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

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.