It`s a Gift

It used to be that receiving a gift certificate was a letdown: no gadget to play with, no clothes to try on, no book to read. The instant gratification of a tangible gift just wasn’t there. In recent years, however, the desire by gift recipients for instant gratification is being overridden by a wish to select their own gifts. A National Retail Federation study, for example, shows 52% of consumers in 2005 wanted to receive a gift card or certificate for the holidays, up from 41% in 2003.

This shift in desire by gift recipients is altering the longtime perception that giving a gift certificate is impersonal. And steadily increasing gift certificate sales show that more gift givers are becoming comfortable with the choice. The TowerGroup, a financial services research and consulting firm, projects total sales of gift cards and certificates to be $78 billion in 2006, up 18% from $66 billion in 2005. Tower projects 15% growth in 2007 to $90 billion.

A welcome shift

So gift recipients are happy and gift givers are happy. And retailers have cause for jubilation, too. 50% of consumers who redeem gift certificates spend more than the certificate’s value, according to a client study by ValueLink, a division of First Data Corp. that creates electronic gifting programs for more than 250 brands.

This increased fondness for gift cards and certificates is especially welcome by online retailer GiftCertificates.com, and for a fairly obvious reason—all it sells is gift certificates. “The bottom line is we offer relevant gifts. And we understand the nuances of specific consumer demographics and lifestyle preferences when it comes to giving,” says Jill K. Ambrose, vice president of marketing. “We gain this understanding by conducting industry and customer research to keep up with the changing demand of this explosive market and studying the habits and purchasing practices of gift certificate buyers.”

Seattle-based GiftCertificates.com claims nearly 20,000 corporate customers and more than 2 million individual customers. The site is divided into three units: personal gifts, corporate incentive solutions and small business rewards. Launched in 1997, the pure-play online company offers gift certificates from more than 200 merchant partners. It also offers its own SuperCertificate, which can be exchanged for gift certificates from any of the merchants on its site. The web site receives 400,000 monthly visits by 300,000 unique visitors; its conversion rate is 6.1%, up from 5.2% in 2004, company executives report. The average customer ticket is $100. Industry estimates put GiftCertificates.com’s annual sales at $100 million, although the privately held company declines to reveal sales.

GiftCertificates.com disseminates certificates as stored value gift cards, conventional paper gift certificates and electronic gift certificates. There has been a continual increase in sales of electronic gift certificates over paper and cards, with digital reaching 39% of sales last year, up from 26% two years earlier.

Nontraditional merchants

GiftCertificates.com divides merchants into 15 categories, with the most popular being department stores, electronics and travel. “In the old days it used to be Sears and J.C. Penney that offered gift certificates. Over time, it expanded to all department stores, and ultimately most retailers,” says Timothy Barefield, GiftCertificates.com CEO. “Today more nontraditional merchants realize they should have gift certificates. For instance, the travel experience options are really expanding. In addition to spas, which started this segment, we’ve offered gift certificates for hot air balloon rides, race car clinics and even flights with a Russian MiG pilot.”

GiftCertificates.com maintains an inventory of products by purchasing paper gift certificates and gift cards along with serial numbers for electronic gift certificates. GiftCertificates.com purchases the certificates at a discounted rate and sells them to consumers at face value plus service fees. To avert risk involved with purchasing product in bulk, the company’s internal inventory department strategically manages supply with customer demand. It forecasts inventory based on sales and redemption activities to ensure it has optimal quantity and denomination values available.

The overall gift certificate boom is adding wind to the sails of a company that successfully weathered some stormy online seas. “Since it launched, it certainly has had steady and stable growth, especially considering the volatility of the market early on,” says Patti Freeman Evans, retail analyst at Jupiter Research. “It has provided a customer acquisition source for retailers and has both supply and demand benefits. It enables retailers to get to customers they can’t reach from other marketing vehicles, and consumers to save time and find gift certificates they might not have thought about otherwise.”

Not all news, however, is necessarily good. While online sales of gift cards enjoyed a healthy 19% year-over-year increase during the 2005 holiday season, they lagged the 25% growth in online holiday sales overall, says John Miniati, vice president of retail marketing solutions at comScore Networks Inc., a research firm specializing in consumer behavior. “This could indicate that gift certificates have less appeal to online shoppers than to consumers who also shop at retail stores, where the prevalence of gift cards is especially appealing for last-minute shoppers.”

Increased exposure

Still, the growth in overall online retailing and increasing use of the Internet to research offline purchases is helping GiftCertificates.com grow, Freeman Evans says. “Many people search online to prepare for an offline purchase, but then often choose to give a gift certificate instead. This kind of activity with multi-channel retailers is pushing gift certificate sales. And it drives both in-store and online traffic.”

Some may wonder why a site like GiftCertificates.com is needed when most retailers can sell their own in their stores and on their web sites. “GiftCertificates.com provides increased exposure for retailers within the consumer market. The increased exposure assists in increasing awareness and building their brand,” Ambrose says. “It also assists in increased sales. We feature unique merchant promotions, for example. The merchant promotion pages this holiday season had around a 9% conversion rate vs. 8% for our home page.”

The company approaches potential merchant partners with a simple pitch. “We will bring you additional customers,” Barefield says. “And if you don’t have the capability to distribute via the Internet, we will be your online channel for offering gift certificates.”

A partnership with GiftCertificates.com can translate into increased revenue. For a merchant, having a brand appear on an aggregate site like GiftCertificates.com means more visibility. Partnering with the site is one more way of furthering branding efforts, says Ed Handel in corporate sales at Crutchfield Corp., Charlottesville, Va. “Plain and simple, their site and sales programs get us in front of more businesses and consumers,” Handel says. “Approximately $3 million of our total annual sales comes from gift cards sold by GiftCertificates.com. So it works really well.”

To provide consumers with a more comprehensive gift option and retailers a chance at more sales and customer acquisitions, GiftCertificates.com created the SuperCertificate. Now the site’s core product, it enables consumers to give a gift or incentive that can be redeemed online for any branded gift certificates.

The competition

“This has allowed merchant partners to get more customers than they could on their own,” Barefield contends. “And because of the electronic option, one that many retailers don’t offer and that ships certificates via e-mail within one hour, it makes for a good last-minute gift choice—especially for those who are uncertain what to purchase. Further, the SuperCertificate is an ideal choice for corporate incentive programs because it covers a large demographic footprint.”

Like electronic gift certificates, sales of SuperCertificates have been on the rise, from 39.2% of sales in 2003 to 50.5% last year.

When it comes to online gift certificates, GiftCertificates.com isn’t the only kid on the block. Quasi-competitor GiftCards.com Inc. sells Visa debit cards that can be used anywhere Visa cards are accepted. This model, however, is very different from the sale of paper, card and electronic gift certificates used by GiftCertificates.com.

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The business model of rival GiveAnything.com LLC is more similar to that of GiftCertificates.com. GiveAnything.com does not offer merchant-specific gift certificates. Instead, it sells a “universal gift certificate” similar to GiftCertificates.com’s SuperCertificate. A SuperCertificate is redeemed at GiftCertificates.com for the branded gift certificates from any of the company’s 200 merchant partners. The electronic universal gift certificate, which can be printed by a gift giver or recipient if so desired, can be redeemed directly at the online stores of GiveAnything.com’s 300 merchant partners. Consumers check out and pay online just like they’re using a credit card.

“They are not competition,” Barefield insists. “It’s a different experience when you’re giving a credit card-like form of payment vs. a gift certificate.”

Edward Brookshire, president of New York-based GiveAnything.com, which makes its money through merchant commissions and float, begs to differ. “We don’t see it that way—we are not ‘currency,’” he says. “Our universal gift certificate is no different than their SuperCertificate. It’s accepted and spent online at a wide variety of stores; and we have a deeper variety of merchants. I don’t see a difference in the actual product.”

Unsettled market

Industry experts view the two companies competing for the same consumers. As for which online retailer will gain and maintain prominence, it’s too soon to tell. “It’s still too small a market to say one company might trump the other,” says Freeman Evans, the analyst. “Growth opportunities will arise, and there is plenty of awareness-building yet to be done. For GiftCertificates.com, another player is not a bad thing. From a competitive standpoint, it will help the company innovate. Plus, more players build overall awareness of online gift certificates among consumers.”

As for the future, GiftCertificates.com sees increasing sales of its SuperCertificate and adding merchants to its network of partners as keys to growth.

“Three years ago we did not have iTunes or any music download merchants because they didn’t really exist,” Barefield says. As product offerings change and trends arise, the company must stay abreast of change and ensure it has the options and choices consumers want, he adds. “We’re constantly looking at new and relevant merchants. And we’re looking to increase electronic redemption.”

The company markets to consumers via search engines, e-newsletters, HTML e-mails, affiliate marketing, web site advertising and radio ads. But the primary strategy moving forward for GiftCertificates.com will be to increase customer retention.

“We are going to spend much more time and effort on retention,” Ambrose says. “We’ve been gaining the most efficiency in our customer acquisition efforts. But search engine keyword prices are up. The opportunity to boost our financials is in retention. We’re still moving forward with acquisition efforts, but we’re layering in more retention.”

Unique motivations

One of the main retention efforts this year will be gathering more data on existing customers. Based on analysis of current data, company executives have identified the most important customers. The company will leverage these findings to launch a customer loyalty initiative, which subsequently will gather new and different data on these important customers. It then will use the additional information to enhance its database and analyze the data to provide better and more focused product offerings.

“Previously we have communicated to all consumer audiences as if they were homogenous. We have not messaged specifically to segments,” Ambrose says. “A key to retention is treating customer groups in a unique fashion. We have discovered unique motivations and needs of various segments, even for purchasing something that seems as straightforward as a gift certificate. We will be embarking on a phased approach to improve target marketing and provide unique customer experiences.”

Phase one, already completed, involved segmenting customers. Phase two, currently underway, has the company evaluating products and services, positioning, messaging, and communications methods for relevancy. Phase three will see the deployment of evaluation findings in marketing efforts and revised site language. And phase four will be the creation of distinctive online shopping experiences for each segment. GiftCertificates.com is searching for technology vendors to help with phase four efforts.

“Because of the nature of this evolving marketplace, advances in online technologies and progress made in the manipulation and analysis of customer behavior, we’re seeking technology companies that can help us maximize our relationship with customers,” Ambrose says. “Specifically, we’re looking at companies that specialize in retention and conversion efforts. Dynamic messaging and e-mail marketing will be just two methods that will support our phased approach.”

The road ahead

Online retail sales are up. Gift certificate sales are up. The desire to receive gift certificates is up. Things, in general, are looking up. But obstacles lie ahead for GiftCertificates.com.

“There is potential competition; other aggregators will be coming into the market. Competition also could come from the shopping search engines adding gift certificates as a product that consumers can search on and compare,” Freeman Evans predicts.

GiftCertificates.com executives believe the challenges they must confront are not unique to the company. The future of the company, they say, will be affected by many of the same factors influencing the entire online retailing industry.

“Every online retailer is facing the increasing cost of customer acquisition through the search process. That will continue to be a challenge,” Barefield predicts. “Another challenge is the fast-changing nature of the game. The bar for having a web site and customer experience that consumers find at minimum to be adequate constantly is raised. Always having to focus on the kinds of changes you need to make and the new features you need to incorporate so that customers have positive experiences is a challenge for everyone.”

bill@verticalwebmedia.com