Dual Value of Delayed Incentives: An Empirical Investigation of Gift Card Promotions

Abstract

Problem definition: Gift card promotions offer a tiered incentive (a gift card) to customers for purchasing regularly-priced products, with higher expenditure receiving a larger incentive. We empirically investigate the impact of gift card promotions on customer purchase behavior by collaborating with a major U.S.-based department store that targets gift card promotion emails on its online channel. Methodology/results: We use a collection of discontinuities in the retailer’s targeting policies and corresponding fuzzy regression discontinuity designs to estimate localized causal effects of the gift card promotion. We find that gift card promotion provided to customers whose most recent purchase was 4 and 13 months ago, respectively, increased their purchase probability by 11.24% and 26.64%, and their average expenditure by 9.53% and 1.9%, respectively. Overall, the gift card promotion generated, on average, $100K in incremental sales per promotion from these customers alone. Furthermore, the promotion induced customers to seek out products from niche categories and increased spending on high-end brands. Gift card promotion emails also had a dominant advertisement effect, that is, customers who received the gift card promotion email increased expenditure even if they did not participate in the promotion. Managerial implications: (i) Gift card promotions are a viable strategy to boost short-term sales and to alter the distribution of the types (brand, category) of purchased products. (ii) Retailers should optimize gift card promotion tiers based on the tradeoff between increased customer expenditure and promotion expenses and consider the advertisement effect when targeting the promotion emails. (iii) Contrary to popular belief, retailers benefit from customers’ redeeming gift cards because they spend more due to the gift card, validating the dual value of the delayed incentive. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.0218 .