The concept of gift cards has been sold as a way of overcoming the problems associated with finding the appropriate gift for an individual and, instead, providing an open-ended option for a specific value. More often than not, people are easily able to identify and associate a ceiling-value for a gift they would like to give. However, finding the right item within that value is not as simple. Companies have cashed-in on this phenomenon for many years which progressed to the creation of cards in the form of an electronic gift certificate or voucher as well.
For a company, gift cards are an interesting source of revenue wherein the person buying or loading a gift card will already make a “purchase” before actually receiving any product in exchange. This article aims to shed some light on exactly how gift cards power profitability for companies by giving you an insight into the ways in which profits are generated, the different types of cards on offer, and what consumer trends have been like since their introduction to the Australian retail market.
How a Company Profits from Gift Cards
Firstly, consider a typical scenario of gift card use. Assume that you buy three gift cards to give to three people, Person A, Person B and Person C. Each card has the same value (say $20) loaded onto it. Let's say Person A decides to spend the entire $20 from the gift card to buy something from the appropriate store, Person B only uses $10 while Person C buys something worth $50 (using $20 from the gift card that you presented). For the company issuing the gift card, Person A bears a no-profit scenario wherein the entire amount was used up. In Person B’s case though, only $10 was used, leaving $10 behind as what is referred to in the industry “Breakage”. This value, if unused until the card expires, will become a profit for the company.
Effectively, it’s like giving the company a certain amount of money and taking back products that are worth less than the amount you gave them. The third scenario, where Person C ends up using the entire value of the gift card and adds more cash over and above that value, is also a profitable scenario. Here the company is enticing a customer to make a bigger purchase than they normally would have. For Person C, it’s a purchase worth $50 for which she/he only had to spend $30 (and the gift card made up the rest).
For the company, however, the entire $50 becomes revenue with their regular profit margin, which is of course higher than the profit they would make off of a $30 sale. Effectively, not all gift cards are redeemed and often not for their entire value either. As a result, companies effortlessly make a profit on the un-used portions of these gift cards or, instead, encourage customers to make bigger purchases than they otherwise would. Generally though, companies rely on the “breakage” revenue when it comes to notching up bigger profits from gift card sales.
Types of Gift Cards in Australia
Primarily, there are two kinds of gift cards in the Australian market – Closed Loop and Open Loop gift cards. Closed Loop gift cards are available at particular retailers and are accepted by those retailers only when it comes to redemption. These are also the most popular variety of gift cards available today in Australia.
The latter variety is quite similar to something like a debit card issued by a bank that you have an account with. The difference is, it's a gift card that can be used at a wide range of retailers. In general, these Open Loop gift cards are issued by a financial institution, like MasterCard or VISA, and come with a completely different set of regulations that control the market.
There are also some Open Loop gift cards that have characteristics of both Closed and Open Loop gift cards. This includes any or all gift cards that are issued by shopping centres or malls, but can only be used within that centre or mall. That means, you are open to use the gift card to make a purchase at any vendor within that centre or mall, but the gift card is closed for use outside of the centre or mall. Another example of this would be a Coles Group & Myer gift card which can be used within their group chain of retails stores (e.g. Big W, 7-Eleven, Coles, Woolworths, LiquorLand, etc).
Trends in the Australian Gift Card Market
They may be relatively new to Australia, but gift cards have certainly hit it off with consumers around the country. Australia was historically known as a large gift voucher market, of the paper variety, so it was quite natural that these plastic cards should also receive widespread and easy acceptance too.
Due to the nascent nature of the market, estimations are still limited but they do indicate that the Australian gift card market is worth around $1.5 to $2.5 billion every year. In 2011, the total value of gift cards offered by just six of the major retailers went upwards of $1.25 billion.
The average value of gift cards given or received by individuals, as revealed in a survey, was seen to be around $57. The most common elements these gift cards were used on included clothing, household goods or entertainment products. A large majority had turned to gift cards as a viable option to replace traditional Christmas gifts. It's been identified too that almost 62% of gift card recipients have used, on average, just 69% of their gift card’s value.
They are also the gift of choice for younger people, which is a great way to control their spending or give them freedom of choice without actually handing them a credit card. The control on what these gift cards can be used to buy is also a way of ensuring that they are not utilising their store credit on things they shouldn’t have access to. The impact of the introduction of plastic gift cards has made the market more attractive and, over the last 5 years, there has been a massive 25% growth in the market.