Why is it worth it for companies to take your money for gift cards or virtual dollars for spending later? Sometimes they’ll even take $40 and give you $50. What’s the benefit to them?
In: Economics
First, gift cards don’t involve companies actually giving you money, only providing you a future discount. There is sufficient margin for goods or services provided that the company would still make profit.
Then, gift cards ensure that you will make a future purchase for a price that exceeds value of the gift card – pretty hard to hit $50 exactly and purchasing something worth $49 will feel like losing $1, so people would rather use the card for a $89 purchase.
Also, selling gift cards means interest-free money now, with services provided at a later date.
Same psychology behind why gyms have a special “$10/month” program….the people who are serious about going to the gym wouldn’t be motivated by simply a low price; it’s targeted to the folks they know who have a sudden urge to get healthy, sign up for the ten bucks a month, and never show up.
A few things.
Gift cards are often gifts, strangely enough. A chance to reach a new customer.
The company usually won’t need to actually sell $50 of product to make a profit, they may still make profit or break even at $40. There worth the risk to them.
Not all cards are used. Free money.
Payment for gift cards is upfront. They can then use this money immediately to reinvest, or even as a kind of interest free borrowing I guess.
Almost all cards will have terms that can be quickly abused. Especially if the company goes in to administration. The first rule is obviously expiration date. But there have been companies recently that have refused to honour any cards since they went in to administration. Others have said they are immediately halving the value.
Now this doesn’t strictly benefit them, as being in administration is very bad news, but it does let them mitigate risk.
Because very often people never wind up using the gift cards or virtual dollars which basically means free money for the company that sold them.
Something like 10-15% is never cashed in. Lost cards and expiration dates give them a profit.
1. You might not spend all of the money on the gift card.
2. It guarantees money to that specific business. Normally, you might spend $25 to Olive Garden, then $25 to Red Lobster. But buying a gift card guarantees all $50 went to Red Lobster. So Red Lobster gets more business than they otherwise would have.
3. If you buy $50 for Red Lobster’s, it didn’t cost Red Lobster $50 to make that food. So if you buy a $50 gift card for $40, that’s still $40 more dollars Red Lobster got than they would have. Combined with 1 and 2, Red Lobster now received $40 of business, when they normally may have only received $25 or less, and since you probably didn’t spend all $50 of the gift card, they are even better off.
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