Eli5: How do stores benefit from selling gift cards?
In: 2
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.
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