Oops! Something went wrong while submitting the form.
Start a Free Trial
See your data in HubiFi < 2 days
Learn how gift cards can boost your business revenue, manage cash flow, and attract new customers with strategic insights and actionable tips.
Gift cards are often seen as a simple customer courtesy, but they hold untapped potential to significantly impact your bottom line. Beyond being a popular gifting option, they represent a dynamic revenue stream that can fuel business growth and improve cash flow. This article explores the multifaceted world of business revenue from gift cards, delving into how these small pieces of plastic can become powerful financial tools. We'll uncover the mechanics of gift card revenue, discuss best practices for maximizing their impact, and address common misconceptions that might be holding your business back. Get ready to rethink your approach to gift cards and discover how to leverage them for increased profitability.
Gift cards are more than just a convenient present; they're a strategic tool for businesses to drive sales and manage cash flow. They offer a way to attract new customers, encourage repeat business, and even generate revenue beyond the initial sale. They're a win-win: customers get a flexible spending option, and your business gets an upfront cash injection.
Selling a gift card creates a prepaid agreement. The customer pays upfront, and your business carries a liability until the card is redeemed. This deferred revenue model has interesting implications for your accounting and financial planning. Accurately recognizing this revenue is crucial for accurate financial reporting. Beyond the initial sale, there are additional revenue opportunities. Businesses can profit from gift cards through customer overspending (when they spend beyond the card's value), breakage (when cards go unredeemed), and sometimes even through associated fees.
Gift cards offer a unique advantage: they provide an immediate influx of cash. It's like an interest-free loan. You receive the payment today, but fulfill the purchase later when the card is used. This can be especially helpful for managing seasonal dips in sales or funding new inventory. This upfront cash injection can be significant, especially since many consumers spend more than the value of their gift card, further increasing revenue for businesses.
This section explains the mechanics of gift card revenue, from the initial sale to when the card is redeemed.
Selling a gift card creates a deferred revenue liability. Think of it as an interest-free loan. Your business receives the cash upfront, but you don’t deliver the goods or services until the customer redeems the gift card. This initial sale doesn't immediately count as revenue. Instead, it's a liability because you owe the cardholder something in the future. This also has a positive impact on your cash flow, providing immediate access to funds you can use for various business needs. For a deeper dive into proper revenue recognition for gift cards, check out this helpful resource on gift card accounting.
One way gift cards generate revenue beyond the initial sale is through overspending. Customers often spend more than the gift card's value, increasing sales. This happens for several reasons: they might want to buy something that costs a bit more, or they might simply be less price-sensitive when using a gift card. Learn more about how companies profit from gift cards. This overspending phenomenon can significantly increase revenue for businesses. Data from the National Retail Federation (NRF) shows that a significant percentage of consumers spend beyond their gift card's value, adding to the overall sales figures for businesses. This additional spending converts the deferred revenue liability into actual recognized revenue, contributing to your bottom line.
Gift cards are a popular way for businesses to generate revenue, but there's a hidden profit center many overlook: breakage. Breakage is the unredeemed value of gift cards. Think about it—how many times have you had a gift card with a few dollars left that you never used? Across all customers, this adds up to significant revenue for businesses. Companies can recognize this potential income proportionally to actual redemptions, using historical data for guidance. Some estimates suggest that up to 47% of gift card value goes unredeemed in the US, representing pure profit. This makes understanding breakage crucial for accurate financial reporting and strategic decision-making. For a deeper dive into gift card revenue recognition, check out this helpful article from Leapfin.
Several factors influence breakage rates. Accurately estimating this income requires careful analysis of historical redemption patterns. For new restaurants, a common starting point for estimating breakage is between 5% and 10%, according to this insight from Baker Tilly. However, this can vary widely based on industry, customer behavior, and the terms and conditions associated with the gift cards. Interestingly, customers with gift cards often spend more than the card's face value, with some studies showing an average overspend of 59%, as highlighted in this Clutch article. This overspending, combined with breakage, contributes significantly to the overall profitability of gift card programs. Understanding these factors helps businesses optimize their gift card strategies and accurately project revenue.
This section clarifies how to accurately account for gift card revenue, ensuring compliance and accurate financial reporting.
Selling a gift card doesn't mean you can immediately book the revenue. Think of it as a promise to provide goods or services later. Initially, the money received from gift card sales is classified as a liability—specifically, deferred revenue. This reflects the outstanding obligation to your customer. Only when a gift card is redeemed, and the goods or services are provided, do you recognize the revenue. This aligns with the principle of recognizing revenue when it's earned, not just when cash is received.
Let's illustrate with an example. A customer purchases a $50 gift card. Your business doesn't record $50 in revenue that day. Instead, you record a $50 deferred revenue liability. When the customer later uses that gift card to buy a product, you then recognize the $50 as revenue. This approach ensures your financial statements accurately reflect the timing of your earnings.
ASC 606 provides a comprehensive framework for revenue recognition. Gift cards fall squarely under this standard. Compliance with ASC 606 ensures consistent and transparent reporting of gift card revenue. A key aspect of ASC 606 is the concept of breakage. Breakage refers to the portion of gift card balances that are estimated to never be redeemed. This can occur for various reasons, such as lost cards or forgotten balances.
ASC 606 dictates that breakage revenue should be recognized gradually over time, not all at once. This reflects the probability of redemption decreasing as time passes. The specific method for calculating and recognizing breakage revenue can be complex and depends on various factors, including historical redemption patterns and estimated card lifespans. For businesses dealing with high volumes of gift card transactions, automating these calculations and ensuring compliance can be a significant challenge. HubiFi offers solutions to streamline these processes and ensure accurate ASC 606 compliance.
Want to see a real jump in your gift card sales? Here’s how to make the most of them.
Gift cards are a fantastic way to increase revenue, especially around holidays. Think Mother’s Day, Father’s Day, graduations—any occasion where people are searching for the perfect present. Offering special promotions during these times, like bonus gift cards with a purchase or a discount on future purchases when someone buys a gift card, can really drive sales. Rewarding holiday shoppers with gift card promotions is a proven way to improve seasonal sales. It's a win-win: you get immediate cash flow, and your customers get a little something extra.
Digital gift cards offer convenience and flexibility, making them a popular choice. Plus, they open up opportunities for personalization. Allowing customers to add a personal message or choose a custom design transforms a standard purchase into a more thoughtful gift. This personal touch can encourage higher gift card values and more repeat business.
Don't limit your gift card promotions to just your website or storefront. Spread the word through various channels. Email marketing is a great way to remind your existing customers about gift card options. Use social media platforms to reach a wider audience and consider influencer marketing to expand your reach even further. A multi-channel approach ensures your message gets seen by as many potential buyers as possible.
This section isn't legal advice, so definitely consult with a legal professional for specifics related to your business. However, I can offer some helpful information about navigating the legal side of gift cards.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) offers significant consumer protections regarding gift cards. This federal law applies to store-bought gift cards, gift certificates, and those carrying major credit card logos (like Visa, Mastercard, or American Express). Essentially, gift cards can't expire for at least five years after the purchase date. Any fees tied to the card must also be clearly disclosed to the customer. Transparency is key. For more information on federal gift card protections, check out this resource from the FDIC.
Escheatment laws add another layer of complexity. These laws, which vary by state, dictate how unredeemed gift card balances are handled. Some states require businesses to turn over these funds after a specific period. This can impact your revenue recognition and financial planning, so it's important to understand the rules where you operate. A good starting point for understanding these laws and how they affect your business is this article on gift card revenue recognition. Beyond state regulations, federal law provides protections to ensure consumers are well-informed about the terms and conditions of their gift cards, fostering trust and transparency in the marketplace. You can find a helpful overview of gift card laws for businesses to get a better grasp of the basics.
Properly recognizing gift card revenue is crucial for accurate financial reporting. This is especially important for businesses with high gift card sales volume, such as restaurants and retailers. Accurately estimating breakage—the portion of gift card value that ultimately goes unredeemed—is essential for complying with accounting standards like ASC 606 and presenting a clear financial picture. Understanding these tax implications can save you headaches down the road. For a complete guide to gift card accounting, explore our in-depth blog post.
This section addresses some common misunderstandings about gift card revenue. Clearing up these misconceptions will help you develop a more effective gift card program.
One of the biggest misconceptions about gift cards is that they represent immediate revenue. It's easy to see why some business owners might think this: a customer buys a gift card, and cash goes into the register. However, that money isn't yet earned revenue. Think of a gift card as an IOU. The cash received represents a liability until the card is redeemed and the goods or services are provided. As HubiFi explains in its guide to gift card accounting, gift cards are considered deferred revenue. This means you can only recognize the income when the card is used. Properly managing this deferred revenue is crucial for accurate financial reporting and remaining ASC 606 compliant.
Another misconception is that gift card sales are guaranteed profit. While gift cards can contribute to your bottom line, a portion will go unredeemed. This is known as breakage, which we'll discuss later. Also, the costs associated with running a gift card program, including transaction fees and the physical cards themselves, can impact your overall profit.
Gift cards offer more than just a convenient payment method. They can be a powerful tool for driving sales and building customer loyalty. Research suggests gift cards can contribute an average of 5% of a company's revenue. Market data shows the global gift card market is substantial, demonstrating strong consumer demand. Gift cards often lead to increased spending, with customers frequently spending beyond the card's value, resulting in additional revenue for your business. They also introduce new customers to your brand, potentially turning them into repeat buyers. Understanding the true value of gift cards goes beyond the initial sale and encompasses these broader benefits.
Gift cards are more than just plastic; they're valuable data sources. Using the right technology to manage them can unlock key insights into customer behavior and streamline your accounting processes. This isn't just about making sales—it's about building stronger customer relationships and making smarter business decisions.
A reliable gift card program needs a solid foundation. Integrating your gift card management system with your point-of-sale (POS) and accounting systems is crucial. This creates a seamless flow of information, ensuring that every transaction is accurately recorded in real-time. This integration minimizes manual data entry, reducing the risk of errors and freeing up your team to focus on other important tasks. Plus, it provides a clear, up-to-the-minute view of your gift card liability, which is essential for accurate financial reporting. For businesses dealing with high transaction volumes, consider exploring automated solutions like those offered by HubiFi, which seamlessly integrate with various platforms.
Gift card data is a goldmine of customer insights. Specialized gift card management software helps you analyze redemption patterns, revealing when, where, and how customers use their gift cards. This data allows you to fine-tune your gift card program, tailoring offers and promotions to better resonate with your audience. For example, understanding peak redemption periods can inform your marketing calendar, while identifying popular items purchased with gift cards can guide inventory decisions. By leveraging these insights, you can optimize your program for better performance and create more effective marketing strategies. This data-driven approach not only improves your gift card program but also enhances your overall business strategy. For more insights on data-driven decision-making, explore resources like the HubiFi blog.
Rolling out gift card programs takes careful planning and execution. Consider these key aspects to create a successful and profitable program.
Navigating the legal landscape surrounding gift cards is crucial for avoiding penalties and maintaining customer trust. Federal laws like the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) provide consumer protections for various types of gift cards. Stay informed about these regulations, especially regarding expiration dates and fees. Also, be aware of state-specific laws, such as Maryland's Gift Card Scams Prevention Act, which addresses packaging requirements to prevent fraud. Working with legal counsel specializing in this area can help ensure your program's compliance.
A positive customer experience is essential for encouraging gift card use and driving repeat business. Offer omnichannel redemption options, allowing customers to use their gift cards both online and in physical stores. Simplify the redemption process, making it quick and easy for customers to apply their gift cards during checkout. A smooth experience encourages customers to not only use their gift cards but also spend beyond the card's value, increasing your overall sales. Gift cards can be a powerful tool to increase customer loyalty and drive future purchases.
The gift card market is constantly evolving. Stay ahead of the curve by adapting to new trends and technologies. The rise of digital gift cards offers convenience and personalization options, appealing to today's consumers. Consider incorporating personalized messaging or special offers with digital gift cards to enhance their appeal. Keep an eye on market trends, such as the increasing use of gift cards during periods of economic uncertainty, as highlighted by this Forbes article. Understanding these trends allows you to tailor your gift card program to meet evolving consumer demands and maximize its potential. For example, consider offering bonus gift cards during promotional periods to incentivize purchases and drive revenue. Staying informed about the growing gift card market can help you make strategic decisions for your program.
Knowing how to effectively measure your gift card program’s success is crucial for sustainable growth. This involves consistent tracking and ongoing refinement of your strategies.
To get a clear picture of your gift card program's performance, focus on key performance indicators (KPIs). Start by monitoring your gift card sales volume to understand the overall demand. Equally important is tracking redemption rates. A high redemption rate indicates customer engagement and successful utilization of gift cards. Finally, pay close attention to the average amount spent beyond the gift card value. This metric reveals the potential of gift cards to drive additional sales. Studies show that customers often spend more than the face value of their gift card, creating a significant revenue opportunity. Accurate tracking of this data is also essential for proper accounting and financial reporting. For high-volume businesses, consider automating your revenue recognition processes to ensure accuracy and efficiency. Schedule a demo with HubiFi to learn how our automated solutions can help.
A successful gift card program requires a commitment to continuous improvement. Gift cards are a powerful tool for increasing sales and fostering customer loyalty. Integrating them strategically into your overall business plan can unlock numerous benefits, from enhancing customer engagement to streamlining operations. Explore different marketing strategies to see what resonates with your audience. Consider offering exclusive gift card options or promotions for your VIP customers. This can incentivize them to interact more with your brand and explore your other products and services. Targeted promotions can also create a sense of exclusivity and encourage further purchases. Regularly review your program's performance and adapt your strategies based on the data you gather. This iterative approach will help you maximize the impact of your gift card program over time. Learn more about optimizing financial operations on the HubiFi blog.
Why are gift cards considered a liability initially?
When you sell a gift card, you receive payment for goods or services you haven't yet provided. It's essentially an advance payment, creating an obligation (a liability) to the customer. This liability is resolved when the gift card is redeemed.
How does breakage contribute to profit?
Breakage represents the value of unredeemed gift cards. While not all gift cards go unused, a portion will inevitably expire or be forgotten. This unredeemed value becomes profit for the business, although the specific accounting treatment can be complex.
What’s the biggest mistake businesses make with gift card revenue?
The most common mistake is treating gift card sales as immediate revenue. Remember, it's deferred revenue – recognized only when the card is redeemed. Misclassifying this can lead to inaccurate financial reporting and potential compliance issues.
How can technology improve gift card management?
Integrating gift card systems with your POS and accounting software streamlines operations and provides valuable data. This integration automates processes, reduces errors, and offers insights into customer spending habits, enabling data-driven decisions.
What legal aspects should I consider with gift cards?
Federal and state laws govern gift card practices, including expiration dates, fees, and unredeemed balances (escheatment). Staying informed about these regulations is crucial for compliance and maintaining a positive customer relationship. Consulting with a legal professional is always recommended.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
Copyright © 2025 HubiFi | All rights reserved.
