Gift Card Recursion

April 14, 2011 3:06 PM

Why is letting our customers use gift cards to buy gift cards a bad idea? Or is it?

I work for a small online retail company and, in the course of doing some website usability QA, discovered that we allow customers to use gift cards to purchase other gift cards. This seems like a terrible idea to me, but I'm having a hard time articulating why. Is it in fact a terrible idea (for us as a company trying to make a profit)? Why or why not?

posted by anonymous to work & money (27 answers total)

Gift cards specifically from your company or generic gift cards?
posted by Max Power at 3:12 PM on April 14, 2011

Isn't it actually a brilliant idea? They already gave you the money--as long as it's a full price exchange everytime they're essentially just giving themselves a chance to lose or forget they have the card at essentially no cost to you.
posted by Potomac Avenue at 3:13 PM on April 14, 2011 [5 favorites]

Well, presumably you want to bring in actual revenue. In the first transaction, money -> gift card. The gift card may or may not be redeemed, if not, hey, profit! Or someone may use $13.47 of a $15 gift card and throw away $1.53 left on there. Profit. If the second transaction is gift card -> gift card...you just processed an online transaction, mailed out a new gift card, reset the timer on the possibility of gift card loss and thus free profit...in exchange for zero gross revenue increase.
posted by T.D. Strange at 3:13 PM on April 14, 2011 [6 favorites]

Do the gift cards have an expiration date? if so, you're allowing them to exchange an almost-expired one for a new one.
posted by drjimmy11 at 3:13 PM on April 14, 2011 [3 favorites]

Unless you fear some sort of scam, sell the darn gift cards. They don't cost you anything, and it's just another opportunity for customers to lose them and never redeem them, which is where the real profit is anyway.

(not a business guy)
posted by cccorlew at 3:15 PM on April 14, 2011

There is a cost associated with each gift card (picking, transaction costs, shipping maybe) with no profit to cover those costs.

In Canada gift cards can't expire but if they do in your jurisdiction then this would prevent expiration.

If you don't track which gift card was purchased by which gift card this would be a dandy way to launder money.
posted by Mitheral at 3:15 PM on April 14, 2011

If you have an overhead cost on the gift cards / certs (let's say 1%), but expect customers to buy merchandise with a 20% markup, you'll make 19% profit on a gift card purchase. Cycling through gift cards eats into your profit margin as you lose 1% every time the card cycles. Also, it will let any user circumvent expiry dates by buying a fresh gift card on the day the old one expires.
posted by benzenedream at 3:15 PM on April 14, 2011

Usually gift cards are handy for a retailer because the recipient will spend slightly more than what's on the card, or not use it (so the giver's handed you $50 in pure profit). If they're using them to buy gift cards, then there's no profit, you're just moving that initial $50 bucks around. If there's any kind of transaction cost to you, then there could be a loss there.
posted by Diablevert at 3:17 PM on April 14, 2011

No matter what, if I went to your store and was told that I couldn't but certain things with money that is only good at your store, I'd be pissed.

You'd have your $x amount of profit from the gift card I didn't use. But I wouldn't be going back so you wouldn't get any money from me. And I'd tell my friends (and possible places like Consumerist) how stupid your store is for not accepting your store's currency for your store's goods.
posted by theichibun at 3:18 PM on April 14, 2011 [5 favorites]

I think Diablevert has it. Let's say I have a $50 gift card. I don't like what your store is selling so I buy two $25 gift cards and give one of each to my sisters. Each of my sisters comes to your store and spends $50! So, without you having to do much of anything you got free direct marketing and made $50 profit on top of a $50 sale.
posted by amanda at 3:19 PM on April 14, 2011

The term in the trade is "breakage"--something north of 10% of gift cards go unredeemed.
posted by donovan at 3:34 PM on April 14, 2011

Money laundering?
posted by joshu at 3:51 PM on April 14, 2011 [2 favorites]

Let us say you ran a promotion that offered gift cards at a 10% discount. Someone can do this:

$90 cash/credit => $100 gift card
$100 gc => $111 gc
$111 gc => $123 gc
...
and so on.

This is the potential recursion you could run into. If you made sure you would never offer a discount for gift card purchase, then I think this should be ok.
posted by thewildgreen at 3:59 PM on April 14, 2011 [2 favorites]

Depending on how you're set up to include gift cards in your accounting, allowing gift cards to purchase other gift cards might or might not mess up your revenue recognition.
posted by jacquilynne at 4:10 PM on April 14, 2011 [2 favorites]

Are you looking at the theoretical, or real information here?

You may want to actually go back and look at the numbers and see how many people have actually purchased gift cards with other gift cards. Theoretically this is a bad idea as gift cards, I'm guessing, cost a business money. If you buy a gift card with a gift card, then you could make the argument you are losing money on the cost of the card.

However, if you are looking for real information to base a decision on whether or not to allow this, go back and see if you can find any instances of this. I'm guessing there are very few, if any.

As thewiledgreen states, if you have discounts on gift cards, then "yes," you will lose out on some money.
posted by TheBones at 4:40 PM on April 14, 2011

I would probably wait to gather some information on how often this happens. If once a year you have someone buying a gift card with a gift card, then (even though it's not profitable) it's a nice feature that you offer your customers.

If this happens once a day (or more frequently) then it's A) possibly money laundering or some sort of scam, and B) causing a not-insignificant financial drain.

In and of itself, the ability to buy a gift card with a gift card isn't a problem. But if that system gets abused, then it should be stopped.
posted by ErikaB at 5:25 PM on April 14, 2011

If I am given a 100 gift card to SuperSportsNStuff, I might want to use it to buy 4 25 cards for my nephews, since I don't need any Sports Stuff. Treat your customers well, they like it.
posted by theora55 at 5:48 PM on April 14, 2011 [4 favorites]

It seems to be a pretty standard retail policy to not to allow the purchase of gift cards with other gift cards. Whatever the problems you think it might cause, I think it would be better to have a consistent policy from the beginning versus changing it mid-stream so I'd be on the side of not allowing it to begin with. People get way more agintated if they think rights are being taken away from them (even if they never used them) than if they never had the rights at all.
posted by victoriab at 5:52 PM on April 14, 2011 [1 favorite]

*agitated*
posted by victoriab at 5:53 PM on April 14, 2011

At worst, charge a nominal fee for buying gift cards with gift cards -- one that most closely matches the cost to you of such an exchange.
posted by astrochimp at 6:41 PM on April 14, 2011

This is probably not your situation, however, way back in the olden days, around 2001, Indigo, the online bookstore, ran a promotion: Buy $25 in gift certificates and get a $5 gift certificate for yourself. The flaws in their brilliant promotion?

1. They allowed you to buy gift certificates with the gift certificate.
2. They allowed you to buy gift certificates for yourself.

So I bought myself a $25 gift certificate and got a $25 gift certificate that I paid for and $5 that I didn't. I used these to buy myself a $30 gift certificate. Then I used the proceeds to buy a $35 gift certificate, then a $40, then a $45 and THEN a $50 gift certificate. So with the $50 gift certificate, I got a $10 bonus, which I used to buy a $60 gift certificate and then used that plus the bonus to buy a $70 gift certificate. Then I used those to buy an $80 gift certificate, for which I got a $15 bonus. And so it went.

By the end of the promotion a few days later I had turned my $25 into a little under $300 in gift certificates. It would have been more if there hadn't been a few hours between ordering the gift certificate and receiving it by email.

Oddly, they never ran that promotion again.

So umm...think through WHY people would want to do this and see if you're losing here. If they're using it to break up gift cards (Turn $100 into four $25, then you probably win since they'll spend a little extra more four times instead of just once). If they're using it to combine, then you probably lose and there's no real benefit to them.
posted by If only I had a penguin... at 7:02 PM on April 14, 2011 [2 favorites]

Indigo now specifically disallows using gift cards to buy gift cards. It must be all your fault.
posted by jacquilynne at 7:22 PM on April 14, 2011 [1 favorite]

If only I had a penguin gave a good reason why you never discount or run promotions directly on gift cards (giving away gift cards works, as long as the conditions make the customer buy or do something is profitable or at least can't recursively be done, as in that example). Another problem is if you decided to discount gift cards, then the customer buys sale merchandise with it, they've really leveraged the discount too much.

Starbucks lets you do stuff at their stores (never tried it online) to consolidate gift cards, which is effectively buying or replenishing a gift card with another. I've never tried to take, for example, a $20 card and get 4 $5 cards. But they have taken gift cards I received and put those balances on my main black card that I use, without any fee for doing it. I can't think of a direct reason not to go either way, at least in person (my online reservation comes as my last point).

I'd agree with the reasoning that doing so is good customer service, could lead to more sales, etc. The costs of issuing the plastic is negligible and more than overwhelmed by the rule that gift cards build sales and are never 100% redeemed. Most gift cards paid for with cash don't expire, although some do have "inactive card fees" which I guess could be evaded by doing this. I think fees on gift cards of any kind are evil, so...

Here's my caveat about allowing online purchase of gift cards with gift cards:

- I'm using a hot credit card and I buy gift cards or gift certificate codes online at your store.
- 1-3 months later you get the chargeback when my victim discovers this.
- If I haven't used the gift cards, you can at least cancel them.
- If I've transferred the value around and around by doing some transactions where I bought gift cards with gift cards, I've clouded the issue. They could possibly be traced, but it's gotten harder.

I seem to remember that gift cards are frequently bought with hot credit cards. That is, a high proportion of the <1>
Having said all that, unless gift cards are some ridiculous proportion of your business, I think the benefits of allowing people to buy cards with cards outweigh the risks.
posted by randomkeystrike at 7:37 PM on April 14, 2011

I'm not an accountant, but I thought businesses didn't like outstanding gift cards on their books because they're a liability. So I guess buying a gift card with a gift card would me you wouldn't really get rid of the liability (until the second card was redeemed).
posted by sardonyx at 8:01 PM on April 14, 2011

I agree that it sounds somehow wrong to let people do this, but except for the discount leveraging that people mention above, I can't think of a reason not to allow it. For example, unless you are using some gift card service that charges you a fee, I don't see how running a gift card transaction costs any more than running a credit card transaction.

Except for one, and it is a minor one: when people buy gift cards, I believe accounting will tell you that you can't mark it as a "sale", but as some kind of cash inflow that you can't really use for anything. That costs you nothing, but letting people keep stringing that along increases the amount of time between when you got the cash and when you can record a sale.

randommonkeystrike makes a good point, but I'm not sure its going to be a problem in the real world, because I would think that one would want to convert the "hot" gift card into something else pretty quickly. I don't think you lose any money you wouldn't have already lost letting gift cards buy gift cards. Especially if you put some controls on them where the new card retains information about the old one.
posted by gjc at 8:08 PM on April 14, 2011

Your customers will think harder about breaking your promotions than you will.
posted by Blasdelb at 10:03 AM on April 15, 2011 [1 favorite]

How is this money laundering if someone buys the gift cards with gift cards? Explain this to me please - do you mean that the initial gift card would have been bought with dodgy money? If so, how does buying more gift cards 'launder' it?
posted by mippy at 10:03 AM on April 15, 2011