Running head: CARDSWAP

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CardSwap

Daniel Watrous Marketing Northwest Nazarene University

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CardSwap Value Proposition Gift cards provide value to both merchants and consumers. However, the nature of the value derived by each is different. For the consumer, the value is convenience. For the merchant, there are many financial incentives to offer gift cards. Some have argued that the financial value to consumers is weak and consumer advocacy groups have been vocally opposed to the use of gift cards. Business Value Increased immediate cash flow is one obvious benefit to merchants that results from gift card sales. The merchants receive an influx of cash without giving up any inventory. Some governments have produced regulations regarding the issuance and servicing of gift cards (System, 2010) (Government, 2012). These rules define the type, frequency and magnitude of fees merchants can charge against outstanding balances available on gift cards. Regulations also dictate whether expiration dates can be applied. In most cases this regulation is free of any requirements on the merchant regarding the management of the cash in the time between the purchase of the gift card and its redemption. As such, merchants are free to choose a business policy that fits with their business objectives. In some cases gift cards are partially redeemed by a consumer. The industry refers to this as breakage (Horne, 2007) and some estimates put it at around 10 percent. This data suggests that for every $100 gift card, the merchant gets to keep $10 of that money without providing goods or services in return. While this is appealing, it’s only part of the story. Further research has shown that consumer spending habits and even venue choice are affected in ways that benefit the merchant. For example, processor data indicates that consumers spend around $1.40 per $1.00 of the face value of the gift card (Horne, 2007). Additional research has examined the way in which the payment form (e.g. cash vs. gift card) affects consumer buying behavior (Raghubir & Srivastava, 2008). The outcome of

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this research suggests that consumers are willing to buy more expensive products and services when the payment form is a gift card. This is referred to as industry lift.

Customer Value When considering the value of gift cards to consumers, it’s important to distinguish between two groups of consumers. The first consumer group is the purchaser of the gift card. The second group is the receiver of the gift card. Both groups benefit, but in different ways. Convenience for Gift Card Givers. Data gatherd by payment processor First Data indicates that consumers like the convenience of giving a gift card (International, 2011). In response to the question about why they had chosen to give a gift card, 83 percent cited the ease of buying and giving gift cards. These same consumers also noted the time savings that resulted from giving a Gift Card (Dhar & Nowlis, 1999). For recipients who lived far away from the buyer, gift cards are easier to mail. Some consumers deliberately choose to give a gift card, while others choose a gift card due to inventory outages (International, 2011). Giving a gift card has the appearance of giving a thoughtful gift. Cash may not be perceived to have the same thought behind it. Gift card malls are locations at general purpose stores where consumers can purchase gift cards valid at various locations. This allows the consumer to browse a variety of gift card options in one place, giving them more options (International, 2011). Reduced Inhibitions and High Perceived Value for Gift Card Recipients. Among those who receive gift cards, there is a high perceived value. In many cases respondents indicated they would prefer a lower value gift card to a higher value gift. The most popular price point desired among surveyed recipients was $25 (International, 2011). Another benefit to gift card recipients is a reduction in inhibitions. This is what provides the industry lift mentioned above (Raghubir & Srivastava, 2008). In other words, consumers make purchases with gift cards in excess of what they would with cash. While

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this is a benefit to the merchant, it is also an emotional benefit to the recipient who feels like he can purchase a product or service that would normally be out of reach. Value Detractors and Industry Pressure Some research contrasts the merchant and customer benefits and concludes that the benefit is heavily in favor of the merchant (Horne, 2007). The data does appear to show greater financial benefits to the merchant, while the benefits to consumers are primarily emotional. From a finance and economics perspective, this may appear frustrating, especially when considering the time value of money. However, when looking at the customer perceived value, monetary cost is only one factor. Other significant factors include time cost, energy cost, psychological cost, not to mention the perceived image and personal benefits (Kotler & Keller, 2012). When taken as a whole, the ultimate benefit to the customer is not intended to be purely financial. Additional concerns related to the lack of security, guarantees, cash out options, inflexible redemption policies, expiration, etc. are being addressed by regulations. For example, regulations in both the United States and Canada protect consumers from policies that would produce greater financial loss to consumers (System, 2010) (Government, 2012). In some cases, local regulation has even gone so far as identifying unclaimed gift card balances as unclaimed property which must be handed over to a the government for possible retrieval later from the consumer (Bendle & Taylor, 2011). Market Considerations Estimates put the dollar value of unwanted gift cards at $1 billion per year in Canada (Bendle & Taylor, 2011). This is compared to an estimated total market of $6 billion. Roughly translated that represents 1 out of 6 recipients don’t want their remaining gift card balance. Due to low remaining balance, some of that $1 billion pool is not eligible for the CardSwap service. Since that number is unknown, we’ll project the estimated figure for breakage onto the pool of cards in the CardSwap target market and estimate that 10

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percent of those cards have an insufficient balance for trade (Horne, 2007). This leaves an available pool of $900 million in unwanted gift cards. Profit Potential Market size is one dimension required for the evaluation of CardSwap’s profit potential. However, the market is still immature with only one large competitor, which means that competitive analysis and industry benchmarks are unavailable. This makes it difficult to project profit opportunities clearly based on market size. Conversion rates represent another critical dimension and are more dynamic than the more static market size. Analysis of conversion rates will provide more immediate feedback based on promotional efforts. Another dimension that effects profit is the overhead required to provide the service for each card in the pool. Cards from smaller retailers represent a proportionally higher overhead requirement to verify the amount on the card and ensure it’s value. Due to seasonal spikes in gift card giving, this may have significant staffing repercussions. A final dimension that will affect profit is risk assessment. Assurance costs incurred to reimburse buyers of used cards in cases where a card is fraudulently sold and then consumed by the seller will require either an internal or external insurance mechanism. This implies the overhead of an underwriting function and maintaining some amount of cash on hand to cover losses. The accuracy and cost of this insurance mechanism will factor in to net profit. The three primary dimensions of profit projection formulation discussed above represent a highly complex and potentially unstable model. The number of variables and the possibility for movement in key metrics will further complicate long term planning. CardSwap USP One key advantage CardSwap enjoys is in its infrastructure which allows CardSwap to verify the amount on a gift card (Bendle & Taylor, 2011). A strong R&D focus will be

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required to maintain this advantage. As they further develop their internal systems, they may find that some of those can be marketed independently as ancillary services, such as providing an online verification mechanism to smaller card issuers. There are precedents for this type of reselling of internally developed systems and infrastructure as can be seen with Google and Amazon reselling computing resources. In a similar way, CardSwap may find that there is a market for verificiation infrastructure which would benefit them and card issuers. CardSwap also enjoys first mover status. This has provided them wide brand recognition. One possible pitfall related to early brand recognition is that the name may be used to refer to the type of service, not the specific company. Similar associations have plagued brands such as Kleenex which people use interchangeably with tissue and Jacuzzi which people use interchangeably with hot tub. CardSwap will have to be careful in their PR and marketing efforts to associate the name and service with their specific company.

Customer Acquisition

Lifetime Customer Value

Calculation of lifetime customer value will be very difficult for reasons similar to those mentioned in the section on profit potential above. Of the two consumer groups mentioned at the beginning of this paper, only the recipients are in the target market for the CardSwap service. That consumer group is a passive consumer of gift cards, which makes the volume of possible transactions unpredictable. Even if continuous communication systems are introduced to retain customers, the amount of time between gift card receipts introduces risk that the customer will find another service or choose not to use it. All of these unknowns make lifetime customer value difficult to formulate which results in a metric that provides less insight in marketing planning.

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Cost to Acquire New Customers Various approaches are available to estimate the cost of customer acquisition. Each has advantages and pitfalls. It’s likely that a combination of the following approaches will produce the most accurate cost projections. Historical Projections. As internal data is acquired on CardSwap customers, this data can be used to calculate the cost of customer acquisition. An advantage to this approach is accuracy. Since CardSwap owns all the data and can confirm it, any values formulated are likely to be very accurate. It may even be possible to model seasonal spikes. One challenge to this method is the collection of sufficient analytics data to identify through which channel the customer was acquired. If the analytics data is not available or accurate, then the value of the model is diminished. Another challenge relates to the amount of data. In order for statistical models to produce accurate projections, a large sample of data is required. This means the initial projections may not provide as much value as later projections. Accuracy would be expected to improve over time. Market Size Estimation. A less accurate method would be to make projections based on the anticipated $1 billion of unwanted gift card balance. Use of this model to calculate the cost of acquiring customers could be based on the same dimensions presented in the profit potential section above. Cost to acquire and service higher risk cards and low balance cards is higher than other market segments. One advantage to formulating acquisition costs using this method is the prospect of targeting only the more profitable segments where risk is low and profits are high. One disadvantage to this method is the complexity of the model and the likelihood of inaccurate projections. Promotion and Advertising Promotional and advertising efforts should cater to the specific demographic that is most likely to respond to the CardSwap service. When considering the two consumer

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groups mentioned above, there is an expected age differential between the gift card buyer and the recipient, with the recipient group being younger on average. There is useful distinction to be made between the nature of online efforts, which are segmented below into social and broadcast efforts. Demographic. It is assumed that much gift giving flows from an older giver to a younger recipient. This assumption is based on gift giving behavior, especially in families. Assuming a younger market, certain demographics can be projected. For example, they are more likely to be online and disconnected from traditional media. This population will be more concentrated in urban areas and may have more predictable social behaviors. Online Social. Data suggests that consumers use social media sites, such as Facebook and Twitter, to discuss businesses, products and services. Social media discussions may reflect both positively and negatively on a company. One implication of this ongoing, public discussion on social media platforms is that companies must have a strategy regarding how they monitor and respond to customer discussions. In the case of CardSwap, a strategy that provides easy ways for the customer to share positive experiences on social media can increase word-of-mouth marketing. One method of doing this would be to use oAuth with the social media sites, like facebook and Twitter for quick user registration and access within CardSwap. This approach could then automate sharing of certain details on the authenticating social media site. Affiliate marketing is another effective online promotional tool that would allow existing customers to refer their social media connections to CardSwap in exchange for a percentage of the transactions they perform. This would further encourage promotion and provide a broad avenue for mass promotions during seasonal demand peaks. Online Mobile. In order to tap into the enormous smartphone market, a valuation app could be developed. Such an app would allow the gift card owner to use the camera on his phone to scan the back of a gift card and receive an immediate assessment of the card’s value. The app could then guide the customer through the process of listing the gift card

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on CardSwap. Online Search and PPC. The CardSwap offering is still relatively new, which means that search volume for related terms is likely to be low. This will limit the available traffic from which to pull potential customers. In terms of pay per click advertising, low search volume and competition may represent lower costs per click. Future Product Offerings Due to the popularity of gift card malls (International, 2011), CardSwap may find it beneficial to offer a branded gift card option. This offering may simply be an open loop gift card or it may be a fixed cost conversion service that allows a consumer to convert existing closed loop cards into an open loop card. Conclusion The gift card consumer market can be broken into two segments, gift card buyers and give card recipients. Of those two groups, the recipients represent the target market for the CardSwap offering. Gift cards deliver value to both the merchant and the consumer, while the financial benefit to the consumer is lower than that to the merchant. The CardSwap offering endeavors to compensate for part of that imbalance in financial benefit to the consumer. Calculation of profit potential and lifetime customer value are complicated and may not yield accurate results. As a result, long term planning for marketing spend and growth projections may be less effective. Continued investment in automation technologies for verifying the current balance of existing cards, social media integration and fine tuning of analytics technology are likely to bring the most long term benefit and growth to CardSwap.

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References Bendle, N., & Taylor, M. (2011). Cardswap: Converting unwanted gift cards into cash. Richard Ivey School of Business. Dhar, R., & Nowlis, S. M. (1999). The effect of time pressure on consumer choice deferral. Journal of Consumer Research, 25 (4), 369-384. Government, A. (2012). Gift cards. Consumer Tips. Heinonen, K. (2011). Consumer activity in social media: Managerial approaches to consumersŠ. Journal of Consumer Behaviour, 10 (6), 356-364. Horne, D. (2007). Unredeemed gift cards and the problem of not. Journal of Consumer Marketing, 24 , 192-193. International, M. S. (2011). Consumer insights into the u.s. gift card market: 2011. First Data. Kotler, P., & Keller, K. L. (2012). A framework for marketing management (5th ed.). Prentice Hall. Raghubir, P., & Srivastava, J. (2008). Monopoly money: The effect of payment coupling and form on. Journal of Experimental Psychology: Applied, 14 (3), 213-225. System, F. R. (2010). Highlights of final gift card rule. Federal Register, 12 CFR Part 205 (Part II).