Closing the loop on closed loop

Open any local or national newspaper, and you will likely find an article on the gift card phenomenon. Watch any big-box retailer's television commercial, and you will find gift cards carefully integrated into the overall marketing concept. Very quickly, in only a few short years, gift card purchasing and using has become a way of life for most U.S. consumers.

Despite the ubiquity of gift cards, we at ProfitPoint Inc. talk to over 2,000 business owners a day and are still amazed by the amount of confusion and lack of understanding that still exists around closed loop gift cards.

Closed what?

A closed loop card is simply a card that can only be used in a closed system. A gift card purchased at a Starbucks Corp. outlet, for instance, would only be redeemable at a Starbucks coffee shop.

Closed loop cards have many functional applications in the retail environment but are currently underutilized, used only as a replacement for paper-based gift certificates. Of the more than 20,000 locations ProfitPoint supports around the country, only a small percentage actually use the cards as a marketing tool to attract new customers or to reward loyal patrons by incorporating promotional offers on the cards to encourage repeat visits and increase the average ticket size.

However, if they are just being used as a paperless gift certificate and are not being heavily merchandised and promoted, chances are the full return on investment (ROI) potential of the card program is not being realized.

Your brand here

Closed loop gift cards are great tools for creating brand awareness and brand loyalty. Most of ProfitPoint's small to medium-size enterprise (SME) clients prefer closed loop programs. SMEs like that once a card is purchased and later given as a gift – as is the case with 90 percent of gift cards –one or more subsequent transactions will almost always take place.

And, as an added benefit, those subsequent transactions generally come from the recipient of a gift card who has little or no prior experience with a particular merchant, thus offering a unique customer acquisition and retention opportunity for the business owner.

But many business owners (particularly SMEs) have not fully embraced the concept of the gift card as a way to increase business and the bottom line. Following are just a few examples of how the big-box retailers, and many forward thinking SMEs, are using the cards to grow their businesses:

• Promotional or incentive cards: Many of our customers use our system to preload gift cards for grand opening give-aways; pass them out at local sporting events; donate them to schools or charitable organizations; attach them to mailers as part of direct marketing efforts; use them as business cards. … The list goes on.

  This one-to-one method of advertising is the most cost-effective investment merchants can make in promoting the company brand to prospective customers.

• Discounted prepaid cards programs: Some businesses offer discounts to gift card purchasers. For example, merchants that sell a $50 gift card for $40. But some ask, Why give away $10 of profit?

  Because statistics don’t lie. Did you know that 61 percent of gift card recipients spend 38 percent more than the face value of the card? Did you know that 18 percent of gift card value is never redeemed? Did you know that it costs 10 times more to acquire a new customer than it does to keep one you already have? How does that $10 sound now? And, the truth is, it’s not even $10 you’re giving away – it’s the portion of the $10 that is your margin that gets given away.

  In short, there is never a bad time to discount gift cards to increase foot traffic and size of the average ticket.

• Merchandise return cards: Forget the hassle of giving refunds or forcing customers to carry around paper-based store credits. Put that refund on a card, and ensure customers spend that money with you the next time. If a customer has a bad in-store experience, nothing says "give us another chance" like a gift card.

Think outside, get inside

The beauty of closed loop gift cards lies squarely in their ability to positively affect in-store buying habits, increase customer foot traffic and advertise the store brand name. Gift card programs are limited only by the creativity and perseverance of the individual merchant. Too many small business owners see gift cards as a "build it and they will come" type of product. They expect to put the cards on the counter, and away they will go.

This is the worst case scenario, and while merchants will sell a few gift cards without doing anything, they will not maximize the gift card's potential. The simple fact is, there is so much upside in this closed loop product, all that is required is a little innovative spirit and outside the box thinking.

Editor's Note: Vaden Landers is Chief Executive Officer of ProfitPoint Inc., one of the payment industry’s fastest growing stored value card program providers. ProfitPoint currently provides transaction processing services and support for more than 20,000 merchant partners all across the country, ranging in size from the single location mom-and-pop to the largest national brands. For more information on ProfitPoint Inc., please visit http://www.profitpointinc.com.

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