You may well be ending the festive season with some gift cards. Some cards you might never imagine yourself using. Even well targeted gift cards can sometimes not be fully used. A balance might remain after the recipient buys what they want, or the card might get lost. To a retailer one of the potential benefits of gift cards is that consumers don’t use 100% of the value on them. Such non-redemption is called breakage, the percentage of the card that is not redeemed. (A similar metric applies to rebates. Retailers usually plan on a significant percentage of available rebates going unclaimed.) What then do we know about consumer value and breakage?
Rules Vary By Jurisdiction
The rules vary by jurisdiction, Still, [as at time of writing in 2014] mostly retailers keep the unused funds. Given this a retailer might see breakage as an unalloyed positive. Dan Horne, a professor at Providence College, argues that this is a shortsighted viewpoint. Seeing gift cards as simply a way of storing a customer’s cash misses much of their purpose.
Marketing should ponder the long-term benefits of service to customers instead of myopic thinking of “money for nothing”.
Horne, 2007, page 193
Consumer Value And Breakage: A Loss Of Goodwill And Opportunity
Dan suggests that marketers viewing breakage as an absolute good are wrong. They miss the fact that breakage — especially when driven by ungenerous expiry terms — loses customer goodwill. This may lose more in the way of long-term profits than it gains in immediate breakage funds. More specifically gift cards are an excellent way of acquiring customers. If a retailer can persuade the customers to come in and use the card in the store, the retailer may see huge benefits in the long term. Additionally, gift cards generate what is known as lift. A customer who spends a gift card is highly likely to spend much more than the face value of their gift cards.
Dan’s overall point is a great one. Retailers should see gift cards as part of their marketing strategy. They should not see them as a quick win whenever consumers lose them in their pile of unwanted presents.
The message for consumers is that you should redeem (or trade, or donate) your gift cards. Perhaps by ensuring your gift cards are used you will actually be doing the retailer a favour in the long-term.
For more on good and bad profits see here.
Read: Dan Horne (2007) Unredeemed Gift Cards and the Problem of Not Providing Customers With Value, Journal of Consumer Marketing, 24 (4), 192-193.