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.