What are giftcards? Where is the money? How do they get the money? Where is the profit margin?

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What are giftcards? Where is the money? How do they get the money? Where is the profit margin?

In: Economics

You commit to spending at one establishment. It is money already spent for goods you “may” receive later if you remember to use it. If you lose the card or don’t use it all, that it’s money they business made with zero loss.

Chain sells cards to stores for $45. They sell to customers for $50. Customer can spend up to $50 at said chain. The profit margin comes from the fact that not every customer will spend all $50 after they buy the gift card. If customers only spend $40 out of the $50 on average for whatever reason-lose/forget about the card, card has expiration date, they stop shopping at that chain, store never sells that gift card, etc- then chain makes $5 per card sold. You just have to correctly adjust what you sell the gift cards to the grocery store for

Let’s say I run a bakery. I sell gift cards that are only good at my bakery. If someone wants to come in and buy a $50 gift card, great. You give me $50 and I tell the computer system that this particular gift card has $50 of value in it. That’s $50 for me without needing to sell anything right now. Now, the guy who gets the gift card might come back and use the gift card, or he might not. If he doesn’t, then I just made straight $50. If he does, then I just sell him $50 worth of products just like I would for anyone else. He doesn’t need to pay me because that stuff was already paid for earlier, but I still make my profit margin on it just like normal. Just because it was paid in advance doesn’t change anything.

The giftcard contains an account number which stores the money that you spent when you bought it. When you use the giftcard, it spends down the money in that account.

The profit margin comes from 2 places. One is that the place you get the giftcard from would rather have money now than later. The second is that many people never fully spend their gift cards.