Coupons vs Gift Cards

I read a Quora question that asked "How do the economics of gift cards compare to coupons for retailers?" Since I've worked a bit in the gift card and payments space* and am super nerdy when it comes to business models and other behavioral incentives,** I wrote a lengthy answer and copy-pasted it below:

Revenue

From a revenue perspective, it depends on the size of the transaction to which the gift card or coupon is applied. Most gift cards don't change the amount of revenue a retailer receives. That is to say, there is no discount given with the gift card so a $50 gift card represents $50 in revenue to the retailer. The retailer may pay for distribution of the gift card, in the form of a discount to face value, but this is a separate question.*** From an accounting perspective I don't know if the retailer can recognize revenue at the time the gift card is sold or has to wait until it is spent. A coupon cuts into their revenue, as by definition it is a reduction in what the customer would otherwise have paid for the same items.

The above, of course, assumes that the customer would have bought the same items at full price regardless of whether an incentive (gift card or coupon) was offered. There is a lot of research and writing on how gift cards and coupons affect purchasing behavior, but that is beyond the scope of this question. What I have anecdotally observed is that versus gift cards, coupons tend to drive more spend outside of the item on which the coupon is used. I.e. I'm more likely to walk into a store to use a coupon and find myself buying more things than just what the coupon is for than I am to do the same with a gift card. To use one example, if I buy $50 of goods in a store and use a $10 coupon, the coupon will directly reduce revenue to the retailer by $10, but it may have indirectly increased revenue by $40. The real question on the use of coupons and other discounts is not their effect on current-period revenue but their effect on margins and as a customer acquisition tool (see for example AT&T's argument that while it loses money on each iPhone it sells at a discount to what it buys them at, it makes up for that loss by the lifetime value of an iPhone subscriber).

With the gift card in fact I may never spend the full value of the gift card, a phenomenon called breakage which benefits the retailer and is built into the business model of the gift card industry.

Balance Sheet

Coupons do not generally affect the balance sheet. Gift cards on the other hand represent a liability, as their balance is indeed owed to the gift card holders, much like a bank deposit. To continue the bank deposit analogy, it is unlikely that all gift card holders would ask for what is owed to them at once. The exception would be a run on a bank, or in the case of a retailer, fear of a bankruptcy. For this reason retailers whose outstanding gift card liabilities represent a material part of their assets should disclose not only the size of this liability but how quickly they expect it to be redeemed (I don't know if this is actually required by the SEC).

The outstanding liability is one reason that gift cards expire after a certain period. One can imagine an extreme case for an older retailer that if there were no expiry date, the sum of all of the gift cards ever issued that were lost or otherwise not redeemed might end up being more than the rest of the retailer's balance sheet! (the other reason is the breakage component of the gift card business model that is mentioned above)

Which Is Better for the Retailer

The answer to this one, like all good questions, is "it depends." This is really a narrower form of the question "What is a good pricing strategy?"

As Aditya points out, a gift card preserves brand equity better for luxury or higher end brands. On the other hand, for a retailer whose brand positioning includes being low cost - e.g. Walmart, T-Mobile, most grocery stores and pharmacies - a coupon might enhance their image.

For more directly financial advantages to each form of shopping incentive, the answer is completely dependent on the particulars of the campaign, including the size of the coupon/gift card, the nature of the incentive, the item or items being discounted, the distribution channel, etc. For example, a coupon can be for a percentage vs fixed discount; for a particular item vs run of store; have variable expiration dates; have a minimum spend to trigger the coupon (e.g. $10 off your purchase of $100 or more). 

--

* I helped Univision launch their gift card in addition to broader experience w/ other forms of payments.


** Because isn't that what business models really are - ways of influencing consumer behavior?


*** If you are interested, this is referred to as B2B gift cards - as opposed to B2C that are sold directly by the retailer to the consumer - and includes channels such as employee incentives (when a corporation buys gift cards to give their employees), gift card malls (online or offline locations that offer a wide selection of gift cards in one place. You'll often see these in drug stores near the checkout areas), and scrip (gift cards used as fundraising solutions, wherein community organizations such as schools buys gift cards at a discount and then resell them to community members at face value, collecting the difference as a donation). All of these channels share the characteristic that there is a wholesale buyer of the cards, who receives an appropriate wholesale discount.

Amazon Arbitrage: Part 2

A couple of weeks ago I wrote a post called "Amazon Arbitrage" about how I found an item that was $70 pre-shipping on Amazon.com for $32 post-shipping on Amazon.co.uk.  Turns out the joke's on me.

I got an email this morning informing me that Amazon was "unable" to obtain the book, which was just published in June.

Apparently sales they must have not done a lot of sales because it is ranked #1,005,832 on Amazon.com and #137,153 on Amazon.co.uk.  By comparison, Man Walks into a Pub: A Sociable History of Beer, also by Pete Brown ranked #395,371 in the US and #11,254 in the UK.  (It is also #6 under the category of Books > Food & Drink > Drinks & Beverages > Beer, which we don't even have in the US).

Full text is below:
---------------------

Dear Customer,

Greetings from Amazon.co.uk.

We regret to inform you that we have been unable to obtain the following item:

 Pete Brown "Hops and Glory: One Man's Search for the Beer That Built the British Empire"

This item has now been cancelled from your order #203-2653883-6631506 and we can confirm that you have not been charged for it.

We are no longer able to offer this item for sale. Our supplier has informed us that this item has been discontinued and is no longer available.

Please accept our apologies for any disappointment or inconvenience caused.

If you took advantage of a promotional offer when placing this order, this cancellation may affect your order's eligibility for that offer.  If you discover this to be the case, please contact customer service so that we may investigate.  You can send an e-mail to customer service from the following URL:

http://www.amazon.co.uk/contact-us

This item may be available from an Amazon.co.uk Marketplace seller. The availability of the item will be indicated in a blue box that says "More Buying Choices" on the top right-hand side of the product's information page. The links in this box lead to lists of new, used, refurbished and collectable copies of that particular item. To buy the item click the yellow "Buy from Seller" button and fill in the requested information to complete your purchase.

To view the current status and the costs associated with your order, please visit Your Account (http://www.amazon.co.uk/your-account).

Thank you for shopping at Amazon.co.uk, we hope to see you again.

Please note: This e-mail was sent from a notification-only address that
cannot accept incoming e-mail. Please do not reply to this message.

Sincerely,

Customer Service Department
Amazon.co.uk
http://www.amazon.co.uk

Amazon Arbitrage

It turns out the same item might have a completely different price at Amazon.com and Amazon.co.uk (or presumably any one of Amazon's other five country sites).  I'm not talking about a few dollar or percentage points either: I recently purchased Hops and Glory: One Man's Search for the Beer That Built the British Empire, as a chanukah present for one of my beer-loving friends.  The page that suggested it provided a link to Amazon.co.uk, which I thought was odd because it is a US-based site.  Searching for the same book on Amazon.com I found the following amazing result:  The Amazon.com price was more than twice as expensive, even after shipping was factored in.  See pictures below (note that the UK price includes shipping and gift-wrapping:

In this global era, when accessing international catalogs (websites) requires only the conscious effort to do so, it makes you wonder what else you could save money on by ordering from abroad (and whether there isn't a business idea here).