Why Retailers Love Gift Cards

By Annie Mueller | October 07, 2010 AAA
Why Retailers Love Gift Cards

Quick quiz: what's the best Christmas gift anyone can ever give you? Be honest here. It's not a hug, or a box of freshly baked cookies. It definitely isn't that green-and-yellow striped sweater set or the 20-DVD set of 1950s TV shows. Nope, it's cash. Why do we love cash? Because you can spend it anywhere you want, anyway you want. Which means, of course, that you can go get exactly what you want. (Holiday expenses can drown you in debt. Find out how to avoid this festivity hangover. Refer to Keep Holiday Debt From Snowballing.)

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But to some holiday shoppers, cash is a little too quick-and-easy, so they take it one up. Gift certificates and gift cards have become increasingly popular; you'll now find kiosks of gift cards in many major retailers. Ten years ago, if you wanted a gift card you had to go to the store (or online) to get one. Today, you can go to Lowe's and purchase a Starbucks gift card.

That's What the Retailers Do
Gift cards are popular among consumers because they make the gift-buying process easy and guilt-free. It's easy to find out what somebody's favorite store is, purchase a gift card from the store and you've got an almost-as-good-as-cash gift with a personal spin. Perfect. Gift cards are also perfect for retailers, who push these little money-makers especially hard around the holiday season. Why do retailers love gift cards? Simply put, gift cards make it easy for retailers to make money.

1. Unused Cards
Not all lucky recipients of gift cards remember to use them; about 6% of gift cards end up unused. For retailers, nothing could be better. Imagine making $50 on nothing, for nothing. Many retailers put a time limit on gift cards, and once the expiration date has passed they are no longer bound to honor the card. The Credit CARD Act of 2009, which went into effect in August of 2010, legislates that expiration dates must allow at least 5 years from the date the card is issued, so time limits are becoming less of a problem for consumers. Some states outlaw expiration dates altogether, which gives consumers unlimited time to use gift cards. Still, it doesn't matter what the expiration date is if you never remember to pull the gift card out of your wallet and use it.

2. Full Price
People shopping with gift cards are 2.5 times more likely to pay full price for products. When buyers might hesitate if making a cash purchase, they often won't think twice when using a gift card. Obviously, for retailers, making full price on an item increases the profit; and consumers with gift cards are less likely to price shop, hunt for bargains or wait until items go on sale.

3. New Consumers
While many people try to purchase gift cards for the recipient's favored shop, not all do. Some purchase and give gift cards to treat friends to a new experience, a new store or a new product. For retailers, this gift-card-marketing means the chance to get a new consumer into the store with guaranteed money to spend. If they convert those new consumers into long-term customers, they've gotten far more than the initial value of the gift card.

4. Spend Over the Value
How often does your purchase come out to the exact amount of your gift card? Not often. About half of all consumers end up spending more than the face value of the gift card. For instance, according to studies the majority of shoppers who walk in with a $50 gift card will spend 20% more on their purchase in store.

5. Boost Sales
Holiday sales are the boon of the year for retailers, but the post-holiday slump can be painful when retailers are still trying to move overstocked inventory. Gift cards help bring people back into the store in that slow, post-holiday season. Even if consumers are feeling the pinch of post-holiday blues in their own wallets, they can spend a gift card guilt-free - and often end up purchasing just a little more than the value of the gift card.

IN PICTURES: 9 Ways To Trim The Fat From Your Spending

6. Repeat Business
Gift cards may help guarantee repeat business; a shopper who might not have returned, or might not have returned as quickly, will be pulled by the lure of a gift card to do repeat business. Every moment a consumer spends in-store is a chance for a retailer to increase brand loyalty.

The Bottom Line
For consumers, gift cards are convenient, easy to wrap, easy to give and as close to cash as you can get without giving the green. For retailers, gift cards offer a whole range of potential purchases, and all of them mean more money in the register at the end of the day.

For the latest financial news, check out Water Cooler Finance: The Post-Stimulus Slump.

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