Like how does the store or company profit off of a $20 gift card that costs $20?
In: Economics
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.
Latest Answers