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?

Question

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

Answer 1

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.