PaymentsJournal
SUBSCRIBE
  • Analysts Coverage
  • Truth In Data
  • Podcasts
  • Videos
  • Industry Opinions
  • News
  • Resources
No Result
View All Result
PaymentsJournal
  • Analysts Coverage
  • Truth In Data
  • Podcasts
  • Videos
  • Industry Opinions
  • News
  • Resources
No Result
View All Result
PaymentsJournal
No Result
View All Result

Gas Rewards Points Give Some Gift Card Issuers Heartburn, But Three Is Greater Than Zero

Ben Jackson by Ben Jackson
May 24, 2012
in Uncategorized
0

542933

0
SHARES
0
VIEWS
Share on FacebookShare on TwitterShare on LinkedIn

Two sales boosting strategies – third-partygift card distribution and gas rewards points – have come intoconflict at gift card malls. Savvy consumers are turning to giftcards as a primary currency in order to take advantage of rewardspoints, but some retailers are saying the costs are getting toohigh.

A newsletter devoted to investing and savings, “The FranklinProsperity Report,” recently published a savings tip from one ofits readers that captured the essence of the dilemma facingretailers. Here is the crux of the letter:

“So if I know I’ll be spending $50 at Walmartand $50 at Target for example, I’ll buy those $50 gift cards at thegrocery store and get 400 reward points (a 40-cents-a-gallondiscount at the store’s gas pump) and use the gift cards for mypurchases at Walmart and Target instead of checks, cash, or creditcards. It makes me feel like a really smart shopper!”
Unfortunately, this strategy is making some prepaid issuers andrewards issuers feel like really dumb sellers. The reason for theirlow self-esteem is that they feel like they are giving theirmerchandise away too cheaply. Let’s combine those $50 gift cardsinto a $100 gift card and use a hypothetical situation to discoverwhy.

Imagine that a really smart shopper wants to buy something costing$100 from an electronics store. Being really smart, the shoppergoes to the grocery store and buys a $100 gift card and then takesthat card and redeems it as described. Along the way the ReallySmart Shopper collects a slew of gas points which get used upfilling the tank for the trip to the electronics store.

The math for the RSS is simple – everything is less expensive! Forthe issuer of the card and the retailer supplying the rewards, theequation is more complicated.

The issuer spent, let’s say 5 percent of the face value to get thatcard into distribution, and then it paid another 2 percent of thetransaction to process the gift card. Let’s further pretend thatthe margin on the $100 product is 10 percent. So, when the shopperbuys the item with the gift card bought at the grocery, the salemath goes like this:

$100 Sticker Price
– $90 Cost of Item
– $5 Cost of gift card in distribution
– $2 Cost of processing gift card transaction
Profit = $3 (when it was formerly $10)

For the retailer that sold the card and provided the gas points,there is a similar equation that needs to be worked out between themargin they earn on selling the card and the gas points receivedand used by the Really Smart Shopper.

As simple as this math is, however, it does not tell the wholestory. There are two primary complicating factors that keep thisfrom being an open and shut case.

  1. Increased shopping at the Issuer’s Store: Really Smart Shopperslike to get deals. They will go to great lengths to get a bargain -collecting multiple copies of Sunday papers for coupons, signing upfor multiple loyalty programs and promotions, and – mostimportantly – changing where they shop to get a deal. An issuer,then, needs to consider the competitive landscape when evaluatingthe benefits of third-party distribution in places that offerrewards. If buying one store’s gift cards provides gas points andthe item they want to buy, and they can’t get the gas points forgoing to the other store, then the really smart shoppers will buythe gift cards that get them the gas points. So while a thinnermargin is less desirable than a fatter one, any margin is betterthan no margin at all. Or, to put it in context of the equationabove, $3>$0.
  2. Over-Spending: All gift card issuers know that when a customerredeems a card, as a rule of thumb, they spend more than the facevalue of the card. Estimates on the average amount of overspendrange from one third to twice the face value of the card. Thismeans that if our RSS makes impulse buys, fails to budgetcorrectly, or justifies additional spend because s/he is savingmoney thanks to gas points, the gift card issuer stands to makeadditional sales. Let’s take another look at that equation.

So, beginning again with a $100 sticker price:

– $90 Cost of Item
– $5 Cost of gift card in distribution
– $2 Cost of processing gift card transaction
Profit = $3 (when it was formerly $10)

But now we need to add a second half to the total purchase. For thesake of discussion, let’s hold the margin steady at 10% andpresume, conservatively that the over-spend is half the face valueof the original purchase.

So now, we have a $50 sticker price:
– $45 cost of the item
– No transaction cost (assuming best case scenario of consumerpaying in cash)
Profit = $5

Putting the two together, we get a total profit of $8, with overhalf of that at the originally desired margin and the balance beingfunds likely won from a competitor.

This analysis just accounts for those Really Smart Shoppers who arebuying the cards for self-use, not those who buy them as gifts andtherefore cause new customers or incremental shops to come intoissuers’ stores.

The other item missing from this analysis is the qualitative piece.What is the value of having the brand in the card mall? What is thevalue of having the brand associated with getting a good deal? Doeshaving a connection in customers’ minds with getting a deal on gaslead them to think of the issuer as a place where they can get agood deal on other things? Does it lead to increased shopping andword of mouth recommendations? These are complicated questions thatcannot be answered simply, but they need to be part of theanalysis.

As issuers think about distribution strategies for their giftcards, they need together as much data as possible about thepurchase and redemption of their cards. They also need to take timeto understand the customer’s behavior. Once they have theinformation in hand, they can make an informed decision about thevalue of various channels.

Tags: Banking ChannelsCompliance and RegulationDebitMercator InsightsMerchant AcquiringMobile PaymentsPrepaidSelf Service and ConvenienceSocial Media
0
SHARES
0
VIEWS
Share on FacebookShare on TwitterShare on LinkedIn

    Analyst Coverage, Payments Data, and News Delivered Daily

    Sign up for the PaymentsJournal Newsletter to get exclusive insight and data from Mercator Advisory Group analysts and industry professionals.

    Must Reads

    Why Businesses Need to Adopt Real-Time Payments as a Competitive Differentiator

    Why Businesses Need to Adopt Real-Time Payments as a Competitive Differentiator

    January 27, 2023
    faster payments

    Faster Payments Are Set to Revolutionize Modern Digital Payments

    January 26, 2023
    How AI can Help Manage Payments Risk in 2023

    How AI can Help Manage Payments Risk in 2023

    January 25, 2023
    cross-border payments

    How to Implement Effective and Innovative Cross-Border Payment Strategies

    January 24, 2023
    credit card experiences, digital payments, b2b payments

    Will Consumer-to-Business Payment Trends Drive B2B Global Growth in 2023?

    January 23, 2023
    Faster Payments Faster Identity Verification, connected car, payments

    2023 Predictions: Authentication, Digital Identity, and In-Car Payments

    January 20, 2023
    bank data

    Interconnectivity, Data Sharing, and Security Are Vital for Banks to Thrive

    January 19, 2023
    B2B Payments, cryptocurrency

    Crypto as a Practical Solution to B2B Payments

    January 18, 2023

    • Advertise With Us
    • About Us
    • Terms of Use
    • Privacy Policy
    • Subscribe
    ADVERTISEMENT
    • Analysts Coverage
    • Truth In Data
    • Podcasts
    • Videos
    • Industry Opinions
    • News
    • Resources

    © 2022 PaymentsJournal.com

    • Analysts Coverage
    • Truth In Data
    • Podcasts
    • Industry Opinions
    • Faster Payments
    • News
    • Jobs
    • Events
    No Result
    View All Result

      Register to download the Brighterion eBook - The power of today’s market-ready AI to reduce transaction fraud