Retailer's optimal strategy of gift card based on descending consumer's reservation price

Abstract

Gift cards are widely used by many enterprises nowadays for products promotion. Gift cards are used not only for a basket of goods, but also for some specific kinds of goods. In this paper, we characterize consumers' purchasing behavior according to descending consumers' reservation price, then develop a model to derive the optimal purchase amount threshold and gift card value. We find that offering gift cards is obviously better than not offering that for retailers. The results also indicate that in addition to the average gross margin of the retailer and the type of purchases consumers make with gift cards, the profitability of gift cards depends on the redemption rate and whether the consumers are consistent or not.