The Evil Downside of Gift Cards

This past holiday season I saw probably one too many articles trumpeting the value of gift cards to retailers and how they are a great thing for retailers. My skeptic side starts coming out as I see article after article appear, and I have to start asking “Is the increasing prevalence of gift cards as a holiday gift (primarily Christmas) a good thing for retailers?”

First, let’s look at timing:

Gift cards are primarily purchased before Christmas in lieu of a more than likely full-priced gift. The gift card is then held by the purchaser for a week to a month before given to the recipient on Christmas (or slightly before). This means that the recipient cannot possibly purchase something before Christmas when average discount levels are much lower and instead will likely redeem the gift card immediately after Christmas (or within a couple of weeks) when the discount levels are much higher. So, by encouraging people to purchase gift cards, the retailer is actually giving away margin based on average discount levels.

Next let us look at psychology:

There are two psychological trends potentially at work in purchases made with a gift card. The first is the gift giver versus conscious shopper mentality. A gift giver is potentially less likely to give a discounted gift because they don’t want to feel that they are giving the recipient a cheap gift, or for the recipient to perceive it is a cheap gift because they might have visibility to the fact that it may have been on sale.

The conscious shopper mentality comes out in people who think “Now I’m going to get as much out of this gift card as possible.” The conscious shopper mentality will result in the consumer ultimately acquiring more highly discounted goods than the gift giver likely would have purchased. Where the gift giver looks for perceived value (often including paying a higher price), the conscious shopper looks for value for money (often including paying a lower price).

There is one more piece of psychology related to the conscious shopper, and that is the notion that to a conscious shopper actually buying a gift card seems like a bad deal “Everything else in the store is discounted except gift cards, so gift cards are a “rip-off” or a bad deal so I won’t buy one.” This puts a cap on a retailer’s potential gift card sales unless they are willing to discount their gift cards during their promotional sales as well.

We will conclude this section with a piece of psychology that may lie in the minority, but still warrants merit. For some people gift cards don’t seem like real money and people that would otherwise be frugal and seek discounts might become luxury shoppers and buy something at full price that they wouldn’t otherwise buy. Retailers of course hope that this is the majority, and for their sake, let’s hope they are right.

Finally, let us look at competition:

Gift cards are seen as a retailer’s last line of defense against “walking” a potential customer. The potential customer has been all through the store and hasn’t found quite the right thing and so you try and convince them that a gift card fits the bill. And if the customer doesn’t buy the retailer’s gift card, there is a real danger that they might buy some other retailer’s gift card, so now they are offering incentives. Buy a $100 gift card for retailer X and get a $10 gift card for yourself. Buy a $100 gift card for restaurant Y and get a $20 promotional gift card for yourself. Sometimes they are using gift cards themselves as an incentive (Spend $50 before December 24 and receive a $10 gift card). So instead of offering a discount on the current full-priced or less-discounted purchase, they are giving you money to come back and spend when everything is marked down to clear it out.

In summation:

1. Gift cards are going to have to be increasingly discounted to be sold
2. With most gift cards being sold during the winter holiday season, timing results in the retailer moving goods after the holiday at a higher discount
3. The shift in psychology that accompanies the gift card changing hands, results in the holiday purchase being put in the hands of a more cost-conscious, bargain-hungry consumer
4. Three strikes you are out!
   • Oh, wait, it’s a prisoner’s dilemma, and retailers are going to be forced to take this bad deal and try to make it up elsewhere

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Braden Kelley is a Social Business Architect and the author of Stoking Your Innovation Bonfire from John Wiley & Sons. Braden is also a popular innovation speaker and trainer, and advises companies on embedding innovation across the organization and how to attract and engage customers, partners, and employees.