The Gift That Gives Back
The Gift That Gives Back
"What did you do with the gift cards?" The manager of the Comfy Coffee Slurp Shop chain asked the new barista, an eager young man who'd clearly been trying hard to please her ever since he'd started work the week before.
"Oh, those?" the new hire made a wry face. "I didn't think they were as tempting an impulse buy as some of our other products and so didn't want them up by the cash register that way. I think our customers would be much more likely to purchase some of our appetizing Gut-Loving Nuts or Blues-Chasing Bonbons. So I switched their places. The gift cards are now over there." He pointed to a corner shelf.
The manager raised an eyebrow. She would have liked to have made a sharp retort, but Jack here was doing his best. Still, he had a lot to learn.
"I would like you to move the gift cards back to where they were by the cash registers," the manager told Jack. "And I'll explain why."
With wide eyes, Jack nodded. "I'll do that right away, Jane. And please do explain why. I'd like to understand what I did wrong."
"It wasn't wrong to think about trying to increase the coffee shop's profits, but trust me, those gift cards are more valuable than you think," explained Jane.
"Well, I guess they could be a way of advertising," Jack said, trying to reason it out as he moved the candies he'd put up by the register out of the way. "People might buy them for colleagues as a gift and then those folks might come to check us out and become regulars."
"That's true," smiled Jane. Jack was getting it. "But that's not the main reason I want them up by the register." She brought over the tiered display of colorful gift cards. "These guys are worth about ten percent more than the value for which we sell them."
"Ten percent!" Jack's whistled. "How is that possible?"
"Think about it," the manager said. "Haven't you ever got a gift card you never used?"
"Well, yeah. Probably. In fact, yes. Two years ago my aunt gave me a gift certificate to a spa." Jack made a face. "I think she may be getting a little senile. I meant to give it away, but I'm sure I lost it by now."
The manager nodded. "Every year, for every business, a certain percent of the gift cards go unredeemed. That means the business gets the money for the gift card but never has to pay out the goods or service for which it was bought."
"But the customer might come in some day and redeem it," Jack added.
"True, but companies have enough historical data to know that after a certain number of years have passed, the likelihood of a redemption becomes almost nil. They can count on keeping the money they made on the unredeemed gift cards. There's even a word for it: breakage. And that number can average ten percent of the value of gift cards sold."
Jack touched one of the store's gift cards. "So this baby is worth more than however much the customer loads onto it."
"Right. Think about this. Our chain of coffee shops sold $5 million in gift cards last year. What is ten percent of that?"
"But..." Jack still looked skeptical. "I might find that spa gift card and I might find someone who wants to use it."
"That's why there's an entire accounting procedure that takes into account all of the historical data for our business and the amount of gift cards sold and redeemed. In fact, a new standard was recently applied to all companies. Gift card breakage is determined by historical redemption rates and recognized in proportion to the actual redemptions of the gift card."
"That sounds complicated. How can you possibly keep track of it all?"
"Fortunately, Comfy Coffee implemented an Enterprise Resource Planning system a few years ago. All of the accounting for the gift cards and how much of the unredeemed balance the company can use is kept track of automatically. And the system knows how to distinguish between our outlets in different states with different laws regarding our gift cards."
"So we should push the gift cards," Jack said.
The manager beamed. "You're going to do all right here, Jack."
If you’re not yet sold on the idea of gift cards, consider these statistics:
33% of purchasers will spend more on a gift card than they would spend on a traditional gift.
Consumers are budgeting 55% of their annual gift-giving for gift cards rather than traditional gifts.
76% of shoppers plan to buy at least one gift card.
Consumers spend an average of $59 more than the original value of the card, especially at restaurants. Supermarkets can see an average of spending at 94% more than the original value of the card.
In 2018, the gift card industry was $160 billion.
Do you have an unused gift card in your wallet?
Gift cards are so important to businesses today that most ERP and eCommerce systems recognize them as valid payment alternatives.
Rubenstein / Justman Management Consultants (RJMC) is expert at helping companies determine the best system solutions to integrate new payment methods with ease. Give us a call today at 310-445-5300 - We Get Projects Done!