How do stores and companies make money off of gift cards?

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Like how does the store or company profit off of a $20 gift card that costs $20?

In: Economics
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Normally gift cards aren’t bought by the same people who use them. They will give them as a gift which encourages the other people to spend money in their store. If you get a $20 card, you may go to the store and end up spending $25. You wouldn’t have spent any money had you not had the card.

Some people also don’t use the gift cards, lose them, or not use the full balance. Since the store receives cash for the cards at the time of purchase, any money left over on a card or on a lost card is pretty much pure profit for the business

Many gift cards start off with a $5-10 “activation fee” This money, minus taxes, is pure profit for the company. Companies also make money off gift cards that aren’t their own.

The same way the store makes money by selling their merchandise.

If you walk into a store with $20 cash, and leave the store with $20 worth of merchandise, the store likely turned a profit on the merchandise they sold you.

It’s the same thing with a gift card: it starts with someone paying $20 cash and ends with someone else leaving with $20 worth of merchandise. That’s still a profit.

Companies sell goods for less than it costs them to acquire said goods. If you think about it this should be obvious, it is the only way they can make any money at all.

Therefore if a company is selling a gift card for their own store it can be reasoned that whatever goods bought with that gift card are going to provide a profit. But what about a gift card for a different company? In that case the gift cards are provided to the selling company at lower than face value.

For example if a company makes 50% profit on their products then if another company can sell a $20 gift card you can comfortably provide it to them for $18, meaning they make a $2 profit off the sale. Then when that $20 gift card is used in your store you still make $18 from it, or $8 in profit as opposed to your usual $10. A major benefit of doing this is that it brings people to your store that otherwise might not have come, and it is unlikely their purchases exactly equal the value of the gift card. Either they don’t use it all (free money) or they buy more (extra sales).

For their own gift cards, they don’t, they make it when that card is redeemed in the same way they make money selling any of their products. In fact, for accounting purposes, a gift card is generally a liability (a debt the company owes).

For other cards (like iTunes gift cards, or Outback or what have you) that you’re buying from say Target or the grocery store, they usually buy them at some reduced rate from a distributor or directly from the source.

There are two ways they make money on a gift card.

The first is the same way they profit on any sale – they don’t make any money on selling a $20 gift card itself, but when the money on that card is spent on products in store, they make the same profit on that sale as they would if you paid cash.

They also make a certain profit on gift cards that are not used – if you buy a $20 gift card, the company gets your $20, when you use the card that money goes towards the cost the retailer paid for the products you buy. If you forget to use the gift card, or lose it, the company still has the $20 you gave them for the card in the first place, and now don’t have to pay for the products you buy with it. So for every gift card bought but never used, they gain almost 100% profit (minus the small cost for the card itself and the processing for it).

For simplicity, let’s assume we’re talking about a gift card for a specific store. The gift card costs next to nothing for them to produce. So worst-case scenario, the gift card goes to someone who was already going to buy something at their store. In that case, they don’t make any more money then they were going to, but they have lost a few pennies at most, and they still make the same profit on the items that they sold.

However, there are two ways for the store to increase their profit by selling gift cards. The first is if a card is gifted to someone who wasn’t otherwise going to spend money at their store. Since the gift card is specific to this store, the only way for the recipient to benefit from their gift is to spend it there. That’s $20 in turnover they wouldn’t otherwise have gotten. As a knock-on benefit, if their experience was positive, the gift card recipient may now be motivated to return to the store for future purchases, so it also works as a form of advertising.

The second, more nefarious way that stores can make a profit off gift cards, is if the gift card is never cashed in. The shorter the card is valid, the more likely this is to happen (and the more you should avoid ever buying it for someone). At this point, the store is just getting free money.

The second scenario is one of the things that companies who are specifically in the business of gift cards are betting on. We all know these nigh-unspendable gift cards given to us by clueless relatives. $30 to spend on a stay at one of Montana’s most mid-tier hotels. A $15 voucher for tickets to any weekday matinee showing of an R-rated movie. Any gift card less than $10 for a chain store that you’ll exclusively visit while not having this card on you. Even if the companies behind these gift cards don’t charge their participating vendors anything, they can still make a profit just by making it hard enough for people to spend their gift cards.

Money in the gift card that can only be spent at that shop.

– It costs SubShop $3 worth of ingredients, labor etc., to make a sub, which they sell for $5.
– You normally spend $10 a month on subs, so SubShop makes $4 from you after expenses.
– Your uncle Bob gave you a $20 SubShop gift card for the first month.
– You spend $20 at SubShop within the month, SubShop has now made $8 from you.

The gift card cost them maybe $0.50 for the card itself, plus all the computer stuff for issuing and tracking. So they actually only made $7.50, but it’s still better than the original $4.

Also gift cards expire. Some people will lose them / forget them, after a while that money goes to SubShop.