By Theresa McEndree, Blackhawk Engagement Solutions
Marketers have trained consumers to seek out deals and promotions, and with unlimited technology at their fingertips consumers are working incredibly hard to find the best deal.
We’re a nation of deal-seekers. That’s long been the case, but today it’s more pronounced. As marketers, we’ve trained consumers to seek out deals and promotions. With unlimited technology at their fingertips – the smartphone is turning everyone into a professional shopper – consumers are working incredibly hard to find the best deal.
That’s scary to retailers. Are we in an inevitable race to the bottom?
I don’t think so. Quite the contrary; we're in a perfect promotional storm, in which gift cards can be the centerpiece of an overall loyalty strategy that attracts deal-seekers without sacrificing profit margins — and while maximizing customer data collection to boot.
So what about gift cards?
Clients frequently ask us, “What’s the right reward?” Our response often starts with another question: What rewards are consumers purchasing for themselves? One popular answer, getting more popular by the year, is gift cards.
In 2009, the total loaded on closed-loop (gift) cards in the U.S. was $225 billion. By 2016, that had grown to $353 billion, with $372 billion projected for 2018. That’s a clear sign of consumer acceptance and adoption. Open-loop cards show similar growth, with $133 billion in 2009, projected to $343 billion in 2018, according to forecasts from Mercator Advisory Group.
We also get questions about e-gifts. Blackhawk’s research has found that most consumers prefer plastic cards — there’s just something comforting about holding a real, tangible reward in your hands — but e-gifts are also on the way up. Spending is expected to triple in five years, from $5.5 billion three years ago to a projected $18 billion in 2018, according to research by HowStuffWorks, a division of Infospace. So gift cards work. But how do you best use them for more effective customer acquisition and loyalty?
Play money
Retailers love gift cards as much as consumers do. The profitability, ROI and long-tail customer value of gift cards, especially when they’re used in promotions like loyalty programs, can be substantial. One reason may be the first rule of gift cards: Look at the overspend. Consumers tend to see gift cards as play money, or a bonus. Spending more than the card’s value doesn’t really count, since the gift card was “free money” anyway.
And overspend consumers do – a lot. Research by CEB TowerGroup indicates that not only do 65 percent of gift card users overspend, but they do so at a rate of 38% over face value. Interestingly, as gift card popularity grows, so does consumers’ willingness to overspend. Research on prepaid consumer behavior by First Data shows that the average amount of overspend has dramatically increased in just three years, from $20.79 in 2013 to $27.29 last year.
The deal-seeking mentality
For today’s consumer, price is more influential than any other factor. In studies conducted by Blackhawk over the past several years, consumers identified price as the factor with the greatest effect on their purchasing behavior, easily outdistancing quality, brand or availability. Similarly, more than three of four would drive up to 10 minutes out of their way for a $10 rebate on a $50 item. Eight of 10 consumers look for deals before they go shopping. This mentality holds for all age and income groups, according to Young Rubicam shopper research.
Contemporary consumers have a reputation for wanting instant gratification, but what they want more than getting it fast is getting it cheap. Having helped create this psychological need, the trick for loyalty marketers becomes finding a way to capitalize: to give customers something of value, but also get something in return.
Win-win-win
Which brings us back to the perfect promotional storm. It’s pairing the consumer’s love of gift cards with a deal-seeking mentality, then adding in all of the benefits to the retailer. We call that a win-win-win scenario.
Here’s an example. Your new promotion offers a $10 gift card on a $100 purchase of pots and pans. You can structure the retail customer experience for an advantageous impact like this:
- Consumer buys advertised item.
- Consumer visits promotion website to redeem offer.
- Consumer receives gift card or e-gift.
- Consumer returns to store and shops.
This process presents an opportunity for incremental loyalty. You’ve brought a customer in, collected their data, sent them out with a gift card, and they’re going to come back to spend — and possibly overspend. As a result, you now know:
- That they bought pots and pans.
- That they responded to a gift card promotion.
- Who they are.
- What else they purchased.
This is a robust data set for remarketing to this shopper, all thanks to a $10 gift card.
Why gift cards beat instant discounts
Gift cards provide better promotional economics than instant discounts.
When you run the same promotion with a $10 discount, you’re giving that discount to 100 percent of the consumers who buy the product. That includes everyone who would have purchased it at $100, plus those who only wanted it for $90. There’s no separation of the price-sensitive from the price-insensitive; either way, they get the discount.
When you drive people to redeem, you’ll always have some non-redemption, so you extend your promotional budget. But when shoppers do redeem, you receive enhanced customer data. You can collect the information you want (reviews, likes, etc.) and then connect it to your other digital initiatives. Plus, that $10 is coming back to you, along with at least $3.80 in overspend. Conversely, the instant discount benefits customers you may never see again, and gives away $10 you will probably never get back.
Doing the math
All promotions come down to the numbers. Fortunately, doing the math is easy when it comes to using gift cards.
Here’s another example. Let’s suppose the promotion is a $100 purchase with a $25 gift card. The breakdown:
- $100 purchase.
- $25 gift card for those who redeem (usually well under 100%).
- $25 spendback.
- $9.50 overspend (38%).
- CRM data.
The cost of acquiring CRM data will vary, but let’s assume $90 per customer as a general rule of thumb. Add it all up and you arrive at an approximate $200 total value per customer for those who redeem.
Again, that’s a lot of heavy lifting done by a gift card.
Loyalty marketers don’t always give gift cards a lot of consideration as a mainstay of consumer loyalty programs. I hope this article gives you reason to take another look at gift cards as a valuable and effective tool in your promotional toolbox.
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