In a special holiday edition I focus on why Gift cards are interesting. They are central to many retailers’ strategies and yet economic theory often seems premised on the idea that they shouldn’t exist.
Why Give Gift Cards?
The argument against them is that a gift card is a bit like cash, just worse. Closed loop cards, those connected to a single retailer, are limited in where you can spend them. A Target gift card works if you want to shop at Target. Cash would allow you the option to shop elsewhere too. Open loop cards, pre-paid cards which can be used at any number of places. They are more flexible but the business model relies on fees. One need not pay fees to use cash. Despite this a vast number of gift cards are purchased. Why?
Why Gift Cards Are Interesting
Explaining why a retailer would issue gift cards is easy. Even ignoring breakage (unused balances that the retailer may be able to keep) there are plenty of benefits. For example, gift cards lock in the consumer to the retailer, reduce returns, and give the retailer a “free loan”.
More puzzling for some is that consumers want gift cards.
…many commentators go so far as to argue against the purchase of gift cards, suggesting that consumers would better off using other gift types. This misses the important point that givers voluntarily buy cards and receivers enjoy gaining them. Consumers undoubtedly perceive the value in gift cards.
Horne and Bendle, 2015, page 1
Gift Cards Solve Problems
We argue that gift cards create value by solving consumers’ problems. Gift cards provide a compromise product. They are easier to give than tangible gifts but less easy to give than cash. Gift cards give more choice to the recipient than a tangible gift but not as much as cash does. They show thought on the giver’s part compared to cash, but not as much as a tangible gift would. Overall gift cards provide a socially acceptable way of giving that is a little more efficient than giving a tangible gift. (They generate less deadweight loss, see here, lost value from unwanted gifts). Though gift cards aren’t ideal for every occasion — don’t give a supermarket gift card for Valentine’s day.
Consumers seem willing to sacrifice a little flexibility for something more social acceptable than cash and more convenient than a tangible gift. I, for one, think consumers pay for stranger things.
For more on gift cards see here.
Read: Dan Horne and Neil Bendle, (2015), Gift cards: a review and research agenda, The International Review of Retail, Distribution and Consumer Research, 1-17, DOI 10.1080/09593969.2015.1086402