Friday, December 9, 2011

Why GiftRocket’s business model is broken

Yesterday I have visited GiftRocket’s site, trying to find out how they operate and what value do they add to (potential) users of their service. At the first glance, the story is simple: person A chooses one business, say a cool new coffee shop, and sends so called "online gift card" to person B. Person A also sends some amount of money alongside the card, say $20, and a personal message to person B. GiftRocket then sends that money via PayPal to person B, and nicely formatted "gift card" which is also called GiftRocket, taking hefty $1 + 5% commission. Finally, person B can then happily spend the money at before mentioned coffee shop. Everything is great, right?

Wrong! The catch is, person B can spend his money any way he wants. He does not have to go to that coffe shop. He can even burn it down, for all GiftRocket cares. The reality is that person A could have done exactely the same thing (sending email + money via PayPal) without GiftRocket, thus saving $1 + 5%! Therefore GiftRocket doesn’t add any value to users whatsoever.

When enough people understand that, they will be out of the business.