How do gift cards profit?

When I was younger, I remember walking into stores and seeing gift cards from all the major brands, ranging from Xbox to Starbucks. I also remember asking myself the question: How do they make money?

I’d like to start this by saying, if they weren’t benefitting from gift cards, they wouldn’t be selling them in the first place.

Costs?

There are two main participants involved in the distribution of gift cards - the retailer (displays the gift cards to me or you) and the supplier (produces the gift cards for the company) Both the supplier and the retailer will take a cut of the revenue, yet the gift card stays the same price. Would this mean that the company is selling gift cards just to lose money?

A typical distribution chain

1. Supplier produces the gift card for the company

2. (Optional) Gift card is held in wholesalers

3. Retailers purchase the gift cards from wholesalers

4. Gift cards are now put on display

5. Your mum buys you a gift card for Christmas

Although retailers and suppliers do take a cut from gift cards, it’s often at a lower margin. Usually, it’s anywhere from a 8-20% cut of the sale. Even with these extra costs, the company would still have to sell at the same price. After all, why would you buy a gift card for $25 to only get $20 credit?

So do gift cards lose money?

Not necessarily.

Remember that these companies always like to sell their products with a profit margin. So, whilst the gift cards do add on additional costs for them, they can still profit, just at a lower margin.

Another thing is that you are unlikely to spend exactly the amount on the gift card.

What do I mean by this? Well, let’s say you are given an Apple gift card at Christmas. Whether it’s $10, $20 or even $50, There’s not a lot of Apple products under the $100 range. (apart from their $50 phone cases, of course!) As a result, you buy something that you most likely wouldn’t have bought in the first place due to the gift card acting as a ‘discount’. A study from First Data shows that consumers spend, on average, 94% more than the original value of the card!

Ok, now let’s say you aren’t fooled by the gift card. You may not see the gift card as a big enough incentive as their products are too expensive, or you just don’t like/need their products. As a result, the company will take home almost 100% profit. (minus distribution + manufacturing fees)

A lot of people think this way about gift cards. A survey from CreditCards.com found that nearly half of Americans have at least one unused gift card, totalling to $21 billion. No wonder why all these companies like to produce them - some people don’t even use it, giving them (basically) free profit!

It’s not just the extra revenue, either. Gift cards are a strong yet silent marketing tool for these companies. Every time you enter a store, you’d see these gift cards out on display. The cards reach out to grab your attention, without being too excessive. It’s like that small advert in the corner whilst you scroll through a website or watch a YouTube video. Even though you aren’t directly paying attention to it, the brand will be in your mind. Maybe you’ll get some Mcdonald’s later? This effect is known as salience bias.

Next time a holiday is coming up, just get them a traditional gift instead. It’s more thoughtful and it shows that you know what they like. Besides, it gives you much more happiness seeing them surprised with the gift you give them in comparison to a bland thank you.