So when you go to purchase something, sometimes Honey gives you an offer to buy a gift card and save some money on that transaction. Can someone explain to me how that works? If possible, how does Honey make money off of that transaction (is it like a referral kickback?) Any insight would be good to know. Genuinely curious.
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Companies make a *lot* of money from gift cards. They have the money from the purchasers, and they invest that money in the market (or pay off loans with interest) to make even more money. And sometimes, people never actually redeem the gift cards (or don’t use them for a long time, which means investing that money longer). And even when they do use the cards, they often spend more money at the store than the value of the card, so the company makes more profit in sales–it’s like free advertising. So, sometimes, it actually makes financial sense for a company to offer, for example, a $50 gift card for only $45. Averaged out over everyone who buys the cards, in the long run, the company will ultimately make back that $5 loss easily.
The prices of the things you buy are often a lot higher than what they cost to make. Like, WAY more than you think. Most people assume markups are something like 10%. In reality markups of 3x to 5x are pretty common.
So a lot of times even giving away 50% off of an item still makes money for the business.
If they sell you a $50 gift card for $45 and Honey takes a $5 from that for being the facilitator, the company has only lost 20% of that original $50. If they’re marking up merchandise at 4x, then something you will pay $50 for only cost them about $12.50 to make. So they made $40 selling an item that cost them $12.50 and have $27.50 in profit. That’s enough to manufacture 2 more of the item you just bought.
So why not just put coupons in magazines or buy ads online? Two reasons.
This way is nicer for the company because Honey is advertisement that *only* costs them money proportional to sales. That’s kind of a big-word concept so let’s break it down.
If you buy plain old ads, you tend to pay per *view* and the amount you pay goes up based on how many people the advertiser can brag about reaching. But not everybody who sees the ad is going to go buy something. Each time the ad is viewed and NOT used to make a purchase, the company loses that little bit of advertising money.
Letting Honey sell a gift card puts the risk on Honey. If Honey shows the offer to 100,000 people and nobody buys it, the company loses no money and Honey makes no money. If all 100,000 people buy a gift card, both the company and Honey make money. It’s a very win-win situation: in the worst case the company just makes the money they’d have made without making the deal. In the best case, the company gets a lot of money that MIGHT get used for purchases.
That last part is important, too. If I have money TODAY, I can do something with it. If I put it in savings or investments, it starts making money for me immediately. If you promise me money next week, that doesn’t help me. I can’t invest it or use it to buy something yet. So in economics, people often argue that money today is worth more than more money tomorrow. (This can be taken to some very dumb extremes, it’s important for people to remember “rules” like this always have exceptions!)
If I get a coupon for free, the company *hopes* I spend money. I might never spend it. If I don’t, that coupon was a complete waste for them.
If I buy a gift card, the company gets my money immediately. They can use it to make more stuff, invest it, or anything else they want to do with it. If I forget about the gift card and never use it, I’m the one who loses money. In reality, usually these gift cards end up with some small amount like a quarter left on them and then get thrown away, meaning the company made a little extra off each one. This is another way it’s a win-win for the company!
So to recap:
* The company isn’t losing money via the discount.
* It’s more likely to result in sales than traditional advertising.
* The “risk” of the advertisement not working falls on Honey, not the company.
* Since Honey makes money off the sale, their best interests are to sell as many as possible.
* The company gets the money right away.
* The customer might forget to use the gift card or not fully use it.
* Having a lot of money today is a lot better than having the potential to make the same amount tomorrow.
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