Incentive Insights

The Real Economics of Gift Cards

Maximizing Value and Reducing Waste

Gift cards are a key component of the incentive, payments, and rewards industry, but their financial intricacies and the economics of gift cards are often misunderstood. This is largely due to the limited transparency provided by many gift card delivery vendors, making it difficult to accurately assess their true cost within your organization. Understanding the real cost of gift cards in your organization is critical to minimizing waste.

4 minute read

A significant challenge in gift card distribution is that many deliveries are lost in crowded inboxes, filtered into spam, overlooked, or fail to resonate with recipients, leading to non-redemption. This inaction is not merely an oversight—it is a key source of profit for most gift card delivery companies. Not understanding the economics of gift cards can be costly.

Two business models in gift card delivery

There are two primary business models in the gift, rewards, and incentive industry:

Non-Refundable Delivery (The Industry Standard)

The non-refundable model is the most widely used. Vendors facilitate the distribution of gift cards or redemption options but retain the value of any unclaimed rewards—a practice known as breakage.

Breakage occurs when recipients fail to redeem their gift cards, often due to email delivery failures, loss of interest, or simple forgetfulness. The issuing provider retains these funds, making it one of their most lucrative revenue streams.

At a 77% claim rate, the program cost is 23 cents per dollar delivered.

Refundable Delivery (A Cost-Efficient Alternative)

The refundable model, though less commonly offered, provides significant cost savings by returning unclaimed funds to the sender. Refund timelines can be structured around a specific date or a set period following delivery. The refundable delivery approach allows businesses to recapture lost funds and reallocate them to future initiatives, ensuring a more efficient and effective use of incentive budgets.

At a 77% claim rate, the program cost is 6 cents per dollar delivered.

Selecting the appropriate model

Determining the best model depends on an organization’s financial and strategic priorities:

Non-Refundable Model

Suitable for organizations that take a one-and-done approach to distribution and do not require tracking of redemption rates and don’t want to send reminders or follow-up messages —though this model can lead to substantial budget inefficiencies if a significant percentage of cards remain unclaimed.

Refundable Model

More appropriate for organizations seeking to maximize the effectiveness of their incentive programs by minimizing losses and ensuring every dollar contributes to engagement and motivation. This model offers automated reminders, more incentive options (SWAG, Merchandise, Payments) and follow-up messages post-claim. The refundable delivery model charges a small delivery fee, similar to sending a package.

The financial impact of breakage

Many organizations fail to recognize the economic impact of gift cards and the financial implications of breakage, assuming that once a gift card is distributed, its purpose has been fulfilled. However, an unclaimed incentive does not achieve its intended outcome, whether that be increasing engagement, recognizing employees, or influencing consumer behavior.

Each unredeemed gift card represents:

Unrealized impact – The intended recipient never benefits from the incentive.
Diminished engagement – The desired action remains unfulfilled.
Wasted budget – Funds allocated for incentives are instead absorbed as profit by the provider.

If 20-30% of distributed gift cards go unclaimed, this equates to a significant portion of the incentive budget lost to breakage. Moreover, because most vendors profit from this model, they have little motivation to improve redemption rates. A PayTronix study showed that in 2022 on average, 32% of gift cards went unclaimed.

Strategies to Maximize Value and Minimize Waste

To enhance the effectiveness of incentive programs and ensure optimal value, organizations should consider the following best practices:

Select Transparent Providers – Work with vendors that offer visibility into redemption rates and unclaimed balances. Providers that profit from breakage may not align with an organization’s best interests.
Leverage Refundable Delivery Models – The ability to reclaim unclaimed funds provides financial flexibility, enabling businesses to reinvest in future campaigns or reallocate budgets strategically.
Optimize Delivery Methods – Relying solely on a single email notification may result in low engagement. Utilizing reminders and multi-channel delivery methods (e.g., SMS, in-app notifications like Microsoft Teams) can significantly improve redemption rates.
Offer a Range of Redemption Options – A single gift card brand may not appeal to all recipients. Providing a diverse selection of local, international, and digital payment options increases the likelihood of redemption.
Monitor and Adjust Strategies – Regularly track redemption rates and analyze trends to refine future incentive programs and enhance overall efficiency.

Understanding the economics of gift cards allows organizations to optimize their incentive programs, reduce financial waste, and ensure funds are used effectively.

If a provider benefits from breakage, organizations should recognize that their objectives are fundamentally misaligned with those of their supplier. When funds go unclaimed, the provider profits at the organization’s expense, creating an inherent conflict of interest where maximizing redemption is not in the vendor’s best interest.

Aug 1, 2024

Starbucks (SBUX) ‘s fiscal third-quarter results show that customers have $1.77 billion stored in unredeemed gift cards, up 9% from the previous year.
In 2022, they recognized $196 million in breakage revenue from company-operated stores.

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