Thread: Profits to Gift Cards to Revenue to Profits

Imagine a company which took half of its profits and converted them to gift cards that can only be used to by its more expensive goods and services. No other company could accept them because they came from the profits and they must go directly to future sales of the company. Part of the future sales involves the gift cards, etc, so therefore a multiplier is involved. Now if production cannot catch up with the increased aggregate demand, that is fine, since the total spending possible from initial sales to the end would be the same as if there were no tax in or on that sales at all, due to the recycling of gift cards.

Originally Posted by kmarinas86

Imagine a company which took half of its profits and converted them to gift cards that can only be used to by its more expensive goods and services. No other company could accept them because they came from the profits and they must go directly to future sales of the company. Part of the future sales involves the gift cards, etc, so therefore a multiplier is involved. Now if production cannot catch up with the increased aggregate demand, that is fine, since the total spending possible from initial sales to the end would be the same as if there were no tax in or on that sales at all, due to the recycling of gift cards.

This post makes no sense whatsoever, do you want to clarify?

No company will ever set profit aside for gift cards. The purchasing of gifts cards create profit. It makes no sense financially.
Since gift cards are basically cash at the store they are good for, I don't believe you can legally tell them that they are to only be used for higher end merchandise.
Normally, gift cards cannot be used at other companies.

Even if this is just a hypothetical it seems to make little sense.

typo:
"same as if there were no tax in or on that sales at all"


Shouldn't have been there.

Originally Posted by metheron

Even if this is just a hypothetical it seems to make little sense.

Let's make the hypothetical simpler. Back to basics:

The company wants to increase its sales. It can do this by spending money on gift cards. Now usually, gift cards are bought by the consumer. Instead, here the company buys the gift cards themselves out of their own profit and gives them to prospective customers. Doing this increases the sales of the business. Actually, I have a better word for this, it's called coupon. The difference with this "coupon" or gift card, is that it has as much cash value as its balance, but a coupon has only a fraction of a cent of cash value.

Originally Posted by kmarinas86

Let's make the hypothetical simpler. Back to basics:

The company wants to increase its sales. It can do this by spending money on gift cards. Now usually, gift cards are bought by the consumer. Instead, here the company buys the gift cards themselves out of their own profit and gives them to prospective customers. Doing this increases the sales of the business. Actually, I have a better word for this, it's called coupon. The difference with this "coupon" or gift card, is that it has as much cash value as its balance, but a coupon has only a fraction of a cent of cash value.

If you profit 100k and you reduce (well you wouldn't really be reducing it, you would be offsetting it to another category) that by 50k by purchasing gift cards to distribute to potential customers, if your accounting methods are correct will not change the bottom line at all. It ill just change the categories in which they are potentially put in.
In fact, I would go so far as to consider it risky. If there is no time limit on these gift cards and your cost of sales goes up on your particular products then you could realize less profits than what you may have begun wiith.

Right?.......If not....why?

Originally Posted by metheron

If you profit 100k and you reduce (well you wouldn't really be reducing it, you would be offsetting it to another category) that by 50k by purchasing gift cards to distribute to potential customers, if your accounting methods are correct will not change the bottom line at all. It ill just change the categories in which they are potentially put in.
In fact, I would go so far as to consider it risky. If there is no time limit on these gift cards and your cost of sales goes up on your particular products then you could realize less profits than what you may have begun wiith.

Right?.......If not....why?

Consider a coupon which does not increase sales, but increases the costs associated with the good and services sold. These extra costs are $80, so the effect on profits is minus $80.

Consider a gift card which increases sales by $100, but increases the costs associated with the good and services sold by $80. In addition, $100 is initially taken out of profits to fund the gift card. Both costs and sales are greater by $100 than in the coupon scenario. The gift card scenario has a higher cost as a percent of sales. The profit, however, is the same as the first coupon scenario.

Now, consider a coupon which increases sales by $100, but increases the costs associated with the good and services sold. These extra costs are $160 for two products (buy 1 get 1 free), so the effect on profits is minus $60, this is twenty dollars better than either of the prior scenarios.

Consider a gift card that work by paying half the total selling price of goods, which increases sales by $200. The total cost of the goods to the business is $160. In addition, $100 is initially taken out of profits to fund the gift card. Both costs and sales are greater by $100 than in the second coupon scenario. The gift card scenario has a higher cost as a percent of sales. The profit, however, is the same as the second gift card scenario.

Originally Posted by kmarinas86

Consider a coupon which does not increase sales, but increases the costs associated with the good and services sold. These extra costs are $80, so the effect on profits is minus $80.

Consider a gift card which increases sales by $100, but increases the costs associated with the good and services sold by $80. In addition, $100 is initially taken out of profits to fund the gift card. Both costs and sales are greater by $100 than in the coupon scenario. The gift card scenario has a higher cost as a percent of sales. The profit, however, is the same as the first coupon scenario.

Now, consider a coupon which increases sales by $100, but increases the costs associated with the good and services sold. These extra costs are $160 for two products (buy 1 get 1 free), so the effect on profits is minus $60, this is twenty dollars better than either of the prior scenarios.

Consider a gift card which increases sales by $200, but increases the costs associated with the good and services sold by $160. In addition, $100 is initially taken out of profits to fund the gift card. Both costs and sales are greater by $100 than in the second coupon scenario. The gift card scenario has a higher cost as a percent of sales. The profit, however, is the same as the second gift card scenario.

There is no such animal as a gift card that increases sales. The cost of the gift card is the cost of the sale. Once a gift card is purchsed, the profit margin on that gift card is determined by your profit margin on the product purchased. So...........if you take straight profit and turn it into a gift card you have no alternative but to lose money unless your profit margin is more than 100 %.

If my first paragraph is a bit off.......consider this. If you take 100 of profit and turn it into a gift card. The recipient of that gift card then purchases a 100 dvd player that only has a twenty percent profit margin on it. You just lost 80 bucks. Your scenario relies on additional sales. Without the additional sales it would be a foolish venture, unless you are trying to expand your customer base and are willing to lose money to do so.

In real life. Gift cards are great. The profit margin is basically the same minus the expense of making the cards themselves.....minimal.
Coupons companies make less money, but they are still profiting plenty. In neither real life scenario is there any risk.