Yes that is correct. What is your willingness to pay for $100. To be specific, $100 gift card? This is not quite the same as the behavioral economics aspect on gift card I wrote about in the past. Nor is this the case of $400 worth Starbucks Steel card that costs you $450 to buy. This is just plain cost economics. So your answer, if you are the type of person who like to buy Gift cards, should be a value less than or equal to $100.
The price difference exists because you see whatever transactional and other factors that erode the value below $100. The value erosion is different for different people. For the same person the value erosion is different for different stores as well – likely influenced largely by perception of value they get for $100 in each store. Let me make this more concrete for you.
- What are you willing to pay for $100 Amazon.com gift card?
- What are you willing to pay for $100 Barnes and Noble gift card?
Now you see the difference?
This value distribution in our minds is not just known to us but to marketers as well. This is on display on United Mileageplus rewards redeem program for gift cards. United’s frequent flyer program offers you to redeem your miles for store gift cards. How many miles do you think a $100 gift card will cost? You may think all miles are the same and all $100 are the same, but here is the distribution of how many miles it costs you for different $100 gift cards.
The lowest is at Callaway Golf (12,000 miles) and the highest is at Amazon, REI, Sears (16,500 miles). There is a likelihood that United may be doing this price difference ( miles) based on deals they struck with the retailers and passing on some of savings. But if you look at my Amazon-B&N comparison you can see the clear value difference in what $100 can buy in these stores with Amazon being the low price leader.
Now that you see the miles cost, it costs on average 14,000 for $100 gift card, let us flip the question.
What are you willing to pay buy 14,000 united miles?
United thinks you are willing to pay $526.75 ($35 per 1000 miles plus a 7.5% fee).
So a $100 gift card can cost you $526.75.
Explaining this difference is left as an exercise to you.