5 Reasons to Add Gift Cards to a Digital Loyalty Program

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giftsPromoting customer loyalty is a broad goal that local merchants are tackling in many different ways. While plenty of platforms utilize mobile redemptions and out-of-the-box rewards or coupons to curry favor with consumers, an increasing number of loyalty providers are taking a more seasoned approach. These vendors are moving outside the virtual environment with pre-loaded physical gift cards that consumers can redeem for full-priced goods and services.

The way that a vendor integrates gift card products into its platform depends on a number of factors, including program goals and intended customer base. However, the overarching benefits to rewarding customer loyalty with physical gift cards remain the same regardless of the specific platform being used. Here are five reasons vendors should consider adding gift card rewards to their hyperlocal programs.

1. Gift cards drive superior consumer behavior. Research shows that consumers behave differently when spending with gift cards, leveraging a certain psychology of “I’ve already spent the money.” People tend to reach for higher priced items when they’re spending off a gift card. Overspending is another byproduct. Since it’s hard to precisely max out the value of a gift card (imagine spending exactly $100, tax included), consumers tend to spend well above and beyond the amount of stored value they have. Most data puts it at 25% or higher. (Omri Dahan, Marqeta)

2. Stronger emotional memory. If $5 or $10 is credited back to your credit card or added to your bank account, what happens to that money? It’s indistinguishable from the other $50 or $500 you already have in the account. You never actually use the specific award for anything, and it just disappears into the abyss. How can future purchasing behavior be motivated by an award you don’t remember and have no emotional connection to? That’s the reason why we prefer to use virtual currencies and gift cards as rewards over cash-back offers. (Peter Vogel, Plink)

3. Higher perceived value. It really comes down to perceived value. There is no intrinsic value to a coupon before it’s used, so consumers see them as a transparent attempt to drive sales. They feel like opportunistic offers, not earned rewards. Gift cards have another connotation altogether. People generally receive gift cards on special occasions, and the piece of plastic you associate with a gift card feels like a store of value. For those reasons, we’ve seen gift cards drive significantly higher conversion rates than coupons (even if 25%-off would have saved the consumer more than a $10 gift card). They get people in the door, and they protect the brand by positioning what’s essentially a discount as a gift or earned reward. (Zach Smith, Boomerang)

4. Convenient for consumers. Tying both loyalty and store value together is something that’s very powerful for businesses, and also extremely convenient for consumers. As a result, we have been piloting gift cards and pre-paid cards that also use our FiveStars loyalty cards. We have seen strong traction and consumer adoption, so we think this is a logical extension of our loyalty service. Starbucks has done a great job of proving value by using loyalty incentives to increase pre-paid purchases, and over 25% of U.S. transactions are now delivered via Starbucks pre-paid cards that also accrue loyalty points. (Chris Luo, FiveStars)

5. Lower fees, to a degree. There’s an additional retailer benefit when swiping a gift card that most people don’t realize — lower credit card fees. As gift cards are typically processed on different payment ‘rails,’ they don’t trigger swipe fees the way typical credit card transactions do. However, when a retailer first sells a gift card, it still pays interchanges on the entire amount. (And even higher costs if they distribute the gift card through a third-party.) There is a perception by retailers that gift cards are ‘cheaper’ to process — which is true, but probably less so than people think. (Omri Dahan, Marqeta)

Stephanie Miles is an associate editor at Street Fight.

Stephanie Miles is a journalist who covers personal finance, technology, and real estate. As Street Fight’s senior editor, she is particularly interested in how local merchants and national brands are utilizing hyperlocal technology to reach consumers. She has written for FHM, the Daily News, Working World, Gawker, Cityfile, and Recessionwire.