It’s no secret that we think gift cards are great. There are many ways in which they can truly benefit and enrich your store experience, especially when it comes to customers looking for gifts. They solve lots of different problems those customers run into, plus people really like receiving gift cards. Beyond gifting, they can also be used in acquisition and retention strategies, as part of customer support, and more.
However, there’s more to gift cards than just adding them to your catalog and leaving them to work their magic. In order to truly make the most of gift cards, you need to first understand how they work, and the impact they can have on different areas of your business.
Today we’re going to take a whistle stop tour through how gift cards work, and some points you may want to consider as you start to implement them into your store strategy.
First thing’s first - Govalo FAQ
Let’s start with a few questions we see come up with our merchants when they’re getting started with Govalo. Then we’ll dive into how gift cards work, and things you should consider when building your strategy.
How is gift card liability/accounting/reporting handled for Govalo? Will the gift cards issued by Govalo count towards my store’s revenue?
Gift cards issued by Govalo won’t count towards your revenue on Shopify. Instead, it will be added to your store’s Gift Cards Balance, which can be found on Shopify’s admin at Analytics > Reports > Finances > Finances summary > Liabilities. You’ll find the value of the cards issued by Govalo under the column Issued value, and Shopify will take the Issued value and Sold value into account when calculating the balance.
(If some of this sounds like jargon, don’t worry we’ll be getting into liabilities and gift card management later in the article)
Does the Govalo app report on US state legal requirements?
This is not something we provide in our app reporting features. However, it's worth noting that Govalo gift cards are issued through the Shopify Gift Card API, so they are registered as gift cards in Shopify's reporting features. Depending on the accounting software your finance team is using, you should be able to pull all relevant gift card data and orders from Shopify into your finance tech to help manage this.
Does Govalo offer advice on different laws/requirements for accounting?
This is not something which Govalo is able to offer advice on. As there are so many different legal requirements not just within the US but globally, it would be unfeasible for our team to be able to speak with authority on any financial/accounting matters. This is best discussed with your finance team or an external accounting/financial expert within the ecommerce and gifting field.
If you’re already a merchant on Govalo, or you’re considering it for your store, then hopefully this will give you the answers you need. If not, feel free to reach out to our team.
Now let's look at how gift cards actually work, and then what you should consider as part of your strategy.
How gift cards work and how they’re recorded
When you’re building a gift card strategy, the first step is to be fully aware of how gift cards work, and how they’re recorded. With a typical order, the process generally goes like this:
1. The customer places an order.
2. They’re debited for the value and the funds are transferred.
3. The order is fulfilled by the merchant.
4. The funds go into the store’s revenue pot.
It’s a closed loop that happens with one customer, and it’s straightforward to understand. Orders involving gift cards, however, look a little different:
1. Customer A places an order for the gift card.
2. They’re debited for the value of the card, and the funds are transferred.
3. The funds are kept in a separate pot of cash called liabilities.
4. The gift card is given to the intended recipient (Customer B).
5. Later, Customer B redeems the gift card either in part or in full.
6. The order is fulfilled by the merchant.
7. The redeemed value goes into the store’s general revenue pot.
So already you’ll notice there are quite a number of extra steps compared to a regular order, and even at that there are other steps within steps. The major difference is that there are two external parties involved - the purchaser and the redeemer of the gift card. The purchase isn’t an immediate closed loop so takes place over a longer period of time, and the funds from the original transaction are recorded as liabilities.
To get everyone on the same page, let’s talk about liabilities. When someone buys a gift card, that isn’t cash in the bank for your store - it’s essentially a promise to fulfill a future order. In more professional terms, this is recorded as liabilities. This is a separate pot of cash to your general revenue, and is recorded separately also. That money isn’t available to your business, as it’s kept in that IOU until you hold up your end of the bargain and send an order paid for with the gift card. When the gift card recipient redeems the gift card, you transfer the value from liabilities into revenue. This applies even when the gift card isn’t redeemed in full, though only the amount redeemed is transferred and recorded as revenue.
Things to consider when you’re using gift cards
Gift cards are a great way to improve your customer experience, which means a lot of the time when we’re talking gift card strategy we focus on gifting and CX. However there are also considerations you need to take into account before you start using gift cards either as a marketing tool or as a sales strategy. By thinking about these points now, you’ll be able to flesh out a more well rounded gift card strategy.
Gift cards as marketing
Incentives are a long-held marketing strategy for almost every type of customer across many different verticals in ecommerce. Discounting is by far the most popular, but one where success is limited to the short-term with potentially serious long-term impact on brand perception and customer quality. Offering gift cards instead can be a really strong alternative. These provide merchants with a fixed cost of incentive compared to the unpredictable sliding scale of discounts, as well as flexibility in how the incentive is managed be that a “engage to redeem” before a card is issued, limited quantity of incentives etc.
It is however worth remembering that if you plan to offer gift cards as an incentive, you need to budget for the liabilities these result in. Discounts, for example, don’t need to be accounted for in the same way. As part of your gift card incentive strategy, set a fixed amount that you’re willing to issue in total, and how you plan to record them.
Encouraging Redemption
Promoting and selling gift cards is just one piece of the puzzle - you then also need to plan for redemption. The more gift cards that are redeemed, the more funds you can free up for your business. Therefore you want to have a plan for how you’re going to encourage gift card recipients to actually redeem their gift cards. This may include reminders via email and/or SMS, leveraging personalization, and even offering extra incentives.
There are additional advantages to redemption - 87% of recipients say they’re likely to spend above their card’s value, and the average cart value for a customer using a Govalo gift card is as much as $75+ more than the value of the card. Moreover, a proactive approach to gift card redemption can have a positive impact on your customer experience for both gift card buyers and recipients, building stronger relationships and fostering loyalty.
Breakages
While we’d all like to believe that we’d always redeem our gift cards in full and not forget about them, it’s much more common than you may think. More than 50% of Americans say they’ve lost out on a gift card at some point, and US consumers are currently sitting on more than $15 Billion in unspent gift cards and credits. Breakage is where revenue is realized from services which are paid for but not used. In relation to gift cards, this is where that gift card value is transferred from your liabilities to your revenue when a gift card isn’t redeemed after its validity period.
That sounds straightforward enough, right? Gift card expires, you retain the value. Well, it’s a little more complicated than that. There are many rules and regulations around breakages designed to protect consumers’ gift card purchases, and these are different depending on your region. For example in the UK, there appear to be very few regulations around gift card expiry meaning if you’re based in the UK selling to UK consumers you can usually set your own expiry date and rules around using gift cards with your store. If you’re based in the US, there are federal protections which mean that a gift card cannot expire until 5 years after it’s activated at the very earliest. In some states, merchants may be allowed to retain the breakage, however in others may be required to give that unredeemed value back to the original purchaser.
All this is to say that if you’re going to be selling gift cards, do your due diligence in researching what laws and regulations are going to apply to your business and ensure you have a really clear gift card policy on your store’s FAQ that customers can access. If you sell internationally, this can complicate things further, so in many cases it’s likely worth speaking to an expert on the matter.
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Gift cards are a great asset to any ecommerce business, and they can really add value to your store strategy. That way, you’ll go into your journey with gift cards empowered with knowledge and won’t run into any issues that may come as a surprise if you hadn’t taken that time to research and understand them.