This post is the second of our four part series on the state of gifting. Read our first one here.
In our last blog post, we discussed the importance of gifting and why it increasingly matters to retailers. In this post, we’ll take a deeper look at gift cards as the go-to-solution for meeting gifting demand, specifically focusing on customer’s motivation behind giving gift cards and explaining the behavioral economics that illustrates the conflicted feelings customers have toward gift cards.
In 1988, American Express first introduced the concept of gift vouchers. A few years later, physical gift cards were offered by Blockbuster Entertainment and Neiman Marcus in an attempt to combat the problem of gift certificate counterfeiting. Fast forward to today, the gift card industry has evolved into a massive $118 billion industry. Those staggering sales figures are hard to argue with, and are one of the driving reasons that retailers look to gift cards as their primary gifting solution. Gift cards provide flexibility and immediacy, and offer customers the ability to gift a brand (if not a specific product). These benefits are among the reasons gift cards are the most popular gift in the United States today.
However, the sales numbers don’t mesh with what we know about the behavioral effect of gift cards. We recently shared our insights into research done by behavioral economist Prof. Dan Ariely and Kristen Berman, the founders of Irrational Labs about how attaching a monetary value to a gift can make it seem transactional rather than social and thoughtful. Imagine a spectrum that covers relationship interactions, with one extreme of the spectrum being Social and the other extreme being Financial. Gifts are naturally on the Social side of the spectrum; they reinforce our human and social connectivity with one another. In contrast, Financial relationships tend to reduce human interaction to a transaction. Call centers for instance are not Social, as they are about plodding through a customer queue as quickly and efficiently as possible. Time and efficiency equates to money in this case.
Behavioral economics tells us that when a monetary value is associated with a gift, it moves from the Social side of the spectrum to the Financial side. That matches how people give real gifts today. Just think, when was the last time you gave someone a gift without triple checking that you’ve removed the price tag?
So how do we reconcile the behavioral aspect of gifts with the overwhelming popularity of gift cards? An article published by First Data has segmented gift card buyers into 5 distinct groups: Convenience Shoppers (who value time savings and convenience), Budget Tamers (who buy gift cards as a way to manage their budget), Helpful Husbands (who buys gift cards mostly for their children), Card Enthusiasts (who enjoy receiving gift cards as gift as it provides them the freedom to purchase something they like) and the Last Resort gift card buyers (reluctant buyers who find gift cards to be an impersonal, “last resort” gift).
Figure 1: Segment Distribution of Gift Card Customers (First Data and Market Strategies International)
An immediate insight from this report is that the Budget Tamers, who make up 16% of gift card purchasers, does not apply to what Prof. Ariely teaches us about the perception of gift cards because they are not buying gift cards as gifts! The Budget Tamers are merely leveraging gift cards as means to control their own spending. In other words, there is an approximate $18 billion that can’t really be considered part of the gifting industry, and increasing the appeal of gift cards for this group would require a different set of marketing messages that aren’t gift-oriented.
The insights behind the aptly named Convenience Shoppers and Last Resort is where we can really begin to understand the conflict between the perception of gift cards as an impersonal gift and the sheer convenience as a means to a gifting end. The popularity of gift cards among these two segments can be attributed to the changing behavioral trends we see across nearly all of society – people now value time and convenience more than ever before, and gift cards simplify the gift shopping process. Givers do not have to put much thought into the gift and can still make the selection of the choice of gift card, giving the impression that they’ve given thought to choosing the gift.
As a result, it is not surprising why Last Resort customers in many cases should be reluctant to get gift cards for fear of being viewed as less thoughtful by the recipient. Yet, even with this struggle, they currently make up a substantial 18% of total gift card buyers. The combined market for these two groups of customers is 35%, which is a hefty $41 billion of the gift card industry. The advantages of the gift card purchases for these two groups overcome many of the drawbacks. But that also begs the question – would these groups consist of many more additional new shoppers if retailers were able to come up with innovative ways to make gift cards more personal and convenient, essentially catering to customers that do not currently feel comfortable buying a gift card at the last minute.
Unraveling the different behaviors that drive gift card purchases is an opportunity for increased sales if better strategies can be employed to target underserved segments. But we shouldn’t forget the importance of the Gift Card Enthusiast group. This segment represents 24% of all gift card purchasers, and are customers who genuinely like to give and receive gift cards. As gifting evolves and the market increases (especially for online gifting), it is crucial that retailers understand and offer innovative technologies and experiences that continually appeal to the Gift Card Enthusiasts, while also converting a reluctant purchaser, or even more excitingly – convert a brand new customer, into a Gifting Enthusiast.
In the next post, we will expand on how retailers can tap into the disruption taking place in the digital gifting industry to offer gifting experiences that delight and drive sales.