Eric Wiesen
This topic is essentially unrelated to the range of things I usually discuss on this blog. But I recently had a conversation with one of my colleagues that touched on a particular sore spot of mine.
Gift cards. I hate them. And hate is strong word, but in a way gift cards almost offend my sense of order, partially because others seem to like them so much and I find that irrational.
These cards are inferior to cash in every conceivable way. Let’s consider a $50 gift card to The Gap (no reason to pick on them, but I know they sell a lot of these things). You receive this card as a birthday present from a well-meaning friend. Oh good, now I can buy myself something at The Gap, you think. So let’s consider all possible scenarios involving you and this gift card.
Scenario #1 – You go to The Gap (or their website) and you pick out some things. You know you have a gift card so you’re probably not as judicious as you otherwise might be. You wind up with $80 worth of items (which is really $90 with taxes and the 99 centses you probably forgot to mentally add). You happily hand over your gift card for the first $50 and your credit card for the remaining $40. How did everyone do?
The Gap: Sold you $90 worth of stuff. You probably wouldn’t have gone in at all, and if you had you probably would have spent less. On the other hand, they had to pay margin to the gift card issuing platform/company. MAJOR WIN
You: Spent the $50 you were given plus $40 of your own money. You wound up with $90 worth of clothes from The Gap, some of which (possibly all of which) you would not have bought had you not been given the gift card. The argument (discussed below) that this gift card enabled you to “treat yourself” failed in this instance, because you didn’t get a free treat – you are out $40 in cash. MINOR LOSS
The third-party gift card company: There is usually a gift card-issuing platform behind all but the largest merchants’ cards (those guys run their own internally). This company took a nice fat margin on the gift your friend gave you. This came from the merchant’s side of the equation. MAJOR WIN
Scenario #2 – You go to The Gap and you pick out some things. In this scenario you really don’t want to end up paying cash, you just want something for free. So you do your best to pick out something that comes in under the gift card – $42 worth of merchandise. How did everyone do?
The Gap: Gap has a $50 liability in the form of your gift card. $42 of it has now been used up, leaving you with an $8 gift card that, realistically, we all know you won’t ever use. (This is called “breakage” and it’s why merchants love gift cards and want you to give them as gifts). So the Gap sold you $42 of merchandise, paid margin on the $50 gift card, but also got $8 in breakage. That’s 20% free margin to them. MAJOR WIN
You: You got $42 of merchandise from The Gap. Maybe it was what you’d have bought if you had cash, maybe not. You would up with less than the amount that was given you to. MINOR LOSS
The third-party gift card company: They took their margin on the sale of the card. MAJOR WIN
Scenario #3 – You go to The Gap and are very particular. You manage to pick out something that costs the exact amount of your card. How did everyone do?
The Gap: They sold you $50 of merchandise, nothing additional, no breakage, and paid their margin on the gift card. MAJOR LOSS
You: You got exactly the amount of merchandise you were supposed to get without paying anything extra or losing a portion of the value of your card. NEUTRAL (as opposed to having $50 in cash)
The third-party gift card company: As always, they took their margin on the card. MAJOR WIN
Scenario #4 – You put the gift card in a drawer and forget about it. Maybe a year or more later you pull it out and think about using at. At this point, the terms and conditions have probably caused its value to decay on monthly basis (most cards start charging you fees after a while that decrease the balance). How does everyone do?
The Gap: They got $50 less the gift card issuer’s margin, booked a liability, but that liability never had to be paid because you forgot about the card. 100% breakage for them. MASSIVE WIN
You: You never got anything from your friend’s gift. MASSIVE LOSS
The third-party gift card company: See a pattern here? They got paid. MAJOR WIN
From my personal, anecdotal experience, the most common outcomes are:
- Scenario #1 (spend more than the card), followed by
- Scenario #4 (put it in a drawer)
- Scenario #2 (spend less than the card and have a useless stub)
- And last is Scenario #3 (exact use of the card).
And consider your own outcomes in each of these scenarios. At BEST, you are neutral relative to cash in scenario #3. You are a loser in every other scenario, a small one in #1 and #2 and a big one in #4. Had you received cash, you would be better off in all cases. Game theorists call this a “dominant strategy”.
So why do people give these wretched things? Well, they given them because they believe they’re being thoughtful. In this country a lot of people think that giving cash is “tacky”, so they’ll give you a Best Buy gift card, or Sephora, or Amazon (this last makes me laugh), under the theory that, “if I just gave you cash, you’d use it to buy groceries, but this way you can TREAT YOURSELF”. Personally, if my first, best use for money coming in on my birthday is to buy groceries, I likely need that more than something at Sephora. But essentially gift cards are all the restriction of a giver-chosen gift with none of the creativity (and a big bundle of hassle attached, because now I need to take my gift card and go out and BUY MY OWN GIFT). And the reality is, the “I’m going to treat myself” is sort of a weak psychological crutch. If you get $50 in cash as a gift and what you want is something from Best Buy, go to Best Buy and get it. Gift cards merely introduce very significant interference into the purchase process, b/c the gift-giver had to divine what store you might want to go to (but without exercising their own judgment about what you might actually WANT).
The last point I’ll make is to observe a phenomenon that I’ve started to see in the last few years that’s almost unbelievable to me – gift cards that are stored-value credit cards issued by payment networks – Visa/MasterCard etc… rather than actual stores. What on earth is the point of these? So now instead of a crisp c-note I have to carry a separate, branded stored-value Visa card? One where the balance is not easy to find out, that’s hard to use online and where I’m almost guaranteed to have breakage? This strikes me as one of the most consumer-unfriendly products I’ve ever seen, and yet I’ve received them and I as I’ve talked to friends about this question, others have too, so clearly gift-givers are buying these. These are inferior to cash in every respect and don’t even have the “you can treat yourself!” sheen on them, because you can spend them anywhere.
Either pick out something that reflects your thoughtfulness or give cash. Please. The best I can say about giving that gift card to The Gap is that you’re making yourself feel better about not picking out a gift. And it’s not about making the gift giver feel better, it’s about getting someone something they actually want. If you can pick something out for them, great, but if not, let them actually pick out something themselves. And to do that, they’re much better off with cash.
End rant.
Five Years Too Late 
I agree, it’s such a scam. Alas, gift cards appeal to the buyer for many reasons you covered, and probably a few others e.g.:
– they “look” like credit cards and other “high tech money” so have a cool factor
– they are shiny
– maybe recipients are also mostly under their spell, so the giver does get the credit instead of being seen as lazy
Comment by Roy Rodenstein — February 19, 2010 @ 9:55 am
Roy – I think the last of these is likely the most powerful if any of them are. But I would like to rid people of this spell, because it’s causing us all to be worse off!
Comment by fiveyearstoolate — February 19, 2010 @ 3:05 pm
Check out this article from the NY Times, http://bucks.blogs.nytimes.com/2010/02/09/a-charitable-use-for-leftover-gift-card-funds/#more-11017,
This concept will revolutionize gift cards and eliminate any breakage from returning to the stores, banks, and even the government (when the Card Act takes effect in August)
Comment by Darren Cannao — February 19, 2010 @ 10:55 am
Darren – that is interesting. I like that. I still think we’d all be better off if people just stopped giving stored-value cards to begin with, but I like your solution for those who do receive them.
Comment by fiveyearstoolate — February 19, 2010 @ 3:06 pm
fiveyearstoolate,
I agree but we all know they are not going away, they are getting more and more popular so I figure, let’s capitalize on their popularity and use the breakage for good rather than for golden parachutes and political agendas.
Comment by Darren Cannao — February 19, 2010 @ 3:14 pm
Darren – I agree.
Eric
Comment by fiveyearstoolate — February 19, 2010 @ 3:36 pm
Hard to see why Scenario 3 is Major Loss for the Gap – it’s likely that that margin on the $50 worth of stuff purchased with the card exceeds the margin paid to the card processor, so the Gap suffers a bit of margin compression, but it’s still a profitable, incremental sale. One other benefit, that applies to every scenario – the Gap was paid by the card processor when your friend purchased the card, so there’s a very real cash flow benefit for the Gap. I’d say Scenario 3 is at worst a wash for the Gap, more likely a Minor Win.
Comment by Josh Mckay — February 19, 2010 @ 1:58 pm
Josh – you make a good point, and I’m not expert enough on stored value card economics to tell you you’re right or wrong. But my understanding from seeing pitches by stored value platforms is that they have pretty significant margins. If you look at a business like The Gap, they have operating margins of 11.5%, so I can easily see Scenario #3 being a money-losing transaction for them. My perception (feel free to correct me if I’m wrong) is that the money on gift cards is almost all made on breakage, not on exact card usage of the type I describe in that scenario.
Comment by fiveyearstoolate — February 19, 2010 @ 3:35 pm
Hilarious. My birthday is today, am I to assume that I won’t be receiving a gift card from you?
Comment by Charlie Kemper — February 19, 2010 @ 3:39 pm
For you, Charlie, I’ll get a MasterCard stored value card, preferably one that loses 4% of its value every month starting in 60 days, can’t be used online and requires you to dial a call center in India to check the balance. (Happy birthday)
Comment by fiveyearstoolate — February 19, 2010 @ 3:42 pm
You’d get one from me Charlie, that’s if an investor took his balls out of his bankers’ pockets back a company which actually helps and profits!
Comment by Darren Cannao — February 19, 2010 @ 3:42 pm
Amen… I hate those f$%&ing things!
Comment by Hans — February 22, 2010 @ 2:23 pm
Get a life !
Comment by Brian — March 4, 2010 @ 6:09 pm
There’s an interesting counter-point to some of the arguments presented in this blog. The writer asserts that people are worse off because they are forced to purchase from retailers where they otherwise wouldn’t have spent. This is true, but it doesn’t necessarily mean that people are worse off.
There’s an area of behavioral research which hypothesizes that people tend to make purchase decisions by grouping things into buckets. This helps to explain how they can justify spending a lot on something in one instance and being very frugal in the next without having the sense of being inconsistent with their personal spending beliefs. An interesting example from a study within this area of research supports the notion that people like to receive gifts they otherwise wouldn’t have purchased for themselves. For example, there may be a couple that are foodies who are living on a budget. They set personal rules to not exceed $20/person on a meal. Though they’d derive far greater utility from eating a $30 meal one week and a $10 meal the next, their rules do not allow the $30 meal, because it’s seen as a slippery slope to higher spending. This couple would love to receive an $80 gift certificate to a high-end restaurant because it allows them to experience areas of high utility to which they have systematically denied themselves access.
Comment by Ben — March 7, 2010 @ 12:42 pm
There once was a time, a say, $20 Gift Card entitled the recipient to $20 plus dollars in store credit. This was an incentive to buy. Then of course crafty people started purchasing more than a few, with plans to immediately use them, just to save a small amount of cash on a pre planned purchase. Once the trend began, The incentive was removed. and People foolishly continued to purchase that silly piece of money making plastic.
Question: Who in their right mind, would exchange CASH (which by the way can be used virtually anywhere in this world to purchase anything from anywhere, at any time) for a virtually worthless piece of plastic, which is limited to a certain stores limited inventory.
And to all of you foolish gift givers, who are blinded by the colorful and shiny plastic. Wake up, and Open your eyes. You are not giving something that is better than cash itself. Cash can be saved, How many of you are putting Gift Cards into your savings account?
Comment by VehiCROS — July 10, 2010 @ 1:55 am
Correction, from a buyers standpoint, “Money Losing Plastic”
Comment by VehiCROS — July 10, 2010 @ 1:59 am
Think that anyway a gift should be personalized and a gift card is not. Probably better at this point is to give money. But looking for a gift should be a pleasure. May be some internet tool could help, as I try to do with my website. Have a good day
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Comment by saath — October 24, 2019 @ 3:52 pm