What Is Gift Card Business Model And How Does It Work?

There are quite a few steps or loops available in a gift card business model. Generally, a gift card is accepted or can be used anywhere those are accepted. There are two types of gift cards available open-loop cards and closed-loop cards. An example of an open-loop card is a Visa gift card and this type of card is accepted anywhere. On the other hand, closed-loop cards usually work at one store, or at one corporation.

Key Takeaways

• Gift cards are like a prepaid debit cards and they come with a specific amount of money
• For customers, a gift card is like free money but for the store, the entire amount is considered revenue when the gift card is used
• Gift cards are available in two types: open-loop and closed-loop
• The business model of “Gift card business” consists of “Referred Customers”, “Unspent Balances & Fees”, “Overspend Balance”, etc.

How Business Makes Money From Gift Cards

There are costs for making gift cards but for a customer $25 gift card worth the exact amount. So the question is how a business generates profit from the cards. Well, there are many ways business makes money from gift cards. Let’s check them out!

Referred Customers

The use of gift cards let loyal customers refer other potential customers to a business. This is a great way to build brand value for a small business. If a customer buys a gift card then he/she will use the card to buy a product, service, or whatever the business offers. Moreover, a gift card provides an incentive for the recipient therefore the customer will visit the issuing merchant to buy the product or test it. If the customer doesn’t like the product then they can buy another product. The business can margin the cost of the new product with the cost of a gift card. So a gift card is a low-cost, low-risk proposition for a business that is looking to drive new customers. So a gift card can be used as a cheap alternative to traditional advertising methods.

Unspent Balances & Fees

Most open-loop card issuers charge a small, up-front fee to cover the cost of production and processing fees. This fact is not true for the closed-loop card because it lives on the brand’s internal systems. So there are no third-party fees for closed-loop cards. Therefore, most closed-loop cards are sold at face value. Now the question is how an open-loop card made up for the production cost. Well, companies generally made up the production of gift cards from the margins of the purchased product. Many businesses charge a small number of fees if the gift card is redeemed after a few years from the purchase. So it is clear that when a customer buys something using a gift card, businesses make a small profit.

Customers Who Overspend the Balance

Usually, gift cards are available in neatly rounded balances, like $25, $50, or $100 dollars. However, most of the time the customers find something else they want and then pay a little more money to ensure they spend the entire amount of the gift card in one visit. It means the business can earn extra marginal revenue from a gift cardholder.

The Importance Of Gift Cards For Businesses

A study shows businesses with gift card programs generate more sales compared to businesses that don’t have a gift card program. So it’s quite clear that gift cards increase the sales of a business. Moreover, gift cards are convenient for the customers and it’s also a marketing tool. Below are some reasons your business should have a gift card program.

Compete With National Stores

If you are the owner of a small store then gift cards let you compete with the large and national stores. Nowadays, customers prefer gift cards when it comes to gift-giving because they value convenience over uniqueness. Moreover, gifts card are easier to buy and you can also redeem them online which is very convenient. So if you have a store and want to increase the sales volume then make sure you have gift cards available in your store, on your website, and in other possible locations.

Outsell Gift Certificates

For security reasons, many store owners were not fond of gift certificates and if they have the gift option they would try to keep their stash of gift certificates out of sight, in the cash register, usually, in a lockbox under the counter. Some business owners advertise gift certificates with a sign near the checkout line while others wait until a customer asks for it. A recent survey shows businesses that switch from paper gift certificates to plastic gift cards increase gift card sales anywhere from 35% to 50% and in some cases, it’s up to 100%.

Get The Uplift

When customers shop with gift cards they are less price-sensitive compared to when they are shopping with real money. Most of the time customers pay full price for products and services rather than go through the clearance racks and stick to the deals. A study from First Data showed 72% of gift card shoppers spent more than the original gift card value when redeeming their cards. It also reported, “When redeeming their gift card, 25% purchased an item they had not planned to spend money on, 8% bought a more expensive version of an item they already planned to buy, and 3% purchased an item from a store they don’t normally shop at for such an item.”

Bring In New Customers

A well-thought gift card program has the potential to bring at least two new customers to your business, one of them is the gift card giver, and the other one is the gift card receiver. A survey shows about 11% of gift card receivers had never visited the store before and their first visit was because of the gift card they received from their relatives, friends, co-workers, etc. The gift card enables rewards for both the receiver and the recipient and encourages return visits to the stores.

Build Relationships

A gift card program lets the business owner create a strong relationship with both the gift-givers and receivers in a new way. A card recipient may visit the store to activate the card or redeem the card, check the balance, reload the card, see what’s on sale, check store hours, and many more. So a gift card opens a gate of reasons for a customer to visit the store repeatedly. Moreover, if the card is tied to a loyalty program, then you can reward the customers with each visit, purchase, and reload. This strategy will lead to repeat business and increase brand fans.

List Of Gift Card Program Options For Business Owners

Closed-Loop Program from Merchant Bank

Pros

1. Free or Inexpensive

2. Easily Integrated

3. Works Across Locations

Cons

1. Limited Card Design

2. Few Features

3. No eGift Card or Social

4. Locked In

Closed-Loop Program from Gift Card Vendor

Pros

1. Custom Card Designs

2. eGift Cards and Social

3. Reporting Tools

4. Flexibility

Cons

1. More Costly

2. Integration

3. Commitment

Open-Loop Restricted Card Program

Pros

1. No Integration

2. Third-party Fulfillment

3. Low Cost

4. Works with Other Programs

5. Increased Visibility

6. Merchants Can Band Together

7. Merchants Can Limit Buying

8. Great for Online-Only

Cons

1. Not Available in Store

2. Older Credit Card Machines

Open-Loop Unrestricted Card Program

Pros

1. More Convenient

2. Works with Other Programs

3. Increased Visibility

Cons

1. Not Available in Store

2. Doesn’t Have to Be Used at Your Store

3. Older Credit Card Machines

Open-Loop Branded Prepaid Card

Pros

1. Small Orders

Cons

1. Open-loop       

Types Of Gift Cards

There are various types of gift cards available. The three most commonly used gift cards are:

1. Electronic Gift Cards

2. Barcode Gift Cards

3. Magnetic-Stripe Gift Cards            

Electronic Gift Cards

This type of gift card is also known as a digital gift card or eGift card. This type of gift card is very easy to use and it provides more flexibility. Customers can buy this type of gift card online, send to friends and family members, and redeem the card from the official website of the store. Some electronic gift cards contain a numerical code that a customer can redeem from the terminal, like a regular credit card transaction. Another great feature of electronic gift cards is they don’t have any production cost.

Barcode Gift Cards

If you want to set up physical gift cards then these types of gift cards are your best option. Barcode gift cards will act as a unique account for the customer that uses it. That means you can easily search a customer’s information via their account. There is also an option available to reload this type of gift card once its balance becomes zero. This type of gift card is more popular for membership or customer loyalty cards.

Magnetic-Stripe Gift Cards

This type of gift card has superior data security therefore business owners prefer this type of card over barcode gift cards. They are also reloadable gift cards so the customers can easily load the card and reuse it whenever they want. This type of gift card works the same way as a debit or credit card. You have to swipe the card through the card machine and the amount gets automatically deducted from the customer’s account information stored on the magnetic stripe.

Final Thought

The gift card industry has a worth of $160 billion a year so it is indisputable that this is an extremely important business model regardless of your business size. The best part of a gift card is you don’t have to be a massive retailer or restaurateur to reap the benefits out of it. So, if you haven’t taken advantage of this functionality yet; then you are definitely losing a huge business opportunity as well as lagging behind your business competitors.    

References:

1. https://staxpayments.com/blog/how-offering-digital-gift-cards-can-help-support-your-business/
2. https://www.fisglobal.com/en/insights/merchant-solutions-worldpay/article/7-ways-gift-cards-can-benefit-your-business

Last Updated on October 6, 2022 by Magalie D.