CASES
Gift Card Sponsorship
In 2011, MovieTickets.com faced a common cost constraint when launching the 3rd Party Gift Card program. With the exception of nominal set up costs, a vast majority of the merchants' Cost of Goods are paid on performance, when the card is actually sold. The sunk costs or investment risk to the merchant are the inventory costs - the plastic production cost and shipment costs to the 3rd Party Distribution Centers (DC’s).
The company had blown through their budgeted card production on smaller regional supermarkets and other retailers but now had an opportunity to get into the pharmacy behemoth, CVS, with almost 7,000 stores nationwide. However, there was no remaining budget because they had not expected to land a large national retailer so soon. #FirstWorldProblems
We needed $250,000 to produce over 1,000,000 cards to sell at CVS retail.
We got creative. The company had been selling ads on their website to RealD, 3D technology. We told RealD, who had been trying to establish themselves as a consumer facing and recognized digital film projection brand, they could be featured with an exclusive association with MovieTickets.com by being on the MovieTickets.com 3rd Party gift card. We got the gift card sponsored and so MovieTickets.com launched the gift card businesses' first 3rd party-sponsored gift card.
RealD sponsored the $250,000 required for plastics production to populate the pegs at CVS retail. As a result, MovieTickets.com enjoyed an instant ROI given that their investment costs were minimal.
Change in Gift Card Denomination = Massive Change in Profit
Many merchants are ecommerce aggregators, which means they don’t “own” the inventory per se but have non-exclusive access and aggregate gift cards across a fragmented merchant network. These merchants shares a few key traits. For example, they typically make between 5% to 15% margin of the total revenue for gift cards, well below the standard 30% to 40% margin that typical omni-channel merchants make. When “breakage” (non-redemption) occurs, these merchants benefit exponentially since they don’t just make the typical 5% to 15% gross margin but rather 100% gross margin when the value is never redeemed. These merchants make money either way (redeemed or non-redeemed), but the opportunity is enormous.
In 2009, we launched Fandango.com’s $25 denomination (denom) gift card through the big 3rd Party Distributor, Blackhawk Network. Post launch, Fandango discovered that roughly half the value on the gift cards were never used. Subtract about 20% of the gift card denomination for Cost of Goods Sold (3rd Party Distribution royalty, gift card processing fees, credit card charges, ecommerce platform charges, plastics, compliance, etc.) and that leaves the merchant about 30% gross margin from their gift cards. Compared to their margin from their ticketing sales, the gift card business outperforms it by a factor of 2 to 6 times.
In 2010, when we were launching MovieTickets.com gift cards, the company was not as well-known to consumers as Fandango, and they knew that gift cards would be more profitable than online movie ticketing. We knew that to maximize profit, we should maximize breakage. After testing different denom and its elasticities, we purposely rejected the $25 denom card and launched the virgin $35 denom, which was derided as an odd number. Our reasoning for the $35 gift card was that MovieTickets.com had an Average Order Value (AOV) of $27. We convinced the big 3rd Party Distributors to allow a seemingly arbitrary $35 gift card to be sold.
MovieTickets.com $35 gift card had a “breakage” level of roughly 75%, or 25% above Fandango.com’s 50% breakage level. MovieTickets.com’s gift card program became 3 to 11 times as profitable as its core ticketing business, eclipsing even Fandango's success. Until Fandango acquired MovieTickets.com a few years ago and subsequently folded it into Fandango's brand, it remained the single highest profit margin card on the 3rd Party Gift Card peg for almost a decade. When creating gift cards, the denomination should be based on denomination elasticity, average order value and where the cards will be sold.