Gift cards: why are they good business?

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This kind of digressing post is exactly why my productivity can be sub-optimal sometimes. :)
Last week, I ended up buying a gift card. For a couple of seconds, the thought crossed my mind, why does a gift card worth $50 cost exactly $50? The convenience of getting a gift card and the flexibility that it gave the recipient was worth something to me and I might be willing to pay a little extra for it. The marginal cost of printing the card (though minimal) did cost the store something, and there was the fixed cost of the infrastructure for the payments. Shouldn't stores then charge more for their gift cards?
But then I decided the store could probably charge considerably lesser than $50 for the $50 gift card, but pricing it at $50 still made sense!

The best part was the there seem to be so many different reasons for them being able to charge less than the face value of a gift card for it. These were the ones I could come up with right away. Are there any more?
  • Time value of money: a dollar to the store today, is worth more than whenever the recipient of the cards spends it. For a larger firm/chain, it'll help with the accounting for quarterly numbers too.
  • Unspent money: the probability of the recipient spending the exact amount on the gift card is low, so there'll always be some left over.
  • Incentive for the extra spending: on the flip side, the desire of "maximizing" the use of the gift card will cause some people to make a purchase they wouldn't have otherwise considered
  • New customer acquisition: acquiring new customers is the hardest thing to do for any business. A gift card gives them a shot at it.

Depending on the business, I'm sure many stores/companies would be fine with charging less than the face value of the gift card. Businesses will be careful going down that road though, since that could easily trigger a price-war which could make everyone worse off (except the consumer of course:)) Better to leave the consumer used to paying a price which just intuitively seems the natural one to pay.

Comments

Murali V said…
Maybe this comes under the unspent money category, but a non-trivial portion of the gift cards are not even used. NYT puts it at 8.5% (??!!) in this 2005 article.

http://www.nytimes.com/2005/12/17/business/yourmoney/17gift.html?_r=1&oref=slogin

Did you say something about sub-optimal productivity.. back to work.
6:30 PM
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