Gift Cards as a Premium Good?

Wednesday, December 3, 2014

I don't understand coffee. Many people are addicted to caffeine and refuse to function unless they've consumed their daily dose. Actually, that's the part that I understand.

What confuses me is how people have moved from treating coffee as a "thing" to a near-religious experience. They buy thousand dollar machines to prepare it, spend enormous amounts of cash to acquire it and take significant portions of their days to consume it. But, ladies and gentlemen, the bar has just been raised.

Now people are not just willing to pay a premium for coffee, they're willing to pay a premium for paying for coffee. That's right. Whereas once we would expect a gift card to be sold at face-value, Starbucks is now selling $50 gift cards for $200 (plus tax).

As soon as this fact came to my attention, I just had to learn more.

I discovered that these gift cards were not the typical plastic items that one would normally expect. Instead, they were composed of "premium 925 Sterling Silver" and delivered inside "a beautiful red snap pouch."

Although a quick search did not reveal the manufacturing cost basis for these cards, I assume that they are still being sold for a profit. The 300% markup on the face-value of the gift cards is a stroke of genius - even if the company doesn't make a dime in profit from their sale.

Why?

• News organizations (and even blogs like this one) will be talking about this oddity. This buzz represents free advertising that will get people thinking about Starbucks at a time of year when they are most willing to throw their money toward expensive gifts. As such, even folks who don't buy these silver cards will be more likely to buy other Starbucks products.
• Recipients of these gift certificates are going to want to talk about them and show them off. Each time a person sees one of these certificates, he will ask about it. It will happen because these cards are unusual. To borrow marketing guru Seth Godin's famous idiom, a sterling silver gift certificate is a purple cow. People will be curious.
• These cards will help defend their "premium" brand positioning. After all, if their gift cards are made out of sterling silver, their products must be worth their high costs.
• Card owners will feel a strengthened sense of loyalty to the Starbucks brand. When given the choice, would such a person go to a random coffee shop or to a Starbucks where he could be one of the select few who could use a sterling silver gift card?

That's all great for the company, but why on earth would someone pay the $150 premium being charged? Two points come to mind, and it's all about ego:

• The expensive cards will provide enhanced permission for recipients to associate themselves with a premium brand. In a sense, they will say "My life isn't in shambles, look - I have a shiny silver card from Starbucks!"
• The relative scarcity of the cards will allow recipients to say that they have something valuable that others can't or don't have. "Everyone bow before me, for I have a silver card and (more importantly) you don't."

Let me be clear, I would never pay $50 for a $200 gift certificate for any reason. Would I potentially advise a company to offer such a thing? You better believe it!

Want to learn more? Take a look at my very exclusive book on how to price software. How exclusive is it? Only people who pay me money can get it. I also offer consulting services, but only to those who are worthy. Now who says subtlety is a dead art?