When you buy a Target gift card worth $20 or more through December 4, the stylish discount retailer will donate $1 to St Jude Children’s Research Hospital up to $750,000.
Since gift cards are basically stored-value cards and discount retailing has pretty thin margins, how could Target possibly afford to shed $1 out of every $20, even if it’s promotionally-appropriate given Target’s pledge to give 5% of income to charity?
There are a couple of answers. First of all, this is a limited time offer, valid only November 28, 2010 through December 4, 2010, which is fitting since fully 35 percent of all gift cards are sold in November and December.
But all that means is that Target is limiting its exposure, not that it’s necessarily making a sound business decision.
The true answer has to do with the psychology of gift cards, which most of us treat like found money. If you go to Target and the Garmin Nuvi GPS you've had your eye is $99 and you’ve got $80 in Target gift cards, the extra $19 plus sales tax seems like no big deal.
Indeed, according to figures compiled by Fortune magazine, 72 percent of us spend more than the value on the card, an average of 58 percent more.
When you consider that the average value on a gift card is $27 that means the majority of us are likely to spend an additional $15.66 when we redeem our gift card, bringing the total average purchase to $42.66. That’s not the average ticket at someplace like Costco, but it’s not bad either.
And six percent of the value of all gift cards sold are never cashed in. Depending on how Target books gift cards that 6 percent could fall straight to the bottom line.
(Needless to say these averages are for all gift cards given and could be higher or lower at Target.)
Finally, while you can get these cards online or at the store, chances are you’ll buy other goods when you purchase the gift card.
Labels: Costco, Fortune Magazine, Garmin, Gift Cards, St. Jude, Target