The power of choice – an inside look at fixing gift card breakage rates

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It’s a complicated topic in the Gift Card market, breakage rates (unredeemed gift cards) are under scrutiny with Gocompare reporting 1 in 6 brits having lost out after their gift card expired, and the Daily Mail getting a bit excited about retailers and their expiry date scheming.

Question is……… why is this becoming a subject of debate now, and what can be done to ensure consumers get real value from gift cards?

The argument put forward portrays most (not all) retailers as having gift cards that expire too quickly, leaving them to make a healthy profit from the remaining cash (breakage) and the consumer holding a useless piece of plastic.

According to the UKGCVA the gift card market is valued at £5.4bn, and considering an industry average of 2-20% non-redemption (breakage), profits from unused gift cards are somewhere in the region of £100m to £1.08bn.

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Before we reach for the pitch forks and march on our local retailer let’s consider some of the different types of retailers and the gift cards they make available.

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In order to do this I’ve broken ‘retailers’ into 2 different types.  Firstly, the multi vertical retailer that sells everything from food through to electrical items, and the single vertical retailer that has one product, typically an event or entertainment product.

The multi vertical retailer has thousands of products for customers to choose from, in varying price ranges from food (~£5) to electrical items (~£1000).

This gives a consumer allot of choice when they’re redeeming their gift card, and often means that they’ll ‘top up’ the value with additional cash.

For the multi vertical retailer long validity on gift cards is beneficial, in fact it’s optimal.  These Retailers see more value from redemptions than breakage, to reflect this they’re increasing the time a customer has to redeem their gift card (in some cases up to 10 years).

The single vertical retailer on the other hand has one product, which is the same price or value as the gift card they put to market.

When a consumer redeems a single vertical gift card, it covers 100% of their purchase so they don’t spend any extra cash value, or leave any value remaining on the gift card.

In a 100% redemption scenario the single vertical retailer will lose money, so it may not be in their best interest to have all their gift cards redeemed.

This begins to give weight to the argument, and raises an important question.

How do you provide real value to the consumer?

We have to start by considering individual purchase decisions and preference.  Just because someone has been given a gift card it doesn’t mean they are going to redeem it, people forget or simply make the choice not to redeem.

I’ve personally had plenty of gift cards expire on me because I simply wasn’t interested in what they entitled me to.

Now, there is another argument and it comes down to how information is provided to a consumer.  There are some cases where it’s difficult to establish when a gift card is going to expire often leading to disspointment.

So what can happen to make a positive change in the Gift Card market, reduce breakage rates and provide real value to the consumer?

It’s tricky when you consider a gift card being sent from one person to another as a gift, or a business using a single gift card as an incentive.  Here the giver makes an assumption that the receiver wants what is offered.

However, In the case of b2b consumer incentive programs (50% of the market) there is an answer, and it’s pretty simple.

Like the multi vertical retailer, the answer lies in providing choice to the consumer.

By receiveing a choice of incentive from a range of different brands and product verticals, the consumer is more likely to find the incentive that will make them ‘buy now’, and far more likely to redeem the gift card.

They might have started planning to use their chosen incentive even before completing an order.

Where this becomes even more powerful is the use of digital eGift cards emailed directly to the end user with all the links and instructions they need for redemption, validity and a code they can use online.

Now they’re armed with all the information they need to get the value they deserve from the gift card, and the retailers done everything they can in order to make redemption simple, creating real value for a pre qualified customer.

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Summary

Retailers want consumers to redeem their gift cards and they’re giving them more time to do so across the board, but further change and better information is required.

Choice will ensure consumers receive products that are truly valuable to them, and make them more likely to redeem and reduce breakage rates.

In 2014, UK Gift Card & Voucher Association (UKGCVA) members recorded an increase in annual sales of 8.07%. Taking the UKGCVA membership base as a representative of the whole market, the total market is valued at £5.4bn.

UK Gift Card & Voucher Association (UKGCVA) sees an average 50/50 market split b2b/b2c making b2b gift card sales worth £2.7bn.

Useful links and references

UKGCVA – The UK Gift Card and Voucher Association

Loyalty Bay – increase EVERY conversion metric on your website including sales, signups and referrals.

Mail Online – The stores making millions from gift vouchers you forget to spend. Didn’t know there’s a use-by date? Well, we’ve got bad news…

Gocompare – 1 in 6 Brits has lost money on gift cards and vouchers

Author: William Roberts

Founder and CEO of Loyalty Bay

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