Friday, December 25, 2009

Give cash next year?

Tim Harford, writing about Joel Waldfogel's famous work on the "deadweight loss" of Christmas gifts, writes "What to do? Waldfogel admits that with some exceptions, such as gifts from older relatives to teenagers, cash is not a suitable gift. Nothing says “I don’t understand you” like a cash gift. Nor is it easy to turn one’s back on the whole ritual."

But the repugnance of cash gifts has given rise to some close substitutes, some of which work better than others. (I admire wedding gift registries as an elegant market design solution to the problem.) Gift cards, not so much.

The NY Times has an illuminating article about the business of gift cards: Redeem All of Gift Card, or Give Store a Present.

"This year, nearly $5 billion of the money that well-meaning givers have put onto gift cards will go unspent, according to TowerGroup, a financial services consulting firm. The money then reverts back mostly to the retailers and banks that loaded the plastic initially.
In the industry, this is known as breakage, and here’s what it means: If you buy a gift card for a family member or friend, there’s a good chance you’ll give a little gift to the retailer or bank that issued it as well.
How does breakage happen? People lose their cards. Or they abandon them in a drawer and assume they’re expired when they’re unearthed years later. Fees can still eat away at some of them. And people may use $46 of a $50 card and then throw it out rather than make another trip back to the store."
"It isn’t just a break-even proposition either, according to the people behind If you count 10 to 12 percent breakage in your calculations, the site contends, the gift card display can become the “most profitable square foot of space in the place.”
This is how some of the people in the industry talk about gift cards when they think consumers aren’t listening. And for big companies, breakage can add up to real money. Not every big retailer or bank discloses it, but Best Buy was kind enough to note that it kept $38 million in breakage in its most recent fiscal year. Home Depot cleared $37 million. Breakage can be total when a retailer goes out of business. "

One good market design idea is the "gift receipt," a receipt that identifies the store at which a gift was bought, but doesn't list the price that was paid. This is meant to make returns easier (e.g. in case you got two electric can openers, or if last year's waist size no longer fits). These are catching on, according to the National Retail Federation, which reports: Stigma of Gift Receipts is Diminishing Among Americans, According to NRF Survey. (Stores' policies on returns are actually an interesting market design issue in themselves, different in the U.S. than in Europe...)

Then there's Dilbert.

1 comment:

dWj said...

My brother and I rarely give each other gifts, though I have one for him this year (though I expect none for him); I saw something I thought he would like when I was in India, and I know there's no chance he would otherwise be able to get it.

My grandmother frequently manages to find clothing or a book that I like better than I would if I were to go shopping for myself. To a large extent, though, I'd just as soon extend the arrangement I have with my brother of not (usually) exchanging gifts.