What do a gym membership, a bottle of prescription pills, and a holiday gift card have in common? You’ll have to read our New York Times Magazine column to find out. As always, we’ve posted some of the research behind the column elsewhere on this site. You’re welcome to leave comments on this post.
And thanks to Rory O’Connell, who got us thinking about this topic.
Stephen J. Dubner is an author and journalist who lives in New York City.
Steven D. Levitt is a professor of economics at the University of Chicago.
Their book Freakonomics has sold 3 million copies worldwide. This blog, begun in 2005, is meant to keep the conversation going. Recurring guest bloggers include Ian Ayres, Jessica Hagy, Daniel Hamermesh, Sudhir Venkatesh, and Justin Wolfers.
Annika Mengisen is the site editor.
Freakonomics is bolstering book sales at airports because it’s sexy, reports TheBookseller.com -- with or without its Turkish cover.
November 19
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Eric Oliver is a colleague of mine at the University of Chicago. He is the author of the absolutely fantastic book Fat Politics: The Real Story Behind America’s Obesity Epidemic.
He has some new and interesting insights on the “Bigot Belt,” which he has generously written up for the Freakonomics blog.
The Bigot Belt
By Eric Oliver
A [...]
November 19
(11 comments)
Photo: lilivanili and shawnzam
Yesterday I suggested that tastes may not be stable. And then last night, I had the chance to confront the data directly; my local restaurant was serving bacon ice cream.
Bacon: Delicious! Ice cream: My favorite! The combination of bacon and ice cream: a direct threat to my views of economics. [...]
November 19
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Here are the stats, algorithms, and numbers that explain why Kevin Garnett is an MVP. (HT: Phil Notick) (Earlier)
Justin Wolfers’s alumni magazine dubs him “The Seeker.” (Earlier)
Who’s making the fat jokes?
Stanley Druckenmiller is happy he didn’t buy the Steelers.
Chicago’s schools have third-world math scores. (Earlier)
November 18
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Below is a fascinating statement issued by Physicians for a National Health Program, “a membership organization of over 15,000 physicians [which] supports a single-payer national health insurance program.”
You should read the whole thing but, in a nutshell: The people who receive donated organs in the U.S. nearly always have health insurance, while a significant fraction [...]
November 18
(33 comments)
Larry Summers
There is a lot of speculation about whether President-elect Barack Obama will choose Larry Summers to be his Treasury Secretary. But some people are openly opposing Summers’s appointment, in part because of controversial comments he made about women in science.
It’s a close question, but I’m hoping that Obama appoints Summers. I have three reasons:
First, [...]
1. Go to Hulu.com. 2. Choose Arrested Development. 3. Start with Season 1 and then watch every episode of all three seasons. 4. You can thank me later. (SJD)
I can scarcely tell a scarlet tanager from Scarlett O’Hara, but The Life of the Skies had me transfixed from the first page. Jonathan Rosen -- who happens to be a friend of mine -- writes with astounding insight, wit, and compassion. The story he tells here is the best kind of odyssey, an outward journey that ends up highlighting the beauty and daring that live inside of us. Here's a Times review of the book, and here's an earlier blog post about the book and the power of suggestion. (SJD)
Even if you don’t have a son fighting in Iraq, even if you don’t read poetry, even if you think you are immune to the power of a mother’s lament – pick up The Warrior and read it right away. Fran Richey has written some of the most powerful stories I’ve ever encountered. It is obvious that her life was changed by living these poems; yours may well be changed by reading them. (SJD)
In his last walk of the series, the author manages to avoid stepping out into thin air.
All New Yorkers develop tricks that allow them to stay ahead of the pack in daily life. Here I offer some of mine in a couple of handy charts.
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Enjoyed the eBay giftcard spreadsheet on the NYT link - though I’m not sure what would drive someone to pay more for the card than it’s worth…. Perhaps the heat of a bidding war clouds one’s judgment.
— budfoxdoes it have to do with seniorage?
— pawntorook4Never get fully used.
— mookusakiMost people pay for more than they use in all three cases, most of the time that is. A two year gym membership that sees heavy use the first month but sporatic the rest of the term. The bottle of prescription pills that sit in the medicine cupboard after half the bottle is used and you deem yourself healthy enough to discontinue use. And the $2.95 that is left on the Amazon gift card that sits in your desk or wallet after your initial purchase till you eventually toss it out. All money wasted.
— DignanConvenience is most definately a factor driving people to buy gift cards. That and ignorance.
Most people are not aware that they might be paying $60.00 for a $50.00 gift card. Some people might be aware, but simply value the time saved buying the cards instead of searching 45 minutes for the “perfect gift.” That coupled with the satisfaction of knowing that person will get to pick something they really want instead of waiting in a return line trying to get store credit because you gave them something they don’t care about makes me think that the gift cards are not terrible symbols of corporate greed.
Of course, some stores do take the added fees too far. In the long run, that makes those stores less competitive with the places that choose not to nickel and dime their customers.
— Andy from HoustonAssuming that “never get fully” used is the correct answer, there’s a subtle difference between gym memberships and the other two. Stores may like it when people fail to use gift cards, but it’s not bad for the stores if people use up the cards right away. Prescription drugs take this a step further, their being no apparent benefit at all for drug companies or pharmacies if people fail to finish their prescribed medications.
Gym memberships are fundamentally different. If all or even most of the people who join a gym actually used it regularly, sheer chaos would result. The gym would be packed to the point where it would be all but impossible to use any equipment.
— prosaFrom what I’ve read, stores cannot recognize the revenue from gift cards until they are actually redeemed; If that’s true, I certainly would think they’d like the cards to be used. In fact - and somebody correct me if I’m wrong - some local and state governments assume the gift card revenue if they go unused.
As a consumer, I look for gift cards without expiration, but how else can the stores ensure they will eventually receive income (for those cards not used)? I’m assuming there is some stipulation that the stores can recognize income from expired cards.
— budfoxI’d like to see a source, budfox, on where you found that info. There is no way a business can’t recognize that has revenue. They sold it! If that was the case, there would be an unreal amount of money flowing right into government hands. It would essentially be a 100% tax on certain sales - something that just doesn’t make sense.
Perhaps you read where some state reps in Nevada and Wisconsin are trying to get bills passed to declare the money used to pay for unused gift cards “abandoned property” and allow the government to take it.
— ERGriffinI used to work for Amazon Payments and I know they deliberately put the office that issues the gift certificate in Idaho in order to avoid a Washington State law that said companies were not allowed to keep the breakage on GCs. Breakage is money not (ever) used (for example, if someone loses the GC or never uses it up).
I have bid for GCs on eBay and have seen them sell for more than face. The typical sale price for Amazon GCs was about 93% of face. I believe, but cannot prove, that Amazon and other companies buy back their own GCs on eBay at some minimum percentage of face. This is a way of protecting the market value of the GCs and is a clear profit for them if they can always buy back their own GCs at (say) 90% of face. I’d guess they go in and bid them all at about 90% and hope someone else outbids them.
— wprestongMy understanding was that the revenue from gift cards was merely not reported until the gift cards are redeemed. So, the stores still can keep the money but it doesn’t count as official “sales revenue.” I believe I read this in an article concerning holiday sales and how they are actually higher than the numbers say since most gift cards are not used until January.
— RazelaSo the smart move would be to design a system to pool all of those unused gift cards.
I had the idea once that the Salvation Army should set up a box for people to place their left over gift cards that contained loose change. Set a bell ringer next to it and you could have a gift card gold mine.
— kentavosRegarding the accounting procedure (I believe):
Because of the “matching principle” in accounting, gift card revenue can only be recognized once the customer purchases goods/services for the value.
Up until the gift card is redeemed it remains on the company’s balance sheet as unearned revenue and a liability.
— mhertzGift Cards are a woeful way to give a present for Christmas. They are inconvenient and box people in to suboptimal choices. They are so inconvenient for many that there is even a gift card exchange going. There are websites set up for people to swap their cards or to liquidate it for cash. I tracked the sale of some gift cards on eBay and found them trading for .90 cents on the dollar. It was in an admittedly small sample group; not very academic, but interesting.
— Toast1185Link: http://the-economy.blogspot.com/2006/11/making-markets-gift-cards.html
I’m not quite sure how it relates to gyms or pills. But from an economics point of view, I thought gift cards are interesting in that they restrict our choices (or their recipients’ choices). The post from about a month ago on “Tying your own hands” got me thinking about this.
They don’t make any sense rationally - why would I rather give someone a $50 gift card to a store instead $50 cash? Yet that’s what the nearly all of my relatives chose to give me for the holidays.
— celionI liked Kentovas’ recommendation to give to give small residual-value GC’s to the likes of the Salvation Army. I admit I throw out the cards with just a few bucks on it.
Celion has a great point . . . since 9% of GC’s are not redeemed and the store choice limits the recipient, why don’t givers just give cash instead? Last year, Best Buy recorded $43,000,000.00 in profit from unused cards, we don’t throw away our “unused cash”.
— JoeKeeleyIs it significant that health club members attend an average of 4.5 times a month? This is once a week, and I don’t think that is a coincidence. We are creatures of habit, and once a week is an easy rhythm to slip into. Sooo…it would pay a health club to set the monthly rate at the maximum people are prepared to pay for once a week, as members delude themselves they will attend more often.
— Chris PartridgeI think the biggest reason for giving gift cards instead of cash is to convey the impression that the giver “cares” more because he/she has taken the extra step to procure the gift card.
— indi500fanFurther, cash has the implication of just going into your wallet and being spent on anything (maybe just groceries for example). A store gift card (or even Visa one) has the implication that it would be spent on something the receiver wants (and choice of store may impact what kinds of things the giver intended). Put another way, once you put the cash into your wallet, you cannot differentiate it from the rest of the cash. The GC at least is identifiable as from you.
— pkimelmaFor holiday gifts from relatives and kids birthday presents (from friends), they are a godsend (and most kids make sure they spend every last penny ;-)
With gym memberships, I’ve wondered what would happen if fitness centres offered membership options where a larger monthly fee was charged but members were reimbursed or paid for every time they visited (The same ‘Why Not?’ thinking that suggested telemarketers should pay you to listen).
— dave12456It would be easier for enthusiastic new members to rationalize the price by saying ‘I’m gonna go five times a week so really it’s barely costing me anything’, and when their participation wanes after several weeks/months the gyms would cash in. Furthermore, if the reimbursement was given in cash upon arrival you could bet that the sales from the kiosk would increase.
Deadweight loss.
— synapticmisfiresThe article is up:
http://www.nytimes.com/2007/01/07/magazine/07wwln_freak.t.html?_r=1&ref=magazine&oref=slogin
— JoeKeeleyCompanies do not recognize income when the card is purchased, it is shown on the balance sheet as a liability. The income is only recognized when the card is redeemed by the end-user or if it is estimated that they will never be redeemed.
The company does use the cash in the meantime, so effectively it is a free loan to the company.
I read and understood that Best Buy “earned” $43MM in 2006 due to unused gift cards, but the Sunday NYT article by our two favorite authors cited a figure of $16MM. When I read of the $43MM figure, $16MM was mentioned as realized earnings from only fiscal 2006.
I also hear that BB used to have a two-year expiration on GC’s, but have recently changed that policy to cards that do not expire.
What am I missing here? Did they earn $43MM or $16MM in 2006 on unused GC’s?
— JoeKeeleyFound the detail of their statement. Breakage was not recorded in previous years, 2006 was tje first. It’s a .pdf that cannot copy/paste from, but here is part of Paragraph Two of Page Thirty:
http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=IROL-annualreports
“…In addition, net earnings for 2006 included income of $43 million () related to our initial recognition of gift card breakage (gift cards sold where the likelihood of the gift card being redeemed by the consumer is remote). Gift card breakage was not recorded in fiscal 2005 or prior years”
— JoeKeeleyI think Gym memberships are a different sort of animal.
If it was going to cost me $10 or $15 a shot, I would be hesitant to drop by for half an hour of exercise. But by paying a monthly fee, that is no longer a consideration, and I am free to use it.
This is similar to people who choose to own a car, rather than simply rent one for long trips when needed and otherwise take taxis. Even if owning a car is more expensive, the thought of taking a taxi every time you went shopping for groceries, etc. would be hard to take.
— mhennerThe article states:
— Chris Partridge“[the paper] showed that people who buy an annual membership to a health club overestimate by more than 70 percent how much they’ll actually use it. Many people, therefore, would be better off buying monthly or daily passes.”
Unless I have misread the paper, this was not the conclusion, which was that the average gym member consistently signs up for the worst and most expensive contract - the monthly option. Because most people go to the gym once a week, the best option is always a ten-pack of day passes, at $10 each. Next is the annual pass, because you get prompted to renew. The montly pass is most expensive ($17 a visit) because people fail to cancel when they stop going to the gym.