentioned in our last blog, gift cards give retailers opportunities to make money without selling any actual products or services. Between the time when the gift card purchase is made and when it is redeemed, a company enjoys revenue for nothing provided in return. James Sullivan of The Motley Fool further explains.
“Money in the hand today is worth more than money in the future,” he writes, “If Starbucks sells $10 million worth of gift cards — and it sells much more than that — it receives that whole sum up front. It can use the money for payroll, dividends, investments in new stores, or anything else that it sees fit. At some point it will have to deliver on $10 million in products, but that may be weeks, months, or years in the future. Sometimes the company won\’t have to deliver goods at all.”
2. They allow businesses to make money for nothing. Technically, when a gift card is sold, a company generates money for providing nothing in return. As just mentioned, it’s like getting an interest-free loan. But what happens when the gift cards don’t get redeemed? As described earlier, this is called “breakage”. Essentially, each time a gift card is sold, a company is provided with the possibility of increasing revenue without letting go of any inventory.
Consider the fact that not every gift card recipient is a fan of the company represented by the gift card. In many cases, a recipient has no use for the card. “Sometimes a consumer may receive a gift card for something that not wanted or needed,” Sullivan explains, “That $25 McDonald\’s gift card given to the person beginning a strict diet may never get used. That $25 drops almost entirely to Mickey D\’s bottom line.”
3. They function as excellent advertising tools. The purchase of each and every gift card is representative of a piece of word-of-mouth promotion. The providing of a gift card to a loved one is equivalent to the ultimate recommendation. It is no different than saying “shop at this place, I’m betting that you’ll love it!” How could a retailer not love the fact that his/her gift card sales are bound to introduce him/her to new customers?
“Gift cards are advertising for the retailer,” affirms Sullivan, “If you\’ve never heard of Texas Roadhouse but receive a $200 gift card at a holiday party, you\’ll probably find a location and check it out with family and friends. If you enjoy your experience, the restaurant has just acquired a new customer.”