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Last Updated: Monday, 17 December 2007, 11:54 GMT
Economics of gift vouchers
Gift voucher

By Ruth Alexander
More or Less, Radio 4

Gift vouchers might seem like the easiest and safest Christmas present if you're not sure of someone's tastes. But why are they often worth less than their face value?

"It is more blessed to give than to receive," especially when you can exchange hours of pacing up and down the High Street with a quick bulk purchase of gift vouchers.

It's estimated we spend about 3bn a year on gift cards and vouchers in the UK - that's about 1% of everything we spend in the shops.

But the British Retail Consortium says it is thought about a quarter of these vouchers and cards never get redeemed. In terms of actual money spent, about eight per cent is wasted, according to the Vouchers Association.

Tired shopper and children
Unbelievably, some would forgo this experience for a quick and easy gift card
That's a lot of spending power lying forgotten in the bottoms of kitchen drawers. And what's more, some are redeemed only after being sold on for less than their face value.

"The existence of a secondary market," says US economist Jennifer Pate, "demonstrates a gap between the face value of the card and the value to the recipient."

While studying the resale market of credit-card-style gift cards on an internet auction site, Ms Pate amassed a wealth of data. She collected information on about 2,000 completed sales from about 500 unique sellers, covering 31 US stores, between February and June 2004.

"Sellers accept significantly less cash for their gift cards, at a loss of approximately 15% of the initial value on average." Dr Pate says that when selling fees are taken into consideration, that loss becomes 20%.

This echoes another economist's theory about gift-giving, known as "the deadweight loss of Christmas".

Does thought count?

Coined by Professor Joel Waldfogel of the University of Pennsylvania, it states that a typical 100 gift will be valued at just 80 by its recipient. However, Mr Waldfogel purposefully left sentimental value out of his calculations.

I remember getting a gift card for a store that was really for someone who was five years younger than me... there was nothing that I could spend this money on
Jennifer Pate
"The whole process of gift-giving is a way of destroying value," he says.

Other economists disagree, arguing that people value presents significantly above their price tag because they appreciate the thought or they are pleased to receive a luxury they couldn't normally justify.

But still, the number of unwanted presents up for sale on the internet shows how wide of the mark our gift selections can be. And we can get it just as wrong with gift vouchers and gift cards.

Ms Pate says you still have to know something about a person's tastes. That is, it is no good buying a gift card for a shop they wouldn't be seen dead in. Her own experience has taught her that.

$11k gift card

"I remember getting a gift card for a store that was really for someone who was five years younger than me and walking in and just realising that there was nothing that I could spend this money on.

Gift card hardware store
DIY shops are among the best bets for those buying gift cards
"I'm quite the shopper, so to walk into a store and think that there is nothing I can buy with this money - it's frustrating," she says.

You might think you are really treating someone if you get them a gift voucher for a jewellers or a lingerie shop. But Dr Pate says gift cards from specialist shops do the worst in online auctions.

The most expensive gift card she found on sale was for Tiffany & Co, the jewellers. It had $11,000 credit on it but it was sold for $8,800 - a 20% loss. At the other end of the spectrum was a Starbucks gift card for $3.30, that sold for $2.50.

Gift cards for pet shops did badly too - again selling at about a 20% discount.

Cards and vouchers for more general shops, like DIY stores, do better, she says, selling at around 10% discounts.

"Givers who are less aware of the recipient's preferences should rely more on gift cards from general-purpose stores that offer greater product variety," says Ms Pate.

$20 sweet spot

According to the Vouchers Association, 98% of the credit on gift cards and vouchers for supermarkets gets used up, whereas just 85% of the money spent on vouchers for more specialist shops ends up being redeemed.

Child bag
'Awesome... a 20 voucher for Homebase"
And Ms Pate says there is no point just throwing cash at the problem. Scrooges might, in fact, make the best givers.

"I found there are very few gift cards in the range of $20 being resold on the internet because people are able to use them much more easily than one for $200 and up," says Dr Pate. Of course, it could be that people can't be bothered to sell on a card which has a low value.

And there is no way of knowing what proportion of gift cards end up being sold on, so it's impossible to draw any firm conclusions from this research.

The one thing economists know for sure is that the most reliably efficient present is that friendly 10 note slipped inside the Christmas card. But even they realise that can be a bit of a no-no.

Which leads Ms Pate to a creative answer: "At the end of the day, a gift card is just a cash gift for a certain store so if that's what it takes to make a cash gift more special, than one could just give money and include a note that says 'I think you'd really like to spend it at this store', and then that adds the thought that counts."

More or Less is on Radio 4 on Monday, 17 December at 16.30, after which it can be heard here on the Listen Again site.

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