False profits and the folly of gift card expiry dates

Gift cards should be a triple-win in principle: a happy retailer with cash in the bank, a relieved giver spared time, and a grateful recipient with welcome choice. But, like Black Friday, the gift card’s image may be losing its seasonal sheen.

Sales of gift cards net retailers an estimated annual £5.6 billion in the UK alone – and 10% of this is not even redeemed resulting in what appear like costless profits. With those sorts of figures, isn’t the bad PR around consumer protection worth putting up with?

The simple answer is no, it’s not. It’s not only about the poor consumer experience. It’s also bad for brands, who cannot know how many customers and givers resolve never to return or recommend. Gift cards are bad for long-term profits, too.

Businesses may be forced to extend or even remove expiry dates on gift cards (the UK government has already urged self-regulation) – but they should not wait for this. They should act now out of sheer self-interest.

Here’s why. Wasted gift cards are not extra profits. The short-term profits that are so visible are more than offset by the loss of long-term profits that remain hidden. Set them against brand damage or loss of the far greater gains that come from redeemed vouchers and they are what economists call a false economy. As a marketer, I prefer ‘false profits’.

Businesses should remove expiry dates entirely – not just extend them. Indeed, they should actively encourage redemption. Recipients are customers as much as purchasers in this case – possibly new customers that a brand has not had to do a thing to acquire.

Instead of waiting for regulators to rectify the situation – as they did with bank overdraft charges and mobile phone roaming fees – it’s time for brands to save themselves from their own follies.

Five reasons to act now

1. Consumers with a gift card spend on average 40% more in store or online than its face value – that’s a win worth chasing
2. Gift cards and vouchers introduce new customers. A referred customer can spend up to twice that of a regular customer over their lifetime
3. Gift card-referred customers are themselves up to twice as likely to refer than regular customers are
4. A bad experience can turn both recipients and embarrassed givers into brand detractors who gripe to family, friends, colleagues and even journalists, regulators and legislators. Social media makes this very easy and effective. This is a terrible ‘two for the price of one’
5. Handling expired vouchers and gift cards can drive up service costs and demoralise frontline employees with the disgruntled customers’ complaints and demands.

Star treatment – Michelin style?

Here is a case study of the impact of poor gift-card practice. It involves a certain Michelin Star restaurant and me. After two unsuccessful attempts to book a table within the one-year redemption period, I was told that the £250 voucher was no longer valid only two weeks after its expiration. We are talking over 100 Starbucks raspberry and coconut cakes, at least at today’s prices.

The restaurant eventually relented – so remains nameless – but only after gentle prodding including a threat of complaining to the Michelin Guide had gone all the way to the chef. Apparently, he had no knowledge of this practice, one he was horrified to learn about. It was certainly at odds with the great lengths his team went to delight and surprise customers in a positive way.

The chef admitted he would never cut costs on food, ambiance, or staff training. These are central to his business after all. Unfortunately, non-central practices such as gift cards that potentially upset 10% of customers remain under the radar.

Why do retailers love gift cards with limits?

The UK’s first gift voucher, a humble book token, was first issued in 1932. According to the UK Gift Card and Voucher Association, the UK’s voucher and gift card industry has since grown into a £5.6 billion monster that consumes nearly £600 million in waste – either from customers missing the expiration deadline, losing them or simply forgetting about them. And with double-digit growth over the past five years, there is no end in sight.

Some brands already issue cards with no expiry – such as IKEA, iTunes, Selfridges and Starbucks. Some have fairly long periods – such as Amazon (10 years) Marks & Spencer and The Body Shop (two years) or Argos and Zara (three years). Others, such as Costa Coffee, Ticketmaster, Habitat, Ted Baker and the above-mentioned Michelin star restaurant have just one year.

From a regulatory viewpoint, this situation is unfair. The customer bears the entire risk. The company has the money upfront – and can even make a tidy sum on financing the float – and there is no protection for theft, inflation or even the company’s insolvency. But what especially irks regulators is the expiration period. And, in recent months, the UK government has proposed all cards should have a minimum two-year expiry. Lord Foster, a Liberal Democrat business spokesman, wants the government to scrap use-by dates altogether.

The brands who issue them claim that each card must be logged and tracked on computer systems and that this causes administrative expense. And that allowing gift cards to sit on their books would create an unlimited liability, one that could cause problems if there were a run of redemptions. These arguments in favour of expiry dates are incredibly weak. And prioritising accounting neatness over fairness to ones customers certainly doesn't say much for the ethics of a business. If anything, the holders should receive preferential creditor status because the business has enjoyed their free money for no return. This, or some other underwriting pledge, would instil trust in the brand as well.

False profits

Producing false profits is a lot like strip mining your brand. They tend to produce short-term profits while eroding long-term gains.

Banks often operate in virtual silos due to the inability to have one view of the customer based on legacy systems and legal firewalls. In the case of overdraft charges, they would have cold, hard cash that suggested these were not only profitable, but significantly so. But what they did not see was the effect this had on their best customers, those who were too busy making money – that often sat idle in their savings account while the current account was overdrawn – to manage their finances. When these customers were slapped with what amounts to loan-shark level charges, they were far less likely to trust the bank with other profitable services. They were also more likely to make another bank their primary one.

Ditto with telcos. They would assess sky-high roaming charges – even though often due to rates set by their counterparts – resulting in a non-trivial pot of cash for themselves. What they did not observe, however, is the lost money. Customers would switch off their roaming and rely on free wifi at a local Starbucks (who sold them a coffee by the way) or get a local SIM card at the airport. None of the profit models I saw included this deleterious effect on customer behaviour. And this does not even include the anger-fuelled social media rants and contract non-renewals that come from inadvertent bills running into the hundreds of pounds.

Other false profits come in the form of promotions. A fashion brand hooked on seasonal discounting learned this the hard way. Volumes made up for margins during the discount period, making it look like a profitable idea. What they could not see was that some of these customers would have bought at full price at a later point. And the effect was most pronounced on those who bought at full price just before the discount, which included many of their best customers. They changed their behaviour by waiting for sales in the future or abandoning the brand altogether.

According to academic research and my own observations of these issues, these unknown unknowns are far more insidious than service failures or even public scandals, and no less harmful.

Some brands have even institutionalised false profits. I have learned of an airline that instituted a bonus system based on the over-weight baggage charges they manage to accumulate, as well as of a rental car company who offers gift vouchers to the rep having claimed the most damages on vehicles being returned (I wonder if these vouchers expire?).

But even if you are less aggressive about what surely are not long-term profit maximising practices, it is probably worth conducting a thorough analysis of your company profits, maybe guided by customer complaints. What is the percentage of profits that can be linked to customer complaints? Are these worth it? Common sense says no. But you can go further and observe the behaviour of customers hit with complaint-generating profits. If you have the CRM data there might be some indication. In order to get a real handle on them, you may need to run an experiment with a control condition, but in my experience, even a systematic look at customer-level data over time can serve as the business case for halting these practices.

As for voucher and gift cards, treating your customers this way is not just unethical, but plain old stupid. My advice is that if you offer them, eliminate the expiry date and make sure the card or voucher does not get lost or forgotten. After all, not serving a customer is no way of creating repeat business.