Gift Cards: A Profitable Proposition for Your Affiliate Program Strategy
Over the years, gift cards have evolved into the go-to choice for a simple gifting option. Are they a bit impersonal? Debatable. Exceptionally practical? Absolutely.
Gift cards are part of a rapidly growing market – one that’s set to surpass nearly $204 billion in annual sales. However, when it comes to the affiliate channel, gift cards have become what some refer to as the “invisible” product.
There was a time back when affiliate marketing was still finding its feet, and a gift card sale was just another sale – AKA, seen as a commissionable product. As time passed, concerns about margin decline emerged surrounding gift cards in the affiliate channel. Specifically, the fear of paying double commissions on what’s essentially a single transaction – in turn, this led to gift cards being tagged as “non-commissionable” across the industry.
But, here’s the twist – the only way an affiliate can earn a commission on a gift card is through a gift card reseller. It’s ironic, isn’t it? A retailer won’t commission their own gift card through the affiliate channel, but gift card malls, like giftcards.com, have a thriving affiliate program. This raises an interesting question: if a gift card reseller can offer an affiliate program, why can’t the actual retailer, who likely enjoys better margins on gift card sales?
Let’s delve into the reasons why many retailers should offer gift cards as a commissionable product within their affiliate program.
Gift Card Economics
Breakage: Breakage is the balance on a gift card that is never spent. Gift cards, particularly ones with less usage than digital ones like Amazon’s, offer a unique financial benefit. Typically, this is a standard and predictable piece of profit. At any given time, 10% to 19% of gift card balances remain unredeemed, and around 6% of gift cards are never even used.
Overspend: A significant 75% of gift card recipients end up spending more than their gift card value.
Full Price Spend: Gift cards often lead to full-price spending, with recipients being 2.5 times more likely to pay the full price for items than a customer paying with cash or credit card. This means that a dollar spent through a gift card is typically a full dollar earned by the retailer, thus, not diluted by a discount.
Float: Consider the months, or even years, it takes for someone to actually use their gift card. During this period, the retailer benefits from “holding” the cash. This offers them interest income, or the ability to fund more inventory turns, leading to more profit.
New Customer Acquisition: Gift cards have a tendency to attract new customers. The act of gifting introduces recipients to retailers they may not have ever shopped with. Acknowledging the power of driving new customer acquisition through gift card sales is critical, as 34% of gift card recipients visit a store they wouldn’t have otherwise.
Customer Lifetime Value (LTV): Establishing a new customer relationship generally results in a LTV that goes far beyond the initial gift card purchase. This varies from retailer to retailer, but there is a reason that most are willing to invest heavily in acquiring first-time customers, often spending up to or beyond the initial average order value (AOV).
Market Presence: Today’s shoppers typically plan to purchase an average of 15 gift cards during the holidays, marking a 50% increase from 2020, and a 200% increase from 2019.
Leveraging Gift Cards in the Affiliate Channel
Now that we have a solid foundation, let’s make the argument for why – under the right conditions – integrating gift cards into the affiliate channel makes sense.
- Affiliate marketing is a great new client acquisition and sales channel, so why not leverage it to increase gift card sales, particularly during peak season?
- If you can review the gift card economics above and price commissions appropriately to protect against margin deterioration, you can, at the very least, achieve results that fall within your typical customer acquisition cost (CAC). Simultaneously, you can enjoy the benefits of over-indexing on new customer acquisition.
- Conversations with our clients about their broader digital marketing efforts have revealed that spend varies significantly across the board, and there is a tendency to over-invest without a predictable outcome on channels such as influencer marketing, search, and social. So, why not apply the same testing mindset to gift cards? While the term ‘predictable outcome’ may raise some eyebrows, it’s worth noting that many marketers are still navigating emerging channels, like influencer. For example, Harvard Business Review provides insights into the best practices and the numerous variables that contribute to a successful ROI when partnering with influencers.
- Retailers can get creative with gift cards. By branding a gift card or using the right gift card provider, you can incentivize the behavior of your gift card recipients by restricting or soft selling toward specific product segments. For instance, a Kindle-specific gift card is still an Amazon gift card that can be spent on anything on Amazon, but the giver and the recipient both understand the intent was to use it on books. This subtle nudge helps foster specific purchasing behavior.
Gift Card Challenges
We must also play devil’s advocate, and confront the two major potential barriers to offering gift cards through the affiliate channel:
- Double Commission Dilemma: There is a possibility that a marketer will pay a commission not only on the gift card itself but also on the subsequent purchase of products or services, thus paying affiliates twice for basically a single transaction. Unfortunately, the technology is hard to configure to prevent this from taking place – other than manual reversals after the fact, which can create a less-than-ideal experience between a retailer and an affiliate, or an “outside-of-the-affiliate-channel” rule, such as enabling a retailer’s merchant account to not commission on gift cards.
- Unpredictable Usage: Gift cards typically lack product/purchase restrictions, making it challenging for retailers to predict how they will be used. They might end up being redeemed for a loss-leading product or a high-margin SKU. Consequently, retailers with SKU-based commission models may struggle to predict the profitability and appropriate commission structure for gift cards.
Crunching the Numbers
So, here we stand. On one hand, selling gift cards for a retailer undeniably presents a profitable opportunity. On the other hand, offering gift cards through your affiliate channel introduces some margin risk.
So, what’s left to explore?
Picture a fictional scenario involving “ABC T-Shirts,” and their decision to commission gift cards through the affiliate channel at a 10% commission rate. Let’s illustrate this with an example.
- Affiliate XYZ drives a $100 dollar gift card sale for Customer A.
- ABC T-Shirts earns $90 in sales revenue ($100 for the gift card, minus $10 for Affiliate XYZ’s commission).
- Customer B, the gift card recipient, later uses their gift card to make a $100 purchase. Before the order is placed, Customer B finds a 10% off promo code that is being advertised by Affiliate XYZ.
- Customer B finalizes their order, resulting in a $10 discount – plus, Affiliate XYZ earns another 10% commission on the sale ($10).
ABC T-Shirts Revenue:
- Total sales revenue from gift card purchase: $100
- Total sales revenue from purchase with gift card as payment method: $90
ABC T-Shirts Costs:
- $10 paid to Affiliate XYZ for the gift card sale
- $10 paid to Affiliate XYZ for the product purchase with the promo code
- $10 for the online promo code usage by Customer B
This means the total cost of sale as a marketing expense is $30.
Net profit on $100 worth of products, based on a 30% net profit margin, is $30. However, when we deduct the marketing expenses outlined above, the actual net profit becomes $0.
Considering that the industry average customer acquisition cost (CAC) for fashion and apparel is $66, the entire lifecycle of this gift card to purchase, all through the affiliate channel, pencils out at a new customer acquired for zero cost.
In essence, this back-of-the-envelope calculation illustrated that while the transaction itself didn’t generate a profit, it did bring in a new customer at no additional cost, which is a favorable outcome when considering industry standards.
Unlocking Profit with Gift Cards
Leveraging gift cards in the affiliate channel, under the right conditions, offers a profitable opportunity for retailers. It not only enhances revenue but also strategically expands market presence and strengthens customer relationships.
Ready to craft a winning gift card strategy? Connect with our team of affiliate management experts today!