Although many oppose gift cards as a gift, I truly donât mind. It’s the thought that counts.
Itâs certainly better than receiving a present I end up returning. Surprises arenât my style. Practicality and frugalism are.
Although gift cards may seem sad and meaningless, itâs free cash that must be spent! As long as itâs a gift card to a shop I would see myself needing something from, itâs special. Truthfully that rarely happens though. The gifter tends to gift what THEY would want, not what the RECIEVER would.
Nevertheless, if you are stuck with random gift cards from 2006 or gearing up to utilize them effectively after Christmas, before you go out and spend that âfree moneyâ, it may be helpful to know how businesses make more off of the gifter and yourself after the purchase.
Zero Exchange?
A gift card is meant to give the receiver freedom on what they want to spend. It usually signals that the gifter doesnât know what to get. This isnât a bad sign per se since when we get older, it becomes increasingly more difficult to tell what someone would want or more like need without breaking the bank anyways.
It seems as if gift cards fool me well into assuming I got more than what I would normally receive if someone gave me 1 gift since I have the option to choose from the store.
Clearly, gift cards are a highly debated subject. If you have a preference, let us know!
The feeling gift cards present is fascinating. Even if you receive a gift card from a store you disgust, you now feel obliged to spend that money regardless. You ask yourself if itâs better to keep that âfreeâ money on a card or use it for something pointless. Consumers tend to choose the latter option. They are clearly relentless even during hyperinflationary times.
Easiness Pain
This is the most convenient sneaky way stores make money from gift cards. Over 51% of U.S. adults have unused gift cards and the average consumer is leaving $115 on the table which is roughly $15.3 billion nationwide! You could run a store just on gift cards! Itâd never go out of business.
As we get older, we want less materialistic things and more experiences or items we actually need not wonât have fun with for a few days and get bored of. Weâve learned through growing up that money wonât buy happiness and memories donât have a price tag. Usually⌠The best things in life are priceless after all!
Plus itâs much harder to tell what someone older needs. In some way, it could be easier to get someone older a gift. We donât want to seem cheap and insincere with a gift card but over the top and annoying are worse with unnecessary gifts. This leads gift cards to be a heavily weighed option which in the end helps businesses increase their cash flow more than we expected.
Although gift cards cost money to produce, ship, and maintain, compared to the money that isnât spent or more spent, businesses have a lucrative business of this behind-the-scenes gift card program. Although it may sound bland, no matter the size or physical/digital presence of the store, gift cards are a helpful way to attract a variety of diverse customers, even those who just came by to use their gift card! Looking back, I found many of my top stores through expiring gift cards stuck in the back of my wallet. They needed to be used, were used, and used many more times through my own wallet till today.
Gift cards are a relatively inexpensive marketing strategy to promote your brand. Digital advertising is beyond annoying at this point but gifts will always stay in style. It never hurts to give someone your own business gift card as well. They could always spend something and help your small business during this volatile time.
Types of Gift Cards
There are mainly two types of gift cards. Thereâs no question as to which one is more popular since one, a.k.a open-loop, has no constraints as to where the money can be spent.
Open-loop cards are like credit cards and are accepted nearly everywhere. They arenât tied to a vendor and instead they act like cash, redeemable to pay for anything. For example, a Visa or Mastercard prepaid gift card are open-loops.
On the other hand, closed-loop cards are cards that only work at one store, such as a Gap or Subway gift card. Thereâs no way to purchase an item at an alternative shop with a brand-tied gift card.
Being stuck with a particular merchant makes it a bit of a hassle for the consumer but a juicy reward to the merchant. Needing to spend money somewhere that you never needed to spend robs the fun out of the gift card but at the same time makes the consumer feel rewarded inside. Instead of framing it as an annoyance, appreciate visiting a new shop, hopefully, a small business to support them. You never know what youâll like until you try it!
Mechanics and Hidden Costs Behind Gift Cards
Open-loop cards require a bank that works with a network such as Visa which connects all the intermediaries such as the merchant, a processor, and a seller such as Giftcards.com.
When an open-loop card is purchased, the amount is placed on the card and there are additional fees to process the transaction. The cash is held by the bank until it is dispersed through the processor to the merchant once used.
With closed-loop cards, the funds are held under the businessâ internal accounting system, not with a bank. These cards only work within the merchantâs systems. It can be at a specific location, franchise, or nationwide so itâs important to understand where the card can be used. Hopefully nearby otherwise expect it to stay in your wallet forever.
Both open and closed-loop cards generally have a magnetic stripe, like a credit card although smaller businesses usually opt to have a card that can be scanned with a bar code. Most modern POS systems are required to scan the card for security purposes.
Similar to when you purchase something with your regular credit card, gift cards work with various parties and systems from an issuer, a bank, and a processor that all process the transaction in real-time.
Gift Card Revenue Streams
There are several ways businesses earn a return from gift cards. Weâve already touched on a few that can add up quickly over time. Sadly many industries, especially airlines and hotels take advantage of customersâ faults, laziness, and poor memory the best that easily add up to billions in extra profit per year!
Read here how businesses make a fortune off of gullible consumers.
#1 Income Source: Referred Customers
When you receive a gift card, the last thing you promise to yourself is to not stash it into your wallet. You feel compelled to use it ASAP or else it is an immediate waste. It takes the joy out of it.
The main problem with gift cards is that you need to take extra work to buy something for yourself. Time = Money and for that reason, many would prefer to get nothing than a gift card. You feel the urge to spend it since after all, itâs âfree moneyâ. Itâs not really free money since itâs being spent and most likely more will be spent on things you donât need but it feels like it.
You are eager to go to the store and pick yourself a present or gift. This is an incentive for that recipient to visit the issuing merchant and get a feel for whatâs out there. If they are already aware of what the store offers, they are more likely to buy more. If theyâve never heard of it, since they already took the trip to come by, they feel obliged to buy something.
Even if a customer doesnât end up spending anything which is rare having gone to the store with the intent of using the gift card, due to the low cost for the business in producing the card, they can still earn without anything spent. Already at the store, the customer is already losing out on their time, energy, and opportunity cost. Cards are very âstickyâ meaning consumers hold on to them for a while and each time they open their wallets, they are reminded about the business. Another genius low-cost marketing hack.
#2 Income Source: Upfront Fees and Backend Costs
Open-loop cards are available anywhere so most issuers can charge a small up-front fee to cover the cost of production and processing fees. On the other hand, since closed-loop cards go through a brandâs internal systems, there are no third-party fees to offset so the cards are sold at face value for the exact amount.
A sneaky way a business can make more is if the gift card is either never or only partially redeemed. Here the business can charge a small fee against the remaining balance. So even if the customer never ends up spending the balance or didnât spend enough, they can pay a small return for the business later on!
#3 Income Source: Sneaky Balances
The art of adjusting prices is a sneaky business in itself. Thereâs a lot of, excuse the pun, pricing power that goes into setting prices. Gift cards usually come in rounded balances such as $20, $25, $50, $75, or $100 dollars for a reason. Not becuase consumers are bad at decimals or cents. Due to inflation and sales tax troubles, getting near a round amount is nearly impossible with a purchase. To get rid of the card, consumers will want and usually need to spend over the amount in one visit. This allows the business to earn additional marginal revenue from those customers, around 20% extra through an average sale.
Rarely are gift cards a better gift and investment. As weâve found, they are a true pain in the but. Have you ever gotten anything worthwhile from a gift card? A book from Barnes and Nobles? Drink from Starbucks? Keeping it simple is best.
For businesses, gift cards are a cost-efficient way to introduce new customers, give them a âstickyâ reminder in their wallet, and encourage them to spend more or lose and waste it all! Whatever the card-holder ends up doing, they will rarely be as happy as the merchant!
Nothing is free in this world. A hug is enough.