Monday, June 20, 2011

Gift Certificates

Gift Certificates are a great deal for retailers.  What about consumers?

Gift certificates or gift cards have proliferated in the last decade.  And oftentimes they are a cash cow for retailers.  Why is this?

As one reader noted, some coin counting devices will issue gift certificates to related businesses at full face value of the coins.  The math is simple.  If you get a gift certificate for $25 (which is not really a "gift" - you paid for it) chances are, you will spend more than that at the participating store.   Very few people want to spend $19 on a $25 gift card.  So in addition to promoting consumption, it promotes consuming more.

And if the consumer spends less - well that is gravy - far better than the 5% fee than the coin counter would charge.   Either way, they win.

Discover used a similar deal with their cash-back bonus.  If you want your cash back in cash - you have to take it in $50 increments, and waste the rest.  Or, you can get back more as a gift certificate - which a participating retailer will gladly provide - they get a customer, discover pays out less money.

And a not-so-dirty-little-secret of the gift card business is that many are never redeemed at all.  As a result, the company issuing the gift certificate pays out $75 in goods and services for every $100 in takes in.  Why is this?  People lose gift cards, forget them, or put them in a drawer and they expire.  Or they just don't feel like using them for weird reasons ("I just don't like using them" one consumer says, very illogically - perhaps for status reasons?).

So it is no surprise that these cards have taken off like a rocket and that nearly every retail store pushes them.  But are they a good deal for you, the consumer?  I think not.

Why is this?  It violates Bob's first law of consumerism:  The more complicated you can make any transaction, the easier it is to snooker the consumer.

Here, we are taking a simple transaction - handing over cash for goods - and adding a layer or two of complexity and rules.  You have to pay for the gift card or certificate (and some places charge handling fees for this).  Next, you have to keep the card until you use it - without losing it or losing track of its terms and expiration date - if it has one.  And then you have to use the card for at least face value, so as to maximize your benefit (many will cash out only at face value, and if you spend less, you lose the difference.  Others work like a debit card, but you have to spend to the limit to "use it all").  Spending exactly $25 is tough to do.

So right off the bat, we have another financial instrument (and that is what it is) to carry around in our wallet, in addition to cash, debit cards, credit cards (hopefully few!) and the like.  And like with a credit card, you have to know the rules of the instrument and play by them, or lose everything.  You let a gift certificate expire, and you lose it all.

And gift certificates encourage consumption.  You get a gift certificate to a restaurant.  Great.  But it expires next month!  Well, do we go to the restaurant and have a meal, or stay home and eat a TV dinner?  If the financial instrument in question was cash, well, you'd make a decision based on what you want to do.

But with the certificate, it is "Well, we'd better go, before it expires" - and what are you doing now?  Yea, it is like shopping - you are making a transaction, not based on the underlying bargain, but on ancillary indicia.  And chances are, you'll spend more than the certificate amount, so you end up spending money where you never intended to.

Now, this doesn't mean these are always bad things.  If Dad always needs new fishing gear, a gift certificate to Bass Pro Shop will certainly go to good use.  And so on down the line.  But it does add a layer of complexity to a financial transaction - particularly when the person you are "gifting" is yourself - through cash-back bonus cash-ins or coin-counter gift certificates or coupons.  And in that regard, they are sort of like Groupon coupons, in that you pay money and basically buy yourself a very specific gift certificate.

You cannot shop your way to wealth.  And taking a gift certificate in place of cash is not necessarily a smart move, if it encourages consumption or promotes shopping or dining out.  Gift certificates can make good gifts - for other people.  But think about whether it really is smart to go after these for yourself as bonus doo-dads from a credit card or a coin counting machine.

The simpler you can make your finances, the easier it is to manage them!  And let's face it, most Americans - most of US - do a lousy job of managing our finances as it is!

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