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Consumer Behavior
3 Reasons to Ditch Gift Cards This Year
Research demonstrates several surprising benefits of cash gifts over vouchers.
Posted November 14, 2019
As the days are getting shorter and the holidays are drawing closer, our minds turn towards the all-consuming challenge of gift shopping. The tradition of gift-giving is motivated by an exchange of love and affection, but increasing consumerism and affluence in the developed world has turned it into an ever more challenging exercise of box-ticking.
What’s the perfect gift?
These days, the perfect gift has to meet many criteria. Ideally, the present must NICE:
- Novel: not yet owned by the receiver
- Individualized: tailored to the receiver’s likes and wants
- Convenient: easy to buy, easy to post, easy to wrap
- Expensive: of obvious value
With so many issues to consider, it is hardly surprising that an increasing number of people decide to break with the tradition of gift exchange or else replace it with donations to charitable organizations. Others try to simplify the challenge by purchasing gift cards for their loved ones.
Because—what’s not to like about a voucher to spend at a popular store? By letting the receiver pick the final gift, novelty and personal fit are guaranteed. Additionally, gift cards are convenient to purchase, neatly fit into an envelope (or even an email attachment!) and their financial value—often printed on the card—can not be missed.
The negative effects of gift cards
The increasing popularity of gift cards is hardly surprising. However, many well-wishing benefactors fail to realize the implications of their voucher gifts. Indeed, the main beneficiaries of gift cards are the retailers and not the gift recipients!
1. People buy more luxury items
In a previous post, I showed that human reasoning about money—also referred to as mental accounting—frequently violates rational economic principles. A key feature of mental accounting is the categorization or earmarking of money for different purposes. For example, many people mentally differentiate between budgets for bills, groceries, and entertainment. This categorization can help to keep on top of necessary purchases. However, it may also lead to excessively rigid spending rules, which prevent a person from covering financial shortfalls (e.g. in the groceries category) with available funds originally earmarked for other purposes. It is this categorization process of mental accounting, which also leads to an irrational use of gift cards.
Studies comparing cash gifts and voucher gifts have repeatedly demonstrated crucial differences in the ways recipients categorize and subsequently use their gifts. Gift cards are typically allocated to a mental account reserved entirely for hedonic spending. For example, while most gift cards offer a choice between necessities and luxury goods, the vast majority of voucher holders choose items from the second category. Interestingly, this is not the case for recipients of cash gifts, who are quite happy to spend the extra money on much-needed household items. It appears that the mental category attached to gift cards leads to the higher consumption of luxury goods even if other items are needed more urgently.
2. People spend more
In addition to influencing the types of purchases, research suggests that gift cards may also trick people into overspending. Not only does a voucher entice consumers to visit specific stores and browse their offers, but it also leads them to subsidize gift card purchases with personal funds. Indeed, it appears that about half of gift card recipients end up spending more than their card is worth. A frequent reason for additional spending is the fear of losing out on small, non-refundable leftover sums on gift cards. However, even with fully refundable gift cards, people are tempted into overspending. Research suggests that consumers conceptualize items bought with gift cards as “free goods” and are therefore happy to subsidize them with their personal funds. But was this the intention of the benefactor? A gift that tricks the recipient into cashing out?
3. People lose out
A final reason to ditch gift cards this Christmas is that an estimated 30% (yes, that’s right—almost a third!) of gift cards are never used. Having lost or misplaced my fair share of gift cards over the years, this number may not be surprising. An additional barrier to voucher use is frequent expiration dates or annoying small print that ties gift cards to specific, out-of-the-way stores. By the time recipients finally make it to the shops, their gift cards may have lost validity! This reminds me of the time I received a generous Christmas voucher for a little sports retailer off the high street. Once I finally got around to visiting the shop and picking a new yoga outfit, the card had long expired! Annoyed about the wasted effort, I ended up purchasing the items anyway (from my own money). A double win for the retailer!
What are the alternatives?
While there are no easy solutions to the psychological traps of gift-giving, an obvious alternative to gift vouchers are cash gifts. An envelope of notes may appear unimaginative at first glance. However, money is likely to be of better use and save recipients from overspending. Also, who said a cash gift had to be boring? Why not try one of these creative ideas to deliver a little cash injection this year? Your loved ones will thank you.
