The Gift-Card Economy

What do a gym membership, a bottle of prescription pills, and a holiday gift card have in common? You’ll have to read our New York Times Magazine column to find out. As always, we’ve posted some of the research behind the column elsewhere on this site. You’re welcome to leave comments on this post.

And thanks to Rory O’Connell, who got us thinking about this topic.


krampster

The XLS spreadsheet is wrong. The shipping is added to the value of the card instead of the cost of the card.

The shipping cost should decrease the actual discount. Your calculations have the shipping increasing the discount.

Antonio Galvan

I think I have a special (very special) case that relates to this article: wedding gifts. Most of the couples who get married now set up the so-called "wedding tables" (at least here in Mexico). That is, you go to the store, choose what you want for your new married life, and people simply go and buy something from this table. The store then wraps it and sends it to the couple's new address. So here you tackle two of the issues mentioned above: you give something which the couple wants, and at least you choose it from the whole variety. What would someone say on this? I still believe (as an economist) that it is a waste of money and resources. Many couples end up returning half or even more of the gifts to the store, which credits the selling price in a kind of "electronic wallet" which you can use for buying other stuff but only at that particular store. So what puzzles me is this: why do couples decide to do this if they KNOW they will end up returning stuff? Maybe it is that people just like the the whole image of gifts and giftwrapping and all that, and don't care much for what the gift itself is...

Read more...

Jason

Gift Card breakage (unused funds) may be claimed by the gift card issuers in some states as revenue after a specified expiration date, however some states are now changing legislation so that these funds can be escheated (taken over) by the states themselves at some point after the account remains dormant. in these instances consumers can still claim back the funds directly from the states treasury subject to that state's unclaimed property laws.

budfox

Enjoyed the eBay giftcard spreadsheet on the NYT link - though I'm not sure what would drive someone to pay more for the card than it's worth.... Perhaps the heat of a bidding war clouds one's judgment.

pawntorook4

does it have to do with seniorage?

mookusaki

Never get fully used.

Dignan

Most people pay for more than they use in all three cases, most of the time that is. A two year gym membership that sees heavy use the first month but sporatic the rest of the term. The bottle of prescription pills that sit in the medicine cupboard after half the bottle is used and you deem yourself healthy enough to discontinue use. And the $2.95 that is left on the Amazon gift card that sits in your desk or wallet after your initial purchase till you eventually toss it out. All money wasted.

Andy from Houston

Convenience is most definately a factor driving people to buy gift cards. That and ignorance.

Most people are not aware that they might be paying $60.00 for a $50.00 gift card. Some people might be aware, but simply value the time saved buying the cards instead of searching 45 minutes for the "perfect gift." That coupled with the satisfaction of knowing that person will get to pick something they really want instead of waiting in a return line trying to get store credit because you gave them something they don't care about makes me think that the gift cards are not terrible symbols of corporate greed.

Of course, some stores do take the added fees too far. In the long run, that makes those stores less competitive with the places that choose not to nickel and dime their customers.

prosa

Assuming that "never get fully" used is the correct answer, there's a subtle difference between gym memberships and the other two. Stores may like it when people fail to use gift cards, but it's not bad for the stores if people use up the cards right away. Prescription drugs take this a step further, their being no apparent benefit at all for drug companies or pharmacies if people fail to finish their prescribed medications.

Gym memberships are fundamentally different. If all or even most of the people who join a gym actually used it regularly, sheer chaos would result. The gym would be packed to the point where it would be all but impossible to use any equipment.

budfox

From what I've read, stores cannot recognize the revenue from gift cards until they are actually redeemed; If that's true, I certainly would think they'd like the cards to be used. In fact - and somebody correct me if I'm wrong - some local and state governments assume the gift card revenue if they go unused.

As a consumer, I look for gift cards without expiration, but how else can the stores ensure they will eventually receive income (for those cards not used)? I'm assuming there is some stipulation that the stores can recognize income from expired cards.

ERGriffin

I'd like to see a source, budfox, on where you found that info. There is no way a business can't recognize that has revenue. They sold it! If that was the case, there would be an unreal amount of money flowing right into government hands. It would essentially be a 100% tax on certain sales - something that just doesn't make sense.

Perhaps you read where some state reps in Nevada and Wisconsin are trying to get bills passed to declare the money used to pay for unused gift cards "abandoned property" and allow the government to take it.

wprestong

I used to work for Amazon Payments and I know they deliberately put the office that issues the gift certificate in Idaho in order to avoid a Washington State law that said companies were not allowed to keep the breakage on GCs. Breakage is money not (ever) used (for example, if someone loses the GC or never uses it up).

I have bid for GCs on eBay and have seen them sell for more than face. The typical sale price for Amazon GCs was about 93% of face. I believe, but cannot prove, that Amazon and other companies buy back their own GCs on eBay at some minimum percentage of face. This is a way of protecting the market value of the GCs and is a clear profit for them if they can always buy back their own GCs at (say) 90% of face. I'd guess they go in and bid them all at about 90% and hope someone else outbids them.

Razela

My understanding was that the revenue from gift cards was merely not reported until the gift cards are redeemed. So, the stores still can keep the money but it doesn't count as official "sales revenue." I believe I read this in an article concerning holiday sales and how they are actually higher than the numbers say since most gift cards are not used until January.

kentavos

So the smart move would be to design a system to pool all of those unused gift cards.

I had the idea once that the Salvation Army should set up a box for people to place their left over gift cards that contained loose change. Set a bell ringer next to it and you could have a gift card gold mine.

mhertz

Regarding the accounting procedure (I believe):

Because of the "matching principle" in accounting, gift card revenue can only be recognized once the customer purchases goods/services for the value.

Up until the gift card is redeemed it remains on the company's balance sheet as unearned revenue and a liability.

Toast1185

Gift Cards are a woeful way to give a present for Christmas. They are inconvenient and box people in to suboptimal choices. They are so inconvenient for many that there is even a gift card exchange going. There are websites set up for people to swap their cards or to liquidate it for cash. I tracked the sale of some gift cards on eBay and found them trading for .90 cents on the dollar. It was in an admittedly small sample group; not very academic, but interesting.
Link: http://the-economy.blogspot.com/2006/11/making-markets-gift-cards.html

celion

I'm not quite sure how it relates to gyms or pills. But from an economics point of view, I thought gift cards are interesting in that they restrict our choices (or their recipients' choices). The post from about a month ago on "Tying your own hands" got me thinking about this.

They don't make any sense rationally - why would I rather give someone a $50 gift card to a store instead $50 cash? Yet that's what the nearly all of my relatives chose to give me for the holidays.

JoeKeeley

I liked Kentovas' recommendation to give to give small residual-value GC's to the likes of the Salvation Army. I admit I throw out the cards with just a few bucks on it.

Celion has a great point . . . since 9% of GC's are not redeemed and the store choice limits the recipient, why don't givers just give cash instead? Last year, Best Buy recorded $43,000,000.00 in profit from unused cards, we don't throw away our "unused cash".

Chris Partridge

Is it significant that health club members attend an average of 4.5 times a month? This is once a week, and I don't think that is a coincidence. We are creatures of habit, and once a week is an easy rhythm to slip into. Sooo...it would pay a health club to set the monthly rate at the maximum people are prepared to pay for once a week, as members delude themselves they will attend more often.

indi500fan

I think the biggest reason for giving gift cards instead of cash is to convey the impression that the giver "cares" more because he/she has taken the extra step to procure the gift card.