rocket finance

Gift Cards are a Retailer’s Best Friend

I know posts on gift cards have been “done to death”, but it always strikes me as funny that a gift card is seen as a great gift, but cash given as a gift is considered ”tacky”. I was talking recently with a local businessman who offers gift cards and he shared why gift cards are a great deal for him:

1. They can only be used at his store. A guaranteed profit with no competition.

2. 17% are never redeemed! (Who are these people?)

3. Some are redeemed up to 6 years later – some are never used!

4. He makes money from the float: A $100 gift card purchased in 2007, but not redeemed until 2013 could generate almost $40 worth of interest. 

5. He makes money from inflation. If inflation is approximately 3% annually, $100 in 2013 will only buy $82 worth of 2007 merchandise.

So what does a retailer make on a gift card that is redeemed six years after the original purchase? Let’s say his mark-up is 20%. A $20 mark-up + $40 float interest + $18 inflation equals a profit margin of 78%! Okay, so a six-year redemption is a bit extreme. Here is a more realistic example of how companies make money from gift cards – without even taking into account float or depreciation – he assigns a mark-up of 50% and 10% non-redemption. Either way you slice it gift cards are a great deal for business, not the consumer.

But I’m going to keep buying them. I cannot risk tackiness.

 I just always try to use a 5% or 3% cash back card when I buy them.