Written by The Gift Club
Turn on your local news channel, and you are likely to see a recurring theme: inﬂation is here – and it’s on the rise.
From the rising costs of commodities to skyrocketing gas prices, it seems as though the COVID-19 pandemic has morphed into a new threat in the global market.
When inﬂation raises its ugly head, pocketbooks react quickly. Whether it is due to fear mongering from the media or realistic sticker prices in
the stores, a rise in prices means that people have to adjust their spending.
Throw in a geopolitical crisis in Ukraine, and you’ve got a recipe for even worse ﬁnancial outlooks.
In the current global climate, where consumers are already reining in their spending, will inﬂation cause them to cut back even further on loyalty and gift card purchases? And if so, what does that mean for businesses that rely on these programs? Let’s take a closer look.
What is Inflation, and Why Is It Rising?
Inflation is the increase of prices for goods and services in an economy over a period of time. There are many factors that can contribute to inflation, including rising production costs, a decrease in the value of money, or an increase in the amount of money in circulation.
A variety of causes can drive inflation:
- Monetary policy: Lowering interest rates and flooding economies with money to offset COVID-19 deflationary pressures
- Geopolitical instability: Threats to oil supplies and supply chain shocks, as well as consumer uncertainty
- Supply shocks: A disruption to the normal flow of goods and services, such as a rise in the price of oil or a drought that damages crops
- Cost-push inflation: When producers face higher costs for the goods and services they produce, they may raise prices to try to maintain their profit margins
- Demand-pull inflation: When demand for a good or service rises faster than the available supply, it can lead to higher prices
When inflation begins to spike, it can often spill from nation to nation. When major economies struggle under the weight of high prices, it can cause a chain reaction as other countries follow suit.
Current Inflation Stats
The inflation situation continues to change on a near-constant basis as countries continue to enact policies to fight it.
Inflation rates are rising all over the world. Here are just a few of the current rates as of February 2022:
- Japan 0.5%
- China 0.9%
- Australia 3.5%
- France 3.6%
- South Korea 3.7%
- Germany 5.1%
- United Kingdom 5.5%
- United States 7.9%
- Brazil 10.54%
As rates rise, so do concerns about the overall economy. Consumers are feeling the pinch as they try to grapple with increased prices for goods and services. Businesses, meanwhile, are concerned about how these rates will impact their ability to turn a profit.
Gaetano Giannetto, Founder of Italian international prepaid payment networks, Epipoli says “Italy is hit by the same rise of the inﬂation rate experienced by other European countries. With a current forecast of +5.7% on annual basis, certiﬁed by the Italian National Institute of Statistics, consumers are starting to change their spending habits, concerned by the uncertainty towards the future, measured by the consumer conﬁdence climate index, diminished from 112.4 in February to 100.8 in March. In this context, Gift Cards may well represent a safe haven asset for those company willing to reward customers or make a gift to their friends. Cash equivalent rewards and in particular Gift Cards that can be converted into essential goods such as grocery, petrol and other everyday spending baskets are increasingly appreciated by consumers, less attracted by luxury or unnecessary goods.”
How Inflation Impacts Loyalty Programs
While a rising cost of living affects everyone, it doesn’t have the same impact on all industries. When it comes to loyalty programs, there are a few key ways that inflation can cause problems:
1. Redemptions become more expensive: If the prices of goods and services increase faster than the value of points or miles, it becomes more expensive for members to redeem them.
2. The value of points and miles declines: In a period of high inflation, the value of loyalty currencies can decline quickly as people look to preserve their cash. This can devalue rewards and make it harder for companies to entice customers to sign up for their programs.
3. Customers become more price-sensitive: In an inflationary environment, people are naturally going to be more careful with their money. This can lead to a decrease in discretionary spending and a shift in spending towards essential items.
4. Companies cut back on rewards: As profits decline and costs increase, companies may look to cut back on the rewards and benefits they offer to loyalty program members. This can lead to a decrease in customer satisfaction and engagement and an increase in attrition.
Clare White, Business Development Director at loyalty marketing ﬁrm, Catalina UK says “‘Customers value perception of loyalty programs will be a key challenge retailers will face with ongoing inﬂation. As retailers ﬁght for customers and focus on price, the differentiator will be the loyalty programme and the value exchange with their customers.’
While Tom Peace MD at The Loyalty People remarked, “We are all feeling the pain of the rising cost of living. This can be a difﬁcult position for loyalty programmes but many of their members will be looking for ways to save money and cash in their rewards/points for essentials. Programmes can capitalise on these customer needs with targeted offers and valuable burn options that help their members through these tough times.”
The Impact of Inﬂation on Gift Cards
Inﬂation can also have a signiﬁcant impact on gift cards, which are often seen as a way to offset rising prices.
Craig Span, Founder and CEO of Globetopper, the prepaid B2B gift card concierge ﬁrm in the US says “Much of consumer behaviour is psychological. Rising inﬂation and higher prices rightfully cause many people to allocate more of their available cash towards covering basic needs for themselves and their families. There’s a certain economic value tied to the cash in our pocketbooks- how much we are willing to pay for something while considering that money could be spent elsewhere. That can make it very hard for someone to spend on goods and services they consider to be less than practical. Given the inherent limitation on how the funds on a gift card can be spent, consumers don’t have the same pressure to work through that same economic value equation. Gift cards certainly afford people the ability to buy sensible items they need, but they also provide a kind of freedom that allows them to buy things they want. In uncertain economic times, sometimes reducing the psychological pressure on what we spend on can be the most welcome gift of all.”
When inﬂation is high, the value of a gift card can decline quickly, leaving the recipient with less purchasing power than they expected.
In addition, high inﬂation can lead to a decrease in demand for gift cards, as people become more price-conscious and look for ways to save money.
This can lead to lower sales and proﬁts for companies that sell gift cards and a decrease in the overall value of the gift card market.
Colin Munro is the managing director of Miconex in the UK, the ﬁntech behind the award winning Town & City Gift Card programme and the Mi Rewards loyalty scheme.
“The popularity of multi-venue gift cards increased to 38% of sales in 2021. Increasingly customers want ﬂexibility and choice in how to spend their gift cards. Yes, they want to spend on treat items such as a meal they wouldn’t normally have experienced, or a night away, but also on essentials, such as meat from the local butchers or new tyres for the car. As inﬂation rises, we expect that redemption of local gift cards on essential items will increase too. New research from the CIPD suggests that despite rising inﬂation, nearly 1 in 5 employees say not enough is being done to support their ﬁnancial wellbeing. Employers and places can play their part in delivering tangible support for their people at this time. Reward and loyalty programmes, disbursement initiatives or discounted gift cards on local products and services can help people with the jump in the cost of living, increasing their purchasing power and supporting local economies too.”
Opportunities for Loyalty Programs
While inﬂation can be a challenge for loyalty programs, it also presents some opportunities for companies that are able to adapt. Here are a few ways that businesses can take advantage of the current environment:
1. Offer more rewards that can be used for essentials: In an inﬂationary environment, people are going to be more interested in rewards that can help them save money on essential items. Offering more rewards that can be used for groceries, gas, and other necessities can be a way to attract more customers.
2. Focus on exclusive offers and discounts: People looking to save money are often more interested in exclusive deals and discounts. Companies can increase customer engagement and drive revenue by offering special offers that are only available to loyalty program members.
3. Increase the value of points and miles: In order to combat the impact of inﬂation, companies may need to increase the value of their loyalty currencies. This can be a way to encourage members to keep spending and prevent them from switching to competing programs.
4. Launch new programs and promotions: In a period of high inﬂation, companies may ﬁnd that it’s easier to attract new customers with special offers and promotions. Launching new loyalty programs or promotions can be a way to increase market share and drive sales.
5. Be open and transparent about changes: In an inﬂationary environment, it’s important for companies to be open and transparent about any changes to their loyalty program. Customers will appreciate being kept in the loop, and it can help build trust and loyalty.
Tom continues with this advice, “As a programme manager, think about the life-time value of the customer and provide highly targeted offers that reward loyalty with ways to reduce their expenditure, while
generating strong ROIs. Look for patterns in the data that might suggest a reduction in spend or occasions when a customer spends regularly and target the customer with communications that create immediate value for the member”
While inﬂation can present some challenges for loyalty programs, there are also opportunities for businesses that are able to adapt. By focusing on essential rewards, offering exclusive discounts, and increasing the value of points and miles, companies can attract new customers and keep existing ones engaged.
Clare closes with these thoughts of guidance to retailers, “There has been a signiﬁcant move in recent years of retailers changing ‘points’ reward-based schemes to cash, for example Morrisons and Asda offering cash rewards/incentives to their customers. With shopper’s budgets signiﬁcantly reduced, they will make choices around the food they buy and where they buy. Retailers would be wise to consider providing more cash rewards, ‘free product’ and ‘instant win’ opportunities as shoppers know they will get value back immediately rather than waiting to accrue points. This will also reduce risk on retailer’s ﬁnance ledger so a ‘win win’ all round.”
Learn How to Navigate Economic Uncertainty with The Gift Club
Is your loyalty program or business feeling the pinch of rising costs? Don’t panic. The best way to fight back against inflation is to arm yourself with the right knowledge. That’s where The Gift Club comes in.
As the premier introductory network and resource team for the loyalty and gift card industry, The Gift Club is your go-to source for information on how to navigate the current economic uncertainty. With exclusive partnerships with some of the best service providers and consultants on the market around the world, we can help brands to stay ahead of the curve and keep your business thriving by making suggestions on the best providers that match your needs.
Even in the midst of uncertainty, the best way to engage consumers is with loyalty. Don’t allow inflation to damage the value of your program – learn how to fight back and thrive with the free services that The Gift Club can offer you. Follow us online today to learn how our members can help you weather the storm – and come out the other side even stronger.