Understanding Gift Cards from a Retailer's Perspective

Since 2005, a staggering $45.7 billion has been left unused on gift cards in the United States. This extraordinary amount not only highlights the widespread popularity of gift cards but also unveils a hidden source of revenue for retailers. While customers and gift-givers often see gift cards as flexible and convenient, the retail industry holds a different view, one that is primarily focused on maximizing the benefits of these transactions.

Gift Cards Facilitate Sales

The reason behind retailers' enthusiasm for gift cards is simple: consumers often spend more than the face value of the card. For instance, if a customer visits Target using a $20 gift card and ends up spending $40, both the retailer and the customer are happy. Retailers are particularly fond of these cards because they count on the consumer to spend more than the designated amount, ensuring higher sales and profits.

Gift cards come in handy for stores because people are prone to misplacing or forgetting about them, which eventually leads to unredeemed balances. As a result, many stores have a wide range of gift cards available at their registers. This not only encourages more purchases but also offers an indirect benefit to the retailer in the form of free sales opportunities.

The Breakage Income Phenomenon

The concept of 'breakage income' further illustrates the intriguing dynamics of gift cards in the retail world. Gift cards that remain unredemption after a certain period are seen as a liability for the retailer. However, rather than view these balances as a loss, retailers have devised a clever solution: they turn unredeemed balances into 'breakage income'.

The financial figures from 2017 are enlightening. According to data from The Hustle, five retailers each earned over $20 million in breakage income. This figure represents the amount retailers have determined will never be redeemed, essentially converting liabilities into income. For example, if a customer loses a $50 gift card, the retailer retains the unspent balance, which can be added to the company's overall revenue.

Consumer Behavior and Retailer Strategies

Despite the significant amount of money left on gift cards, many consumers find ways to ensure these cards are never wasted. For instance, a personal example mentioned by the speaker involves giving gift cards to their daughter. Instead of allowing unused balances, she converts the gift card values into digital credit on her daughter’s phone.

This consumer behavior pushes retailers to continue marketing gift cards heavily, knowing that while some may be forgotten, a significant portion will generate additional sales. The speaker concludes that while some stores might suggest customers buy more without redemption, the retailer's overall strategy is to maximize sales and secure free money through unredeemed balances.

Conclusion

The retail industry benefits greatly from gift card culture, and the unredeemed balances play a crucial role in generating additional revenue. As long as the strategy is executed effectively, retailers can look at these gift card balances as an additional source of income, highlighting the strategic importance of gift cards from a retailer's perspective.