Why It’s Important to Approach Gift Card Sales with Cautious Optimism
Somehow it happens every year; we look around and suddenly it’s mid-December and the holidays are upon us. Gifting time! What should we get for all the folks on our lists? When I ask family members what they would like, the answer quite often is a gift card.
Now that we’re deep into the age of internet shopping, the gift card has become a much more acceptable, and even sought-after, present. Ultimately, it permits the recipient to get exactly what they want.
Gift cards and the spa industry
When gift certificates, and then gift cards, became popular in the late 90s, spas were one of the lucky beneficiaries, as the ability to gift someone an experience, rather than yet another unwanted item, became very popular. The spa industry saw annual spa gift card sales volumes creep into the millions for some brands. On top of that, the percentage of gift cards that went unredeemed 20 years ago could be as much as 30-40% of sales volume, feeling like easy money to the business. But these days, the legal environment around gift cards is a little different. When it comes to gift card sales at this time of year, it’s important to keep a few concepts in mind behind managing this line item.
The difference between a gift card and a sale
The most important thing to remember is gift card revenue isn’t technically a sale. While it's often counted as revenue on an income statement, it’s actually considered a balance sheet transaction. You now have the asset of someone else’s money, but you owe a liability, or service, in return. The gift card money isn’t declared as revenue until it’s redeemed by the recipient, which may not happen for many months—or even years—after the sale.
According to GAAP (Generally Accepted Accounting Principles), gift card sales money should be held in a separate escrow account from your regular income, and then drawn down as gift cards are redeemed. So, don’t go spending all that cash just yet.
What about expiration dates?
The second major change in the last 20 years has to do with expirations. There was a time when gift cards expired after one year. When that happened, the business could claim the income as revenue under a line item called “unredeemed gift card sales.” A lot of spas rested on this practice with their annual profitability. However, as gift card sales boomed, in 2010 the federal government passed the Credit Card Accountability Responsibility and Disclosure Act, which eliminated expirations of less than five years from the purchase date, along with a few other changes.
The financial effect of this was the gift card cash would remain on your balance sheet as a liability for years, until the client came in and redeemed the certificate. Spas and salons that continued to rack up the sales of gift cards without encouraging their redemption also racked up swelling liabilities, and without keeping at least a majority of this money in the aforementioned escrow account, these liabilities aren’t balanced out with a matching asset.
During the financial crisis of 2007 and 2008, consumers began ransacking their kitchen drawers for unused gift cards that they could redeem, and this served to highlight another problem created. If your daily business becomes 20% or even 30% gift card-based, and especially if you haven’t escrowed the funds, your day-to-day cash flow may not be enough to support the payroll created by the gift card redemption. But spas and salons have never been good at metering the usage and bookings of clients paying with gift cards, as we’ve seen done with frequent flier points by an airline or reward points for a hotel room. Those businesses ask the client how they're planning to pay before awarding them a seat or room, and thus can manage their available inventory to their benefit.
Do gift card recipients turn into loyal clients?
Lastly, one must consider the gift card recipient themselves. If one of your regular clients is gifting a friend who could “never afford to come on their own” or “would never take care of themselves this way,” that friend is probably not going to turn into a regular client for you. This is not always true, but unfortunately, it often proves to be the case.
These gifted clients are really looking forward to their annual trip to the spa. They have a high expectation of what their experience will be like, putting a heavy load on customer service and therapy staff alike. They're not spa regulars, so they don’t always know “how it works,” thus needing more handholding throughout their visit. They don’t typically purchase retail or upgrade their treatments, and sometimes don’t even leave commensurate gratuities. This can have the undesired effect that your staff doesn’t try very hard with the gift card client, and thus begins a dangerous downward spiral of making little to no effort to retain that guest or impress them with their expertise.
Now granted, you may say this isn’t how it works in our spa, and you may be correct. But you must ask yourself how often a gift card client truly becomes a regular, and whether you want to take up too many of your available treatment spots with what may be a dead-end booking.
This is all meant to lend a note of caution to the excitement of gift card sales. Yes, you should sell them—but please sell sensibly. Avoid over-promoting and discounting them, and if possible, try to get contact information on the gift card recipient at the time of sale. That will give you the ability to reach out to them for marketing purposes and get them to come in and redeem that gift card sooner than later. This way, you can recognize the revenue as income and hopefully gain a client in the process.