There’s no doubt that gift cards are powerful customer incentives, and some companies have simply accepted the high expense as their cost of doing business.
Maybe gift cards are truly worth it for you.
But you owe it to your bottom line to confirm that your gift card program’s performance justifies the high cost. After all, you may find that you’re spending a lot more than you need to drive the desired customer action.
Gift Cards Are Great… But Not Perfect
While many customers respond strongly to gift cards because they find them appealing, there are still some significant drawbacks to consider:
- There’s little or no discount to face value. For closed loop cards, which are tied to a single brand, you may be able to negotiate a small discount. For open loop cards, which work across all merchants accepting the processor, you’ll pay above face value due to activation fees.
- Not all customers find gift cards attractive, as shown by Bankrate’s research, which found that 23% of consumers have regifted a gift card, and 8% resold one.
- Most gift cards will be used for a single transaction and then quickly forgotten. And if there’s a small balance remaining it might cause customer angst because they don’t want to throw it out, so it ends up in the junk drawer.
- In order to get an attractive enough face value, some companies feel compelled to push their incentive budgets to the absolute max. This can create negative ROI when the incremental profit the gift card drives is lower than the total program cost.
Given these drawbacks, it makes sense to consider regularly testing other incentives against gift cards to determine if you’re spending more than you need in order to prompt the desired customer action.
How to Gather the Necessary Data to Test Other Incentives Against Gift Cards
The first step in structuring a successful test is to gather data from prior gift card promotions.
Ideally, you’ll have several campaigns that span at least 12 months. If you have this depth of data it’ll allow you to draw meaningful conclusions on how your gift cards have performed. But even if you don’t, you can still gain valuable insights from even one prior campaign.
Next, it’s helpful to segment your customer data using key characteristics like age, geography, product or service mix, relationship length, and any other data points you believe might be useful.
Also, some companies have created customer personas that are used for product development and marketing. If these are available they can definitely be a valuable asset for use in structuring your test.
With your historic gift card program performance data broken out by segment or persona, you’re now ready to select an alternate incentive to test.
Identifying Attractive Incentives to Test Against Gift Cards
What your customers find attractive enough to be motivated to take action can vary somewhat by segment but, in general, a strong incentive will have the following characteristics:
- Appeals to the majority of the segment
- Has low or no fulfillment costs
- Can be sent to the customer digitally, upon completion of the action
- Demonstrates high value at a cost to you that’s much lower than the perceived value
- Offers a volume discount for large programs
- Not widely available at retail
- Isn’t something they already have, and therefore can generate surprise and delight
- Is something that your competitors don’t routinely offer
- Gives the customer multiple uses so they can remember you every time they enjoy it
- Can be cobranded to keep your company top of mind
- Can be immediately replenished if response is stronger than expected
- Is substantially lower cost than your current gift card, so that you can definitively determine if you’re spending more than you need to
If the test incentive you have in mind meets nine or more of these criteria, with #12 a must have, you’ve identified an item that will definitely provide meaningful test results.
The Best Test Methodology for Conducting Your Gift Card Incentive Test
There are several testing methodologies that can give you an accurate read on comparative performance, but one of the most popular and easy to execute is an A/B test.
This approach takes a defined test segment and splits it as close to 50/50 as practical, and in a manner that each subsegment very closely resembles the other (e.g., ages, geography, current product or service, etc. are represented as equally as possible). To ensure accurate results, it’s also important to randomly select the records to place in the A and B subsegments.
In executing your test one subsegment will be offered a gift card (the ‘control’), and the other your alternate incentive (the ‘challenger’). Ideally the subsegments are exposed to your promotion in the same timeframe.
While a 50/50 A/B test is a proven approach, if you’re hesitant to expose a large audience to your test incentive, you can also adjust your mix by keeping the control a larger percent by using a 60/40 or 70/30 mix.
Analyzing Your Test Results: The Winner May Be the Loser When it Comes to Profit
The outcome is clear if your less expensive alternate incentive performed as well or better than your gift card. This demonstrates that you can increase your profit by offering an incentive that’s less costly.
If the alternate converted customers at a rate lower than your gift card, the results still may be worthy of further analysis to determine if the alternate was still the profit winner.
For example, let’s take a look at a hypothetical test outcome:
- Your incentive program was designed to make a $100 sale, with net profit of 30% or $30.
- The A/B incentive test was conducted on 100,000 prospects, 50,000 control, 50,000 challenger.
- Your $25 closed loop gift card cost $20 in large volume, the alternate incentive cost was $3.
- The gift card converted 25% of prospects, delivering 12,500 sales x $30 net profit per sale = $375,000 total net profit before incentive cost.
- The alternate incentive converted 20% of prospects, delivering 10,000 sales x $30 net profit per sale = $300,000.
- Total gift cards costs were 12,500 x $20 per card = $250,000, delivering net profit after incentive cost of $125,000 ($375,000 – $250,000).
- Total alternate incentive costs were 10,000 x $3 per card = $30,000, delivering net profit after incentive cost of $270,000 ($300,000 – $30,000).
- Even though the alternate incentive converted at a lower percent thus driving less total revenue, it delivered $145,000 more net profit!
- In this example, even if the alternate incentive cost was $10 and performed at the same 20% conversion, it would still deliver $75,000 more in net profit than the gift card.
This example shows how much incentive costs affect your net profitability after incentives, and that a less expensive incentive can underperform a gift card and still be a massive comparative profit winner.
How to Find a Low-Cost Incentive with High Perceived Value
Just because the math works out to favor lower incentive costs doesn’t mean it’s easy to find one that meets nine or more of the 12 characteristics of a strong incentive. It’s by no means impossible, however.
Some potential options to consider:
- If you have physical retail outlets you might offer logoed merchandise, as your branding can substantially increase the perceived value of items like beach towels, water bottles, sunglasses, coffee mugs, t-shirts, and other popular items. In this case you can provide a digital redemption code, and then the customer does their own fulfillment by picking up the item at your store. Otherwise, shipping and handling costs can easily exceed the cost of the incentive item.
- Admission tickets to attractions, movies, museums, festivals and other venues can often be obtained at a substantial discount to face value, and digitally redeemed. The only challenge is ensuring the venue has geographic coverage for everyone in your campaign.
- Additional products or temporary service upgrades from your own portfolio, since you have a huge margin advantage as the producer. Service upgrades are always the least expensive to fulfill and therefore can have a clear cost advantage over products.
- Incentives that create a large monetary benefit for your customers, like deep discounts on something they already do every day, but for which they often pay full price.
While finding the perfect alternate, less costly incentive can take some effort, as the above profit calculations showed, the incremental profit can be massive.
Entertainment®’s Dining Advantage® is the Perfect Alternative to Gift Cards
Dining Advantage is your perfect low cost, high value incentive for customer acquisition, retention, and rewards because it meets every one of the above 12 characteristics of a strong incentive.
Cards are available in $25, $50, $100, or even custom increments, they can be cobranded, and are available as physical cards or as digital codes for sending via email or SMS.
Dining Advantage, powered by Entertainment®, provides access to valuable dining deals from our Entertainment discount network, the largest curated collection of local and national restaurant discounts in North America.
Unlike many gift cards, which can only be used at a single brand, Dining Advantage can be redeemed for deep discounts at several hundred thousand valuable restaurants across all dining categories and cuisines, and even attractions and retailers.
In-restaurant dining and carryout is a significant part of consumers’ budgets. According to the USDA, one third of all consumer spending on food is on eating out. This means your Dining Advantage incentive recipients will appreciate the instant savings at neighborhood favorites as well as national chains. They’ll not only enjoy returning to their favorite restaurant or trying a new one, 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 Dining Advantage works is that your recipients use stored credits to select the specific offers and discounts that appeal to them. Then they just show their mobile device to redeem the discount. It’s that easy.
With all the great savings, your recipients will be appreciative of the incentive you provided that helps them stretch their budgets further.
As an alternate incentive, the best part is that Dining Advantage enables you to offer a high value incentive to your customers, at a low cost to you.
In large volume, you can get a Dining Advantage $25 or $50 card (or digital code) for just a few dollars. This incredible pricing will allow you to significantly boost your margins versus using other more expensive incentives, like gift cards.
Dining Advantage cards can be shipped the same day you place your order, and codes can be sent immediately, enabling you to quickly and easily launch your campaign.
Would you like to learn more about Dining Advantage and our other great customer incentive products? Let’s connect! Tell us about yourself and our team of incentive experts will evaluate how we can best help you.