Gift Cards Bring Physical Customers to the Digital World

By Trevor Gilbert , written on August 30, 2012

From The News Desk

Earlier today, Etsy announced a gift card program which will serve as a proprietary payment processing system. Also today, Spotify announced that it would be selling physical gift cards in stores across the United States. This follows companies like Facebook, Apple, and Zynga, that have all sold gift cards at one point or another, all redeemable for virtual goods. More recently, it follows startups like Livrada and larger companies like Google, who are all trying to cash in on the gift card market.

The question, though, is why? Why are all of these technology companies diversifying away from the technology world, and instead making inroads into the physical, analog world?

The answer is that for all of the promise of digital sales and ecommerce, the virtual world doesn’t match up to the virtual world in two areas: sentimentality and the size of the market. These two issues present problems for companies looking to make money online. After all, it’s almost impossible to create sentimental value when there aren’t tangible goods, and the size of the market is going to grow at a predictable rate regardless of third-party intervention.

These problems can be solved though, through a hail-mary pass to the brick-and-mortar retail sector. Physical stores still represent the vast majority of sales, and will for quite some time according to eMarketer. The question then is, how will online retailers take advantage of this market?

The answer is the gift card, which is why we’re seeing more and more companies launch gift card-centric promotions. Gift cards are small, in that stocking them is a small sacrifice for retailers; they are well-known, in that convincing consumers to purchase them isn’t hard; and, they are cheap, in that they present little risk to the companies. It’s the type of solution that just makes sense.

This would be enough to solve the problem of entering the physical world, and take advantage of the market. But just leaving it at that would miss the bigger picture of opening up entire segments of the market otherwise be inaccessible.

These segments include gifts-giving, and the habits of non-technically savvy individuals.

Consider the case for Spotify. When you give someone a Spotify subscription, instead of receiving a nice gift-wrapped CD case like in the olden days, you receive a sparse email with a link to sign up for the subscription music service. How does that sound for a birthday present? Less than ideal, and I’m saying that from first-hand experience.

With gift cards though, there is a tangible quality to the gift, akin to the nostalgia for physical books that people often feel when reading ebooks. Sure, it’s not exactly the same. But at the same time, a gift card is much closer to reality than a push notification.

The second segment that is untapped are the non-technically minded people. Not the people who ignore computers entirely, but the type of person who doesn’t have the time to find the latest tech service, but who would use it if they knew about it.

This market can be reached by putting these gift cards in front of people. In this capacity, they end up serving as advertisements, but instead of losing money, the companies are actually being paid to advertise to people. It’s a win-win.

The final advantage for companies selling gift cards is the third segment of the market: people without credit cards. That’s nearly 30 percent of the United States, according to one survey. It includes teenagers, cash-dependent people, and those with bad credit scores. But these people may still want to cash in on the digital market, but can’t. Gift cards open up this rather sizeable group of people.

When I wrote about Livrada earlier this summer, one of the things founder Leonard Chen shared with me stuck with me: the transition to digital can be both painful and exciting. This takes a little bit of pain out of the equation for everyone. Something that startups seem to be realizing more and more now.

[Image Credit: 401(K) 2012]