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Learn practical ways to increase business revenue from gift cards, from setup and promotion to compliance, tracking, and maximizing customer engagement.
Did you know that billions of dollars in gift card value go unspent each year? This leftover balance, known as "breakage," might seem like free money for your business, but it comes with a catch. State laws, called escheatment rules, often require you to turn over these unclaimed funds after a few years. On top of that, accounting standards have specific guidelines for when you can recognize this breakage as income. Mismanaging these unredeemed balances can lead to significant legal and financial penalties. We’ll explain how to handle breakage, stay compliant with state laws, and accurately report your business revenue from gift cards for a healthy, audit-proof financial system.
Gift cards are more than just a convenient present; they're a powerful tool for generating revenue and stabilizing your cash flow. When you sell a gift card, you’re not just making a single sale. You're opening up multiple avenues for income and creating opportunities to build stronger customer relationships. From the moment a card is purchased to the day it's redeemed (and even if it never is), gift cards work for your business. Understanding these different revenue streams helps you build a more effective gift card program that supports your financial goals. Let's look at the specific ways gift cards contribute to your bottom line.
The most straightforward way gift cards generate revenue is through the initial purchase. When a customer buys a gift card, you receive the cash upfront, long before any product or service is delivered. Think of it as an interest-free loan from your customers. This immediate influx of cash can be a huge help, giving you working capital to invest in inventory, cover operational costs, or fund marketing campaigns. It’s a simple transaction that provides immediate financial value and sets the stage for future sales.
It’s rare for a customer to spend the exact amount on their gift card. More often than not, they treat it like a discount on a larger purchase. This phenomenon, known as "upspending" or "lift," is a significant source of extra revenue. For example, a customer with a $50 gift card might find an item they love for $70 and happily pay the $20 difference out of pocket. This behavior effectively increases the average transaction value for gift card redemptions, turning a simple redemption into a more profitable sale for your business.
Sometimes, gift cards are lost, forgotten, or only partially used. The value left on these cards is called "breakage," and under certain accounting rules, it can eventually be recognized as income. While you can't just pocket the cash from an unredeemed card right away, specific regulations allow you to claim this revenue over time based on historical redemption patterns. Properly accounting for breakage is a key part of revenue recognition, ensuring your financial statements are accurate and compliant. It’s a small but consistent revenue stream that many businesses benefit from.
Beyond the initial sale, a steady gift card program provides a predictable boost to your cash flow. The upfront payment from gift card sales gives you immediate access to funds, which is especially helpful during slower seasons. This predictable income helps you manage your finances more effectively, allowing you to plan for future expenses and investments with greater confidence. A healthy cash flow is the lifeblood of any business, and gift cards are a reliable way to keep it strong throughout the year.
Offering both digital and physical gift cards allows you to meet different customer needs and expand your reach. Physical cards are great for in-store displays and traditional gift-giving, but digital cards open up a world of possibilities. They can be sent instantly via email or text, making them perfect for last-minute gifts. More importantly, e-gift cards allow you to reach customers far beyond your local area, turning fans of your brand anywhere into paying customers. This flexibility ensures you never miss a sale and can connect with a much broader audience.
Selling a gift card feels like a win, but from an accounting perspective, the work has just begun. You can't count that cash as revenue right away. Proper gift card revenue recognition is essential for accurate financial reporting, staying compliant, and making smart business decisions. It all comes down to understanding one key concept: you haven't truly earned the money until your customer has redeemed their card. Getting this right keeps your books clean and your business on solid ground.
When a customer buys a gift card, they are essentially giving you a cash advance for a future purchase. Think of it as a promise you’ve made to provide goods or services later. That cash isn't revenue yet; it's a liability. In accounting terms, this is called "deferred revenue" or "unearned revenue." You owe the customer something of value in exchange for the money they paid. This liability sits on your balance sheet until the customer uses the gift card, at which point you can finally move it from the liability column to the revenue column on your income statement.
The official guideline for this process is ASC 606, the accounting standard for revenue from contracts with customers. A gift card sale is considered a contract where you have a "performance obligation"—the duty to provide goods or services when the card is redeemed. ASC 606 states that you can only recognize revenue when that obligation is satisfied. This means waiting until the customer makes a purchase. The standard also provides rules for recognizing "breakage," which is the portion of gift card value that you estimate will never be redeemed, but the primary rule is to wait for redemption.
So, when is the magic moment you can finally count the sale? Revenue is recognized at the point of redemption. If a customer buys a $100 gift card in December but doesn't use it until February, you recognize that $100 in revenue in February. If they only spend $40 in February, you recognize $40 in revenue and the remaining $60 stays as a deferred revenue liability on your books. Tracking each transaction is key, as revenue is recognized incrementally as the card balance is used up over time.
To stay organized and compliant, you must record every gift card sale as a deferred revenue liability. This requires a system that can track gift card sales, redemptions, and outstanding balances accurately. For businesses with high sales volume, manual tracking in spreadsheets can quickly become overwhelming and lead to errors. Using an automated revenue recognition platform ensures every transaction is categorized correctly in real-time. The right software integrates with your existing systems to make this process seamless, accurate, and audit-proof.
The single biggest mistake businesses make is booking the cash from a gift card sale as revenue immediately. This overstates your income for that period, which can lead to inaccurate financial statements, incorrect tax calculations, and a false sense of your company's performance. It creates a liability that isn't accounted for, which can cause major headaches during an audit. By understanding that a gift card sale is the start of a process—not the end—you can ensure your financial reporting is always accurate and reliable.
A well-run gift card program does more than just offer another payment option—it’s a powerful tool for growing your business. When you treat gift cards as a core part of your strategy, you can attract new buyers, build brand loyalty, and gather valuable data to make smarter decisions. Let’s look at how you can make your program a success.
Think of every gift card you sell as a personal recommendation. Your current customers buy them for friends, family, and colleagues, introducing your brand to people who may have never shopped with you before. This is one of the most effective ways to reach a new audience because the introduction comes from a trusted source. Plus, gift cards encourage repeat business. Recipients often return to use their card and frequently spend more than its initial value, giving you an immediate sales lift. By turning your loyal customers into advocates, you create a simple yet powerful engine for growth and gain valuable insights into your expanding customer base.
Gift cards are a tangible piece of your brand that customers can hold or share digitally. Whether it’s a physical card in a wallet or a digital one in an inbox, it serves as a constant reminder of your business. This repeated exposure helps keep your brand top-of-mind. You can customize your cards with your logo, colors, and unique designs to reflect your brand’s personality, turning a simple transaction into a memorable experience. Every time a card is given, it reinforces your brand identity not only to the recipient but also to the giver, strengthening their connection to your business and what makes you unique.
Getting a gift card program off the ground doesn't have to be a major expense. Many modern point-of-sale and ecommerce platforms have built-in gift card functionalities, which means you can often use your existing payment system to get started. The cost to produce physical cards is typically just a few cents each, and digital gift cards cut those costs even further. When you weigh these minimal startup costs against the benefits—like upfront cash flow from sales and the tendency for customers to overspend their card’s value—the return on investment is clear. You can explore different pricing models to find a solution that fits your budget and scales with your business.
While gift cards are a holiday staple, limiting your promotions to December means you’re missing out on revenue throughout the rest of the year. People celebrate birthdays, anniversaries, graduations, and other special occasions every single month. Promote your gift cards year-round for these events. You can also position them as the perfect thank-you gift or a simple way to show appreciation. By marketing them consistently, you can create a steady, predictable revenue stream that helps balance out seasonal sales fluctuations. A quick consultation can help you identify the best ways to integrate this strategy into your financial planning.
Your gift card program is a goldmine of customer data. Every purchase and redemption tells you something about your customers’ behavior: when they shop, what they buy, and how much they’re willing to spend. By analyzing this data, you can uncover trends that inform your marketing campaigns, inventory management, and even product development. For example, if you notice many gift cards are redeemed for a specific product, you might feature it in your next promotion. Using a system that offers seamless integrations allows you to connect this sales data with your other business tools, giving you a complete picture of your performance and helping you make strategic, data-backed decisions.
Launching a gift card program is just the first step. To truly make it a revenue-generating asset, you need to manage it with the same attention to detail you give your core products or services. This means moving beyond simply selling cards and actively monitoring, analyzing, and securing the entire process. A well-managed program not only protects your bottom line but also provides valuable insights that can inform your broader business strategy. By putting the right systems in place, you can turn your gift card program from a simple sales tool into a powerful engine for growth and customer engagement.
You can't improve what you don't measure. To understand if your gift card program is truly successful, you need to keep a close eye on its performance. Start by tracking essential metrics like the total number of gift cards sold, the redemption rate (how many are actually used), and the average uplift—the extra amount customers spend beyond the card's value. These numbers give you a clear picture of how your program is performing and where you can make improvements. Consistently monitoring these KPIs helps you understand the full revenue impact of your gift cards and make smarter decisions about future promotions and marketing efforts.
Managing gift card revenue on a spreadsheet might work when you’re just starting, but it quickly becomes a liability as your business grows. A dedicated tracking system is non-negotiable for maintaining accurate financial records and staying compliant. This system should automatically track sales, redemptions, and outstanding balances, giving you a real-time view of your deferred revenue liability. Investing in a robust system from the start saves you from major headaches down the road, especially during tax season or an audit. Proper tracking ensures your books are always accurate and that you recognize revenue at the right time, keeping your financials clean and reliable.
The data from your gift card program is a goldmine of customer insights. By analyzing usage patterns, you can learn when, where, and how customers are redeeming their cards. Are they being used to buy specific products? Are redemptions spiking after certain marketing campaigns? This information helps you refine your strategy. For example, if you notice cards are frequently used to purchase a particular item, you could bundle it in a future promotion. Using your sales data to make these kinds of decisions allows you to tailor your offerings, optimize inventory, and create more effective marketing campaigns that resonate with your customers.
As gift cards become more popular, they also become a target for fraud. Protecting your program is essential for safeguarding your revenue and maintaining customer trust. Implement security measures for both physical and digital cards, such as requiring a PIN for online redemptions or using secure activation processes. Regularly monitor for suspicious activity, like an unusually high number of cards being purchased with a single credit card. A smooth and secure process for buying and using gift cards not only prevents losses but also gives legitimate customers confidence when they purchase from you, ensuring the program remains a positive experience for everyone.
For seamless management, your gift card program shouldn't operate in a silo. Integrating it with your point-of-sale (POS) and accounting software is crucial for accuracy and efficiency. This connection automates the flow of data, reducing the risk of manual entry errors and giving you a consolidated view of your finances. When your systems are linked, sales and redemptions are recorded instantly, and your deferred revenue liability is always up to date. Exploring integrations with your existing platforms ensures that your gift card data works in harmony with the rest of your financial information, providing a clear and accurate picture of your business's health.
Once your gift card program is up and running, you can’t just wait for sales to happen. Promoting your gift cards requires a smart, consistent strategy to turn them into a significant revenue stream. The key is to treat them like any other product in your lineup—one that deserves its own marketing plan. By making your gift cards a visible and attractive option, you can get them in front of more customers and drive sales year-round.
A great way to encourage gift card sales is by offering a little something extra. Consider running promotions like, “Buy a $50 gift card, get a $10 bonus card for free.” This not only incentivizes a higher purchase amount but also brings customers back to spend their bonus. These promotions are especially effective during peak shopping seasons but can also create a sales lift during slower periods. For more ideas on growing your business, check out the HubiFi Blog.
To maximize visibility, promote your gift cards across all your marketing channels. Feature them on your website’s homepage, include a mention in your email newsletters, and create engaging posts for your social media accounts. If you have a physical location, use in-store signage at the checkout counter. The goal is to make it impossible for customers to miss that you offer gift cards, keeping them top-of-mind as a convenient gift option.
Your most loyal customers are your biggest fans, so get them involved in spreading the word. Integrating gift cards into your loyalty program is a fantastic way to do this. You can offer gift cards as a reward when a member reaches a certain spending threshold or allow them to purchase gift cards using their points. This rewards your best customers and encourages them to find new customers for your brand.
Gift cards are a go-to present for holidays, so it’s essential to plan your promotional calendar accordingly. Think beyond the winter holidays and create campaigns for Valentine’s Day, Mother’s Day, graduations, and back-to-school season. Develop themed gift card designs and marketing materials for each event to make your offerings feel timely. The gift card market is growing fast, and aligning your promotions with these key periods will help you capture more sales.
Making a gift card feel personal can be the deciding factor for a buyer. Offer digital gift cards that can be delivered instantly via email—a huge convenience for last-minute shoppers. Allow customers to add a personal message or choose from a variety of designs to match the occasion. These small touches transform a simple transaction into a thoughtful gift-giving experience, making your gift cards a much more appealing choice over generic options.
Running a gift card program isn't just about marketing and sales; it also comes with a set of legal responsibilities. Staying on top of these rules protects your business, ensures you’re handling your finances correctly, and builds trust with your customers. From federal laws to specific state guidelines, knowing the landscape is key to managing your program successfully and avoiding any costly surprises down the road.
Think of it as the essential, behind-the-scenes work that makes your gift card program a stable, long-term asset. Getting this right from the start saves you headaches during tax season, audits, and beyond. Let’s walk through the main compliance areas you need to keep on your radar.
It sounds complicated, but the concept is straightforward. Escheatment laws are state-level rules that require companies to turn over unclaimed property—in this case, unredeemed gift card balances—to the state after a certain number of years. This period, known as the dormancy period, is typically between three and five years. These laws prevent businesses from simply keeping the unused funds indefinitely as profit. For your finance team, this means you can't just write off old gift card balances. You need a system to track gift card liability and comply with your state’s specific reporting and remittance requirements.
Your customers have rights, and federal laws are in place to protect them. The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 sets the ground rules for gift cards nationwide. The most important takeaway is that gift cards cannot expire for at least five years from the date they were purchased or the date funds were last loaded. Additionally, if you charge any inactivity or service fees, those terms must be clearly disclosed to the customer at the time of purchase. Being transparent about these policies isn't just good practice; it's the law.
While the federal CARD Act provides a five-year minimum, some states have even stricter rules. Several states, like California and Florida, have laws that prohibit expiration dates on gift cards altogether. This is a perfect example of why you can't take a one-size-fits-all approach to compliance. If you operate in multiple states, you need to be aware of each location's specific regulations regarding expiration dates and fees. Always default to the rule that offers the most protection for the consumer to ensure you’re fully compliant everywhere you do business.
Beyond expiration dates and escheatment, states have various other guidelines you need to follow. These can cover everything from how gift cards must be redeemed (for example, if a balance is under a certain amount, some states require you to offer cash back) to specific disclosure requirements. Because these rules can change, it’s a good idea to periodically review the guidelines in every state where you sell gift cards. A quick check-in with your legal or financial advisor can help you stay current and avoid any potential compliance issues.
When it comes to audits, gift cards are treated with the same seriousness as cash. Auditors will want to see that you have a clear and accurate system for tracking gift card sales, redemptions, and outstanding liabilities. This means your record-keeping needs to be meticulous. You should be able to produce reports that show the complete lifecycle of your gift cards. Having an automated system that integrates with your accounting software can make this process much smoother, ensuring you have the data you need to pass any audit with confidence.
Launching a gift card program is a fantastic way to bring in new sales, but managing it well is what protects your bottom line. A successful program requires a solid strategy to handle everything from the initial sale to the final redemption—or even non-redemption. By putting the right systems and security measures in place, you can prevent fraud, stay compliant, and make sure every gift card contributes positively to your revenue stream.
The foundation of a secure and effective gift card program is your processing system. Think of it as the central hub that manages every card you issue. A reliable system not only makes it easy for customers to buy and use your cards but also simplifies your internal operations. When choosing a processor, look for one that offers robust security features and seamless integrations with your existing accounting and sales software. This ensures that all your data flows correctly from day one, preventing headaches down the road. A smooth process encourages more people to buy gift cards, which is a great way to attract new customers and increase sales.
Once your system is in place, meticulous tracking is non-negotiable. For every gift card, you need a clear record of when it was issued, its value, when it was used, and how much was spent. This isn't just good bookkeeping; it's essential for accurate financial reporting. When you sell a gift card, the money you receive is initially recorded as a liability, not revenue. You must properly record these sales as deferred revenue until the customer redeems the card. This practice keeps your books clean, ensures you’re compliant with accounting standards, and gives you a true picture of your company's financial health.
Gift cards are like cash, which makes them a target for fraud. Protecting your program means implementing security measures for both physical and digital cards. For physical cards, use unique, hard-to-replicate card numbers and keep them in a secure location. For e-gift cards, use secure delivery methods and consider adding PINs or other verification steps. It’s also crucial to make the customer experience smooth and secure. A complicated or untrustworthy purchasing process can deter buyers. Establish clear policies for lost or stolen cards so your team knows exactly how to handle customer issues, building trust and protecting your business from potential losses.
Did you know that the value of unredeemed gift cards might eventually belong to the state? Many states have escheatment laws that require businesses to turn over unclaimed property, including unused gift card balances, after a certain period. These laws vary significantly from one state to another, so it's vital to understand the specific rules where you operate. Staying on top of these regulations prevents hefty fines and legal trouble. Proper tracking and reporting are your best defense, as they provide the documentation needed to prove compliance. Regularly check for updates to these laws and find more insights to keep your program on the right side of the law.
While many gift cards get used, a surprising number don't. In 2022 alone, nearly $21 billion in gift card value went unspent. This unredeemed balance, known as "breakage," can eventually be recognized as income for your business. However, you can't just move that money into your revenue column whenever you want. Accounting standards dictate how and when you can claim breakage income, often based on historical redemption patterns. An automated revenue recognition system can help you accurately track this data over time, allowing you to forecast and recognize this extra income correctly and compliantly. This turns a liability on your books into a welcome addition to your revenue.
When can I actually count the money from a gift card sale as revenue? You can recognize the revenue only when the gift card is used to make a purchase. Even though you receive the cash upfront, that money is considered a liability—a promise to provide goods or services later. If a customer uses $30 of a $50 gift card, you can recognize $30 in revenue for that period. The remaining $20 stays on your books as a liability until it's spent.
What happens if a gift card is never used? Can I just keep the money? It’s not quite that simple. The unspent money, known as "breakage," can sometimes be recognized as income, but you have to follow specific accounting and legal rules. Many states have escheatment laws that require you to turn over unclaimed funds to the state after a few years. It's crucial to have a system that tracks these balances so you can handle them correctly and stay compliant.
My business is small. Is a gift card program too complicated or expensive to set up? Not at all. Many modern point-of-sale and e-commerce systems have gift card features built right in, making the startup process quite simple. The cost to produce physical cards is minimal, and digital gift cards are even more cost-effective. When you consider the immediate cash flow and the tendency for customers to spend more than the card's value, the return on a small initial investment is often well worth it.
Are gift cards only useful for holiday sales? While they are definitely popular during the holidays, limiting your promotions to that season is a missed opportunity. People need gifts year-round for birthdays, anniversaries, graduations, and as simple thank-you gestures. By marketing your gift cards consistently throughout the year, you can create a reliable and steady source of income that helps smooth out the seasonal highs and lows of your business.
Besides the initial sale, how do gift cards really help my business grow? Gift cards are a powerful tool for growth beyond the first transaction. They act as a personal recommendation, bringing in new customers who might not have found you otherwise. Recipients also tend to spend more than the card's value, increasing your average sale amount. Plus, the data you collect from gift card sales and redemptions can give you valuable information about customer behavior, helping you make smarter marketing and inventory decisions.
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.
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