Eli5: How do stores benefit from selling gift cards?
In: 2
A certain percentage of gift cards that are sold are never used. That means the store already has the money, and never had to give any merchandise for it.
If you’re asking about Walmart selling Google Play / Amazon / whatever gift cards, they get a commission on the sale, in the neighbourhood of 5%.
If you’re asking about Walmart selling Walmart gift cards, it’s even simpler, they encourage you to shop at their store. If you buy a gift card as a gift, you’re directly encouraging someone else to shop at that store. And most users will spend a little extra on top of the gift card value, or even return to the store after they’re acquainted with it.
Because stores get a cut of those sales
So using random numbers, when you buy a 20 dollar gift card from Target for Amazon, target gets 1 of those 20 dollars. So you’re getting 20 dollars in credit from Amazon, and Amazon gets 19 of those dollars. So you’d think Amazon is losing money? Well they are a bit, but it is worthwhile for two reasons.
1. Not every gift card gets used, how many gift cards have you gotten in your life that you never fully used up or never redeemed because you forgot or didn’t need anything? Or how much credit do you have just sitting in an iTunes account somewhere. Every gift card bought but not fully used by the person is free money for the company.
2. Gift cards are guaranteed sales. Say you get a $20 dollar gift card to Amazon for your birthday, Amazon instantly gets $19, and sure you might spend that 20 dollar gift card on something, but otherwise maybe you wouldn’t have bought anything from Amazon at all and never given them any money. People are more likely to spend gift cards on things they want but don’t need than their own money. AND they can drive sales too, because how many times have you wanted to buy something, but didn’t want to spend the $30 on it? Well with the gift card it’s like you’re only spending $10 dollars. So that is 10 extra dollars Amazon is getting because to you the $20 gift card feels like free money.
>How do stores benefit from selling gift cards?
Well, they get *money*.
If it’s a gift card for their own store they have to exchange fewer wares for the same amount of cash (since gift cards expire and sometimes aren’t utilized for the full amount), so it’s even **better than cash** and if it’s a gift card for some other vendor then that other vendor is already *paying* them for selling their gift cards, either as a rate or as a cut from the sales.
The most obvious answer is that you’re paying $5/10/20/100+ for a piece of plastic and magnetic strip that probably cost a few cents to make. If that gift card never gets used, then you just made one hell of a profit.
But even if it does, they have a few useful functions:
* Loss Leader – this is a product that is sold for a loss but is meant to get you in the door to maybe buy other things. This is most often used to describe cheap “staple” foods, and things on sale in that category especially (if you have time, look at the bean wars in the UK for how silly this can get), but the basic idea is the same here: a lot of the use of gift cards is for, well, gifts. Gift-buying is a difficult business for some people. If you really enjoy a hobby I know nothing about, and I want to get you something nice, without gift cards I run the risk of getting you something you already have, or something that is bad. As a result, I’m not someone who will ever buy (for instance) yarn or knitting needles as I have no interest in knitting. But if I suddenly need to buy a gift for my sister who knits, well now I either need to know what she needs specifically, or give her a gift card to the local yarn barn (or whatever) – when she needs something from there, she has a gift card now.
But I only *think* that I don’t like knitting. if I go into the yarn barn to get the gift card, there’s a chance I might see some neat piece of knitting that I need to learn how to make, and spend money on myself in the process.
Similarly, if I give my sister a $20 gift card, she might get excited and buy $23 worth of yarn and yarn accessories, thus more profit for the yarn barn, while my sister feels good getting all this stuff for $3 on her end.
Starbucks turns out to be the monster of gift card sales. From the lastest earning call…
Starbucks projected $3 billion in holiday gift card spending in 2021 as they’ve become ubiquitous gifts. Customers purchased 46 million cards in 2020, totalling $12.6 billion in gift cards for the year.
https://www.businessinsider.com/starbucks-says-over-1-billion-is-sitting-on-cards-2022-5
Starbucks cards are bigger than the entire gift card industry, according to CEO Howard Schultz. Customers put billions of dollars on cards each year as an interest-free loan to the chain. Tens of millions of dollars in gift cards are never claimed and recorded as revenue.
Starbucks just revealed that a whopping $1 billion is sitting on Starbucks gift cards unused. Interim CEO Howard Schultz told investors in a second-quarter earnings call that the cards are used by over 120 million people.
Gift cards can be a boon to retailers, as recipients often don’t use the full amount. This essentially gifts free money to the card issuer as nearly 40% of 18 to 29-year-olds lose their gift cards before they can spend them, and around 25% of 30 to 64-year-olds do the same. In 2020, that amounted to $164.5 million on Starbucks gift cards that was never redeemed. That money was recorded as revenue, essentially a gift to the chain.
Imagine you are running a lemonade stand. If I buy a 10 dollar gift card from you, you get 10 dollars right away. You eventually have to pay me back in lemonade, unless I forget about or lose the card.
Normally when I’m buying lemonade, I’m want the cheapest lemonade you have. When I buy your most basic lemonade, I spend 50 cents on something that cost you 25 cents to make. Now, I have a gift card, and don’t care about being lavish in my beverage spending. All 10 dollars are going to lemonade, so I might as well get those upgrades.
I end up leaving your stand with the 12 dollar super energy lemon power drink. Not only did I spend an additional 2 dollars, the upgrades only cost you about a dollar. You’ve now made 10.75 off me.
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