how do stores make money on gift cards
Stores make money on gift cards through several key strategies:
1. Immediate Revenue Recognition: When a customer purchases a gift card, the store receives the cash immediately, which contributes to their revenue even before the card is redeemed. This upfront payment can improve cash flow and help with inventory management.
2. Breakage: Not all gift cards are fully redeemed. Some customers may forget about them or lose them. The amount that goes unredeemed is known as “breakage.” Stores benefit from this because they retain the funds without providing goods or services in return.
3. Increased Sales: Gift cards often lead to additional spending. When customers redeem gift cards, they may spend more than the card’s value. For example, if someone has a $50 gift card, they might spend an extra $20 or more, increasing overall sales for the store.
4. Attracting New Customers: Gift cards can attract new customers who may not have shopped at the store before. If a person receives a gift card as a present, they may visit the store for the first time, potentially becoming a repeat customer.
5. Promotional Opportunities: Stores might use gift cards in promotions, offering bonuses or discounts on future purchases when customers buy gift cards. This can encourage more gift card sales and increase overall transaction amounts.
6. Brand Loyalty: Offering gift cards can enhance brand loyalty. Customers who receive gift cards are likely to think of the store when making future purchases, reinforcing their connection to the brand.
7. Cash Flow Management: Gift cards can help stores manage cash flow more effectively. The immediate influx of cash from gift card sales can be used for operational expenses or reinvested into the business until the cards are redeemed.
Overall, while gift cards provide a convenient option for consumers, they also represent a significant revenue opportunity for stores, leading to increased sales, improved cash flow, and enhanced customer loyalty.