Gift cards can work exceptionally well as customer incentives, but unless you find a way to beat their high cost they can quickly destroy your profits.
Gift cards are an attractive incentive because they have a stated face value, and they give your customer the power to decide how and when to redeem the stored value. This often motivates the behavior you want so that your business can reach its acquisition, renewal, loyalty, cost savings, or incremental spend-per-customer goals.
How to Calculate a Gift Card Incentive Return on Investment
While gift cards are a powerful incentive, it’s important to understand their impact on your profitability, and that’s best achieved by calculating a projected return on investment (ROI).
In order to get positive ROI, an incentive’s cost must be below the net incremental profit (or cost savings) the targeted customers generate by taking your desired action.
For example, if you’re a media streaming provider, and the net profit a new customer generates during their average retention period of two years is $240 ($10 per month x 24 months), you can invest in a large incentive and still generate positive ROI. For instance, if you spend $50 per acquired customer as a sign-up reward, your net profit gain is $190 ($240 incremental profit – $50 incentive cost), for an ROI of 380% ($190 profit after incentive cost / $50 incentive cost).
Or, if you’re a utility company who wants to incentivize customers to switch to paperless statements, and the annual cost savings are $36, you can offer a $10 incentive and still get a 260% ROI in the first year.
While these two examples have plenty of room between the incremental profit and the cost of the incentive, this isn’t always the case. It’s challenging when your budget, or the incremental net profit from the action you’re trying to incentivize, doesn’t allow you to purchase an attractive enough incentive to drive consumer behavior.
Determining Your Gift Card Incentive Budget
Before you consider specific incentives, it’s important to do an economic analysis similar to the above examples.
Start by calculating the incremental profit per customer the desired action (e.g., acquiring a new customer, reducing the cost of servicing a customer, gaining a longer commitment, etc.) will generate. This is the absolute maximum you can spend to incentivize a customer without suffering a loss.
Next, apply what you consider a reasonable ROI. Targets can vary based on many factors, but 100% to 300%+ ROI are not uncommon or unrealistic goals. This calculation will allow you to identify your per customer incentive budget range.
For example, if you’re a print subscription business, and a new customer will generate $20 net profit in the first year, obviously the maximum you can spend to reward a new customer is $20 in order to avoid a loss.
At the low end, a 100% ROI target will allow you to spend $10 ($20 net profit – $10 incentive = $10 net profit after incentive cost; $10 profit / $10 incentive = 100% ROI). To reach at least 300%, the incentive needs to cost $5 maximum.
Working within a small budget can be challenging because If the print subscription business is targeting 300% ROI, a $5 face value gift card is not likely attractive enough to drive the desired behavior.
Finding an Attractive Incentive Within Your Budget
Traditional gift cards are available in two types: closed-loop, which are redeemable only with one brand, and open-loop, which work like a credit card as they are redeemable at any business that accepts debit and credit cards from the identified processor.
If you’re buying a large number of gift cards or e-cards at one time, it’s possible to get a small discount from face value on closed-looped gift cards because the brand may be willing to give up a little margin to gain guaranteed revenue.
With open-loop, you will actually have to pay above face value because of activation fees which, depending on the face value of the card, can be a substantial percent of face value.
The decision between open and closed-loop comes down to your total budget, the face value of the card, and what you think will motivate the customer behavior you desire.
In most cases, if the face value is $10-20, closed-loop is the better choice because you may get a small discount and you won’t bear activation fees. Customer perception could also be more favorable because they may equate the value with being able to buy lunch at a branded restaurant, while a $10 open-loop card may seem small and a hassle to remember to use for general purchases.
But what can you do if your budget is less than $10 per customer, and your incentive still needs to be valuable enough to drive consumer behavior?
Entertainment®’s Dining Advantage® Incentive: High Value for Low Cost
If you have a small per customer incentive budget, but want to offer a high-value incentive, Dining Advantage is your perfect solution.
Dining Advantage cards are available in $25, $50, $100 or custom increments, and are provided as physical cards, or digitally for sending via email. Cobranding is also an option.
Dining Advantage is great for acquisition and retention, sales promotions, customer loyalty programs, employee incentives, and more. And we have the capability to capture user registration information including e-mail addresses.
Dining Advantage provides access to several hundred thousand valuable dining deals from our Entertainment discount network, the largest curated collection of local and national restaurant discounts in North America.
Unlike most gift cards, which can only be used at one restaurant, Dining Advantage cards are redeemable for deep discounts at restaurants across all dining categories and cuisines. This includes everything from fine dining, casual restaurants, pizza, ice cream shops, and even attractions and shopping!
Restaurant dining, including carryout, is a significant part of annual consumer spending, so your customers will love the instant savings at neighborhood favorites and national chains. They will not only discover a new favorite breakfast spot or great place to eat on a Saturday night, but they’ll save money doing it with Entertainment’s best-in-class buy-one get-one free and up to 50% off offers.
How it works is that your customers use stored credits to select the specific discounts and offers that appeal to them, and then they simply show their mobile device to redeem the offer. It’s that simple.
With great savings at their favorite restaurants, your customers will be appreciative of the incentive you provided that helps them save.
The best part is that Dining Advantage allows you to provide your customers with a highly valuable incentive for a low cost.
If you buy in bulk, you’ll be able to provide a $25 or $50 card (or code) for just a few dollars. This low pricing will allow you to get the most benefit from your incentive budget, and will help boost your ROI on your next campaign.
Would you like to learn more about Dining Advantage and our other powerful customer incentive products? Let’s connect! Tell us about yourself and our team of incentive experts will evaluate how we can help your business reach and exceed its revenue and profit goals.