Gift Card sales have become all the rage in the past decade and the numbers prove that customers are purchasing them in increasing numbers. As an example, the National Retail Federation’s Inaugural Graduation survey, conducted by BIGresearch , suggests that last year gift cards represented over 31% of the Graduation gifts given (second only to cash at almost 60%). One-third of Americans will purchase at least one graduation gift this year and the average consumer buying graduation gifts plans to give a gift to two graduates. With the average spent per gift of $50 this represents a huge potential. By doing some quick math, this survey suggests that for every 1,000 of your customers, Gift Cards represent a $10,000 revenue opportunity – just for Graduation Gift Cards! How large a share of your customers’ gift spending are you picking up? How much time and effort are you spending “merchandising” your gift cards?
While prepaid credits such as Gift Certificates are certainly not something new to retailing, Gift Cards have had a strong and unique appeal. Perhaps it’s because they are more tangible than a paper certificate. Though I have a permanent limp from carrying so many cards in my wallet, I will admit that I am more likely to stick a gift card in my wallet than a slip of paper and know it will be with me the next time I am in a store. Surely there is a convenience factor to Gift Cards.
All one needs to do is peruse the gift card wall at a Best Buy store to get an idea of the flexibility and options for marketing and packaging gift cards. Cards can be easily packaged in envelopes for mailing as well as boxed for gift wrapping. It is also reasonable to personalize gift cards based on an event. While a single generic card can be designed to represent your store’s image, special event or seasonal cards can also be developed for graduations, birthdays, anniversaries, as well as seasonal holidays that offer your customer a personalized touch.
Source: National Retail Federation, Consumers to Spend $50 on each Graduation Gift, According to NFR Survey, May 22, 2007, at http://www.nrf.com/modules.php?name=News&op=viewlive&sp_id=295
Promotional Gift Cards
The success of gift cards as a prepaid credit tool has crossed over to being used for promotional marketing. Instead of sending coupons, many retailers are experiencing tremendous results by mailing or giving out promotional “Gift Cards”. Consumers are much more likely to redeem a gift card than a coupon. It’s like receiving free money.
Examples include:
- Mystery Discount promotions – Different cards can be created representing different monetary values for special events, promotions or drawings.
- Birthday Gift Cards – Several retailers are mailing gift cards to their customers for their birthday.
- Donations and Fund Raisers – Promotional Gift Cards are a great way to give to your community and still benefit your store. They can be offered as raffle or door prizes, and can be used for charity fund raisers. In many cases, these can be written off, at least in part, as tax deductable donations.
- Cross Marketing – Allowing complimentary companies to offer your Gift Card with a purchase at their store can be used for cooperative marketing efforts that help drive business to your store. There has been a rash of “Gas Card” promotions since gas prices have increased. You could offer a free Groom’s tux rental Gift Card with the purchase of any wedding band at a local jewelry store.
It may cost a little more to send a gift card than paper, but if the marketing is properly targeted, the results will more than pay for the higher costs. Experienced marketers will quickly assert that this type of promotion is more effective when there are few, if any, strings attached to the offer. You may worry that a $20 gift card will lead to the giveaway of hosiery, but experience suggests that the average ticket size may result in only a 10% discount.
Accounting for Gift Cards
There is an important difference in accounting for Gift Cards issued as prepaid credits and promotional gift cards: Prepaid Gift Cards are liabilities incurred when they are issued and promotional gift cards are discount expenses (or Cost of Sales) that are only posted when they are redeemed. There are important accounting, tax and legal requirements that need to be considered as well.
When a customer gives you cash (or the equivalent) to purchase a gift card, the cash (or equivalent) account is debited and a “Gift Card Payable” liability account is credited. When the Gift Card is redeemed, the “Sales” Revenue account is credited and the “Gift Card Payable” liability account is debited. Gift Card sales aren’t recorded as sales until they are redeemed. Gift Cards are non taxable sales because the merchandise will be appropriately taxed when they are redeemed. The “Gift Card Payable” liability account balance represents the amount of money you owe to customers who have open balances. While most independent retailer are reluctant to ever expire a Gift Card for fear of harming a loyal customer’s trust, there are important ramifications to the balance sheet as years go by and the liability misrepresents moneys owed that realistically will never be redeemed. This is one of the key motivations when the airline industry started setting expiration dates for frequent flyer points.
Before establishing a Gift Card (or any prepaid credit) program check your local laws. Some states require that unused balances be remitted to the state as unclaimed funds where they ostensibly try to find the owner. Of course, this has become one of the advantages for retailers for issuing Gift Cards instead of Gift Certificates which are traditionally associated with a specific customer. If Gift Cards are treated as transferable tender, the retailer has no way of knowing who owns the card and can therefore retain the “breakage” (unused funds) as other income.
Promotional Gift Cards, on the other hand, are not liabilities: no money is taken when they are issued and therefore no liability is incurred. Be careful not to confuse the fact that a promotion includes a gift card with the normal issuance of a Gift Card sold as a prepaid credit. From an accounting point of view, Promotional Gift cards are treated as customer coupons or discounts which are usually either an expense, cost of goods sold, or contra-revenue account. While they could also be recorded as a promotional markdown, though for merchandising purposes should not be confused with markdowns as their spending is not based on the obsolesce of inventory. They are not recorded until and unless the customer redeems them and are associated with a sale.
If Promotional Gift Cards are issued against a liability account, the offsetting debit should be posted to an Advertising or Promotional Expense account for the entire amount of all cards issued. The concern here is that expenses are overstated if all prepaid credits (Certificates or Cards) aren’t redeemed by all customers. If an expiration date is assigned unused credits can be redeemed against the Advertising or Promotional Account originally used. It can work, but it requires some care and has the potential to be an accounting revenue recognition concern (the expense or discount is posted before actually incurred).
Promotional Gift Cards shouldn’t be treated as tenders because they’d inflate sales, understate discount, cost customers more sales tax than is due (discounts reduce tax), and could overstate sales numbers used to calculate store lease expenses!
Notice: Seek professional tax and consulting advice to assure the proper handling of your Gift Cards.
The Technology of Gift Cards
There is often much confusion over the technology of processing gift cards and many retailers are paying far too much for handling them.
Simply put, a Gift Card as a prepaid credit is merely a plastic card with a unique identifier (usually numeric) that identifies each individual card. The number can be encoded in a magnetic stripe or using a bar code that can be efficiently read at point of sale using either a card reader or bar code reader. A human readable code is optional for manual entry. The card has no value (other than the production cost) until it is activated at point of sale: the activation assures that a form of payment has been accepted and tendered to transfer a monetary value to the card. Any dollar amount can be “loaded” on the card, but really the card’s code does not include a monetary value as the value of the card is maintained in a database which is accessible at point of sale. Once the card has value it can be displayed and/or redeemed, in part or full, against a future purchase.
The database that maintains the running balance of each gift card can and should be internal to the point of sale system. Almost all bankcard processing services offer a “Gift Card” program that can use the same card reader that bankcards use. However, this is sold as a service – a very profitable service. Third party processors make their money by charging a fee much like bankcard processing fees. The usually charge for each transaction; when the card is sold, for each redemption against a card (there could be several), and in many cases even if you want to look up the value of the card. In some cases, the processing company even keeps the “breakage” or the balance left on a card after it has expired or charge an inactivity fee.
When considering that this is an application easily handled by a point of sale system, spending money on processing fees is unnecessarily expensive! Consult with your software provider for details on handling your gift cards internally.
Smyth Retail’s Merchant Plus! software system effectively manages prepaid credits like gift cards to help retailers build loyalty.
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