As we approach the shipping cutoff for Christmas with last-minute shoppers still looking for gifts, it’s a great time for companies to shift their focus to gift cards. In addition to generating brand and customer advantages by offering this type of gift, there are also less obvious benefits from the finance perspective.
The gift card market is growing, accelerated by COVID-19.
Consumer adoption of digital gift cards continues to increase. According to Allied Market Research, the global gift card market is expected to grow at a CAGR of 16.2% from 2020 to 2027. According to Research & Markets, while online purchases of gift cards have been increasing over the years, online purchases of gift cards in the United States more than doubled in 2020.
Gift cards are an easy way to improve cash flow.
Selling gift cards can make a meaningful impact on a company’s cash flow. It’s as if your customer (or the person giving the gift) is providing your business with an interest-free loan. Someone purchases a gift card today, giving you cash in advance without needing to provide or ship goods at that time. The gift card is redeemed for a good or service in the future – at which point, you need to incur costs to deliver that good or service. In an extreme example, if you sold $1 million of gift cards today that weren’t redeemed until next December, that would be an extra $1 million that you could use towards growing your business before needing to deliver a single product until the following year.
They’re committed to buying from you in the future.
This may be a more obvious benefit, but when someone buys a gift card, they are committing to making a purchase from your business – this represents future revenue for your brand. On the accounting side, when a customer redeems their gift card to make a purchase and the item is shipped, the amount of the order will be reflected in your revenue figure on the income statement.
On the other hand, in the case that the gift card is never redeemed, you have collected the cash upfront and never need to incur any costs associated with its redemption. As many as 51% of Americans have unused gift cards with an average balance of $116 per person. You can think of this as an interest-free loan that is eventually forgiven.
Capture holiday sales after the shipping cutoff.
In the case of the holiday shipping cutoff, gift cards can represent a meaningful way to generate holiday sales after the deadline, especially for the many of us who procrastinate.
And there are many of us who procrastinate. A recent study conducted by OnePoll, showed that 51% of participants waited until the last minute(Christmas Eve in the study) to do their holiday shopping, with 39% of the group having purchased a gift as late as Christmas Day. With so many people purchasing gifts at the last minute, a well-timed email may be just the thing to generate these purchases before the holiday has ended.
Potentially decrease the return rate.
An economist might argue that the most efficient type of gift is the gift of money. While not exactly the message that might help increase holiday sales, there is something to the notion that the gift recipient would know better than anyone else what they want.
Depending on the type of items you sell, returns can represent a meaningful percentage of sales. In a simple example, if someone purchases a dress for her friend, she hopes that the recipient likes the color and style and that the size is correct. A gift card from a financial perspective can be much more efficient since the recipient can choose the item that resonates with them and may have a better chance of choosing the correct size – potentially, decreasing the number of expensive holiday returns.
Take advantage of value asymmetry.
Think about this – the cost of the gift card to the company is different than the value of that same gift card to the customer. As an example, if a customer purchases a $100 gift card, the value for them is $100. However, when that gift card is redeemed for merchandise, the cost to the company is the cost of the product, which depending on the margins could be significantly less than the $100.
One example that we have seen companies use successfully, is by taking advantage of this value asymmetry. As an example, a brand offers their customers who pay for a $100 gift card, a $110 gift card value. The company receives $100 in cash today and the customer receives a gift card valued at $110, a win-win. Assuming a gross margin of 75%, the cost of the extra $10 value to the customer is only $2.50 to the company – but it might have been the thing to convince customers to purchase a gift card in the first place.
Gift cards can be beneficial financially in obvious and not so obvious ways. Ultimately, you need to fulfill orders and incur costs in the future, but gift cards could be a powerful tool in your brand arsenal.
Written by: Lyndsey Bunting, CEO & Founder of Blue Onion Labs
