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Gift cards mean a better sales experience for both you and your customer. But most importantly, they provide a real return on investment. A popular twist on the gift card concept is prepaid or stored value cards. With stored value cards, your customers pre-pay for multiple products or services in exchange for a discount.
Here are some additional ways that gift / stored value cards improve your bottom line:
- Prepayment advantage. A $100 gift certificate sale means $100 cash for your business today. Products or services are delivered by you well after payment is received.
- Reduced labor and administrative costs. Paper gift certificates are difficult to handle, process, and reconcile. Gift cards are easily stored, issued, and tracked. Transaction times are faster than any other exchange medium…just swipe the card to complete the purchase.
- Reduced loss from theft and fraud. Paper certificates are easily copied or altered. They are susceptible to theft, and must be kept secured, like cash. Gift cards have no value until they are activated, have a unique ID number, and are not susceptible to duplication.
- Breakage revenue. Studies show that the average customer leaves 15% of a gift card’s value unredeemed, and gift card programs are typically set up to leave this value on the card.
- Reduced loss from returns. When a customer returns merchandise, you have the option of offering a refund in the form of a gift card, ensuring that the value of the return stays with your business.
- Free advertising. Your company’s logo and marketing message is printed on every gift card sold. This is a form of advertising that your customers carry in their wallet or purse every day. Plastic cards and associated in-store merchandising also provide advertising at your business.
Are you a numbers person? View our Gift Card Quantitative Analysis.
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Gift Card Benefits - A Quantitative Analysis |
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The following analysis will help you understand why so many businesses deploy stored value card programs in their businesses. This hypothetical analysis and related assumptions may not reflect your business conditions.
Consider a single location business with an active gift card program. Over the course of 15 months, this business sells a total of 1255 gift cards and consumers redeem 1056 gift cards. As this example represents a “snap shot” in time; it is possible that the additional 199 gift cards are redeemed in time. This represents a concept that you are familiar with from running a business: Inventory. Except now, your customers have inventory, not you. |
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Monthly Sold |
Total Sold |
Monthly Redeemed |
Total Redeemed |
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October |
67 |
67 |
32 |
32 |
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November |
80 |
147 |
63 |
95 |
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December |
108 |
255 |
72 |
167 |
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January |
63 |
318 |
31 |
198 |
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February |
67 |
385 |
68 |
266 |
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March |
81 |
466 |
65 |
331 |
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April |
80 |
546 |
62 |
393 |
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May |
73 |
619 |
84 |
477 |
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June |
84 |
703 |
56 |
533 |
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July |
87 |
790 |
71 |
604 |
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August |
88 |
878 |
88 |
692 |
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September |
92 |
970 |
106 |
798 |
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October |
90 |
1060 |
81 |
879 |
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November |
94 |
1154 |
82 |
961 |
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December |
101 |
1255 |
95 |
1056 | | |
| Table 1: Monthly Cards Sold and Redeemed by Month | |
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Chart 1: Number of Cards Sold and Redeemed, Total Cards |
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As you can see in Chart 1, selling two to three gift cards per day builds a strong gift card portfolio. This scenario reflects an overall redemption rate of 85% - consistent with the industry average. Table 2 below extrapolates dollar values for the cards sold in Table 1 with an average gift card activation amount of $25, well below an estimated industry average of $50. |
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Monthly Purchased Amount |
Monthly Redeemed Amount |
Cumulative Prepaid Value |
Cumulative Redemption |
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October |
$1,675 |
$760 |
$1,675 |
$760 |
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November |
$2,000 |
$1,496 |
$3,675 |
$2,256 |
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December |
$2,700 |
$1,710 |
$6,375 |
$3,966 |
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January |
$1,575 |
$736 |
$7,950 |
$4,703 |
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February |
$1,675 |
$1,615 |
$9,625 |
$6,318 |
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March |
$2,025 |
$1,544 |
$11,650 |
$7,861 |
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April |
$2,000 |
$1,473 |
$13,650 |
$9,334 |
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May |
$1,825 |
$1,995 |
$15,475 |
$11,329 |
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June |
$2,100 |
$1,330 |
$17,575 |
$12,659 |
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July |
$2,175 |
$1,686 |
$19,750 |
$14,345 |
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August |
$2,200 |
$2,090 |
$21,950 |
$16,435 |
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September |
$2,300 |
$2,518 |
$24,250 |
$18,953 |
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October |
$2,250 |
$1,924 |
$26,500 |
$20,876 |
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November |
$2,350 |
$1,948 |
$28,850 |
$22,824 |
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December |
$2,525 |
$2,256 |
$31,375 |
$25,080 | |
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The cumulative prepaid value amount is calculated with a .95 spend rate – that is, a $25 gift card is redeemed but on average a customer leaves behind $1.25, which is less than the industry average of 10%. The difference between the value of the cumulative redemption and cumulative prepaid value in the final month of our example represents a 20% breakage rate (unredeemed value). In December, the final month of our analysis, gift cards represent a $31,375 prepayment value while only $25,080 has been redeemed by consumers.
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| Some gift card companies use breakage as a primary factor for implementing gift cards. Not us. Although breakage does happen – it alone is not good justification of a gift card program. If consumers can't find a way to spend a prepaid credit in your business, there must be something wrong!
Gift Cards by Profit
If your establishment is a “destination”, studies show that 80% of patrons will be specifically looking to purchase a gift card from you. Consumers expect that merchants will offer gift cards, and with the PatronPal solution on your side, you can effectively capture this market. If your business has a 25% gross margin, our example of a fully redeemed $30,000 gift card program represents $7,500 in gross profit – no breakage involved. This does not include gross profit from the 60% of consumers who will spend more than their gift card is worth.
Included in the $7,500 gross profit figure above is about 20% of impulse gift card purchases that is accomplished through effective in store marketing. 20% of $7,500 represents $1,500.
You’ll notice our analysis doesn’t include any transaction fees. That’s because with PatronPal running in a single store – there are none! Our multi-store solution also offers a one-time fee model. Internet connectivity between your stores is all that is required. Read more about the features of the PatronPal software.
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