Once again, it appears that purveyors of retail gift cards and vouchers for retail gift cards are at it again… Running around to large organizations touting that the gift cards they peddle deliver “full retail value” to the employees or consumers who receive them as a form of employee recognition or as a consumer reward for purchasing something.
Looks like yours truly is going to have to interrupt this conversation with a timely dose of something the gift card sellers hate to hear: THE TRUTH.
You see, the fact is that retail gift cards are:
- Very profitable for the retailer whose name is on them, and
- Very profitable for the company that is supplying them (or vouchers which can be redeemed for the gift cards), and a
- Really lousy value for the company that is buying them for recognition or reward purchases.
As much as retailers love the money that they make from gift cards, and the interest-free cash-flow that the gift cards afford them, as well as the profits they eventually try to take in before the states lay their hands on the unspent value of non-redeemed gift cards, these little plastic devils really are not a very good reward tool.
And as much as the peddlers love them because they are simple to buy at a consistent discount, easy to fulfill and manage because all the customer service needs shift to the retailer, and extremely profitable (particularly when distributed using a voucher that the recipient must go online and activate in order to claim their specific card), they really are an equally bad deal for the company that is being sold them.
There are simply too many people, making too much money off of things with scary names, like “slippage” and “breakage”…neither of which is very appealing in tone or in reality.
The best way to demonstrate exactly how lousy a value gift cards are for corporate recognition and rewards programs is to use real numbers. Let’s look at exactly how much value is realized, versus how much is spent, when a company gives an employee a voucher good for their choice of a $25.00 (face value) retail gift card.
Bear in mind, the company that is selling these is telling the client that the reason they should want to use the gift card in the first place is because the gift card provides “full retail value” and is the “best, most cost-effective way to recognize your employees”. Okay. Let’s see what really happens here…
An employee of a global manufacturing company stays late one week to help get a project completed on time. Her manager, in wishing to recognize her with some tangible form of appreciation, sends her an e-card which contains a code that may be redeemed online for the employee’s choice of any $25.00 (retail value) gift card. The e-card is sent; the company is billed for the face value of the card ($25.00) plus a 10% handling fee ($2.50) plus a shipping/postage charge of $4.00 for a grand total of $31.50. Note: Paying $31.50 for $25.00 worth of retail value is, in itself, not a very good deal. But hold on, because the ride is just beginning…
What the seller won’t tell the customer is that between 5-15% of vouchers sent to winners (for which the company will be invoiced the full amount, including fees and handling and postage) will NEVER be claimed. The smaller the face value of the gift card, the greater the degree of “slippage” (an industry term that correlates to the value of unredeemed vouchers that are prepaid by the customer, for which no value is ever received). Let’s assume slippage of 10%. This means that the true average cost to the company buying this plan of all the vouchers that are sent and later redeemed is really $31.50 plus 10% of the amount paid (i.e., $31.50 plus $3.15). This total average cost (weighted to reflect slippage) is now $34.65. That gets a $25.00 (face value) gift card into the recipient’s hands.
In order to put $25.00 in retail value in the hands of an award-recipient, the company must expend $34.65. Still sound like a good deal? Wait, there’s more. Here’s some more of what you won’t be told about when you are being “sold” these cards…
A number of research studies have been done in order to determine the percent of retail gift cards that are either: (a) not redeemed at all (in other words, end up in a desk drawer of the bottom of a purse, and are not used), or (b) which are redeemed but for merchandise which costs more than the face value of the gift card (i.e., requiring the consumer to add funds of their own to complete the purchase).
Here is what was found: Between 15-20% of retail gift cards on average are never spent. Again, the lower the face value of the gift card, the higher the rate of non-redemption. The term “breakage” is used by the retail industry to denote cards which are sold but which are not ever spent (or not spent in full). Sticking with our example, the $25.00 face value card given to a top performing employee, the average breakage is, say, 17%. That means that the actual average value realized by recipients of these cards is face value less 17% (to reflect those who received but never spent their gift card). The $25.00 becomes $20.75 (when you back out $4.25 for lost value thru non-redemption).
So here is the bottom line on a $25.00 face value gift card:
- The company buying the card pays an average of $34.65 for each retail gift card that finds its way into the hands of the employees they are recognizing.
- The actual value of the $25.00 gift cards that are put into the hands of employees only translate into a net retail spend of $20.75.
- The difference between what is spent ($34.65) and the average retail value received ($20.75) equals $13.90 in lost value or waste. Over 40% of the average amount spent to get the $25.00 face value gift card into the hands of a reward winner and used to make a purchase is wasted. Gone. No value received.
The seller of the gift card loves this. The seller buys the card for an average of 10% below face value, say $22.50 for a $25.00 face value gift card, and realizes an average weighted profit margin on the sale of the vouchers of $34.65 less $22.50, or $12.15 on every card sold. Not bad. And they don’t have to provide any customer service to the award winner. It is a low-cost, high profit-margin model if there ever was one.
If you want to take this example to its logical conclusion, you will look at the net purchasing power of a $25.00 gift card, which becomes $20.75 after allowing for breakage. From the $20.75 that ends up being spent, the consumer pays 6-8% on average for state/local sales tax, plus shipping (if redeemed from an online ecommerce site). If shipping averages say, $4.00, and sales tax is 7%, the $25.00 gift card will only net around $15.66 in terms of retail price (doing the math: $20.65 less $4.00 shipping = $16.65 less 7% for sales tax = $15.66).
Moral of the story: The next time someone tells you that retail gift cards are “the best value you can buy for employee or consumer rewards”, run, don’t walk, in the opposite direction. It may sound enticing, but the hideous truth lies not far beneath the veneer of the story.