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(originally published by Booz & Company)


The Bottom Line on “Free” Gift Cards

If consumers correctly judge the likelihood that they will redeem the card and not spend beyond its value, the cards have only a slight profit advantage (about 1.2 percent) over discounts, the difference coming from extra sales generated by the qualifying amounts. But the profit advantage can be more than 10 percent when customers misjudge how much they will spend and go beyond the card’s limit.

The authors also offer several lessons for managers, who can adjust product prices to increase consumers’ spending beyond the cards’ limit during the redemption period. By using sales data from the period when the cards were issued, managers can periodically determine the amount of dollars held in gift cards and how many customers have them. During the redemption period, stores can focus their promotion efforts on products with higher prices, thus requiring most cardholders to spend more than the value of their cards.

Limiting or expanding the cards’ redemption periods could also be useful. For example, cards issued prior to Christmas could be redeemable for one week in early January, which might increase sales during an already busy period and bring customers back after the peak season.

It’s also important to keep consumers motivated to increase their purchase amounts even if they already qualify for one or more cards. For example, a display of $30 products could promote their purchase as “free with three $10 certificates,” encouraging shoppers who already have one or two $10 cards to keep spending to qualify for one or two more.

Bottom Line:
When implemented correctly, free gift card programs may be profitable for high-margin retailers, who can use them to generate sales they otherwise wouldn’t have, especially when consumers value other items besides the ones they plan to purchase. The cards can have an advantage over product discounts because consumers spend more on additional items to qualify for them and can often be induced to spend above the cards’ limit when they are redeemed.

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