For a decade now, we have been continually building and improving GiftCards.com. As I look back at where we started, the product has changed, but has also remained the same. At the core of our business, we still sell gift cards—the same type of gift cards that came to the market 10 years ago.
Although we added Virtual Gift (e-gift cards) in 2007, Discounted Gift Cards in 2008, Group Gift in 2010, and Local Gift in 2012, the core product of creating personalized gift cards is basically the same.
Five years ago, I thought that by now all gift cards would be virtual—digital in, plastic out. Yet the movement has been slow. As you can see in the graph below, only 11 percent of gift cards are purchased online. The remaining 89 percent are purchased offline, mostly at issuing retailers or at grocery stores.
In my opinion, the transition from physical to virtual gifting has lagged for three primary reasons as follows:
Grocery stores, retailers, and points providers (think airline miles) drive around 80 percent of gift card purchasing. These players have longstanding relationships with gift card suppliers such as Blackhawk Network and InComm, enabling them to offer customer incentives tied to gift card purchases. For example, when I buy groceries at Giant Eagle, I receive “Fuel Perks,” a discount for gasoline at Giant Eagle gas stations. The gasoline discount builds up according to the amount of money I spend on groceries. If I buy gift cards at Giant Eagle, my Fuel Perks get a turbo boost and I can save even more.
The prevalence of gift cards in the grocery store and the ability to reward customers who buy gift cards with additional savings makes this a very effective and tightly coupled marketing opportunity for all players involved. Converting to digital gift cards would impact several parts of the business, so the incentive to move that direction is almost non-existent.
The second reason the transition to digital gifting has lagged behind predictions is that there is very little profit to be made in the gift card industry. Despite this being a multi-billion dollar industry, the “product” we sell is a face value dollar amount. The margins are less than 10 percent. So you have to sell a boat load of gift cards to make money. The low margin stifles innovation and prevents smaller firms or investors from getting into this market, something that is needed in order to dethrone plastic.
Thirdly, gift cards are purchased very few times a year compared to other goods and services. Buying gift cards is not like buying gas, milk, or even songs from iTunes. You probably buy gift cards during the holidays and for birthdays, but you don’t buy them daily. So, despite their popularity in being the most requested gift, gift cards are generally not a highly used product.
In addition to gift card apps, digital gift cards can be purchased online. Since we are an online gift card site, we monitor search engine traffic daily. We also own the popular couponing website, MyCoupons.com. The number of times “Target gift card” is entered into a search engine like Google or Bing is minuscule compared to the number of times “Target coupon” is entered. Shoppers are always looking for savings. They are not always looking for gift cards.
We have seen companies like Wrapp, Gyft, and others receive funding because they are trying to grow. But, they face the same issues above. We announced our own $1M investment in digital gifting for a product we call, GiftYa. We believe this digital platform is the solution.
It’s now 2013. When will digital gift cards become mainstream and dominate plastic, store-delivered gift cards? My prediction is five years…again. I think we are ready. I know GiftCards.com is ready. We have innovative technology ready to make the virtual gifting experience enjoyable, and we have the margin we need to be profitable. As smartphones make digital wallets more the norm, digital gifting and GiftYa will be riding shotgun. The only people left to board the train are the marketers who will need to incorporate customer rewards and incentives like they have in the grocery store. When a user can pay for gas with a virtual Visa card, the solution will be complete.
We shall see. I’m excited for that day and hope we are the leader when it arrives.