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Gift cards: not just for big business anymore

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in Small Business Tax

It’s a fact that your competitors plan to ramp up their gift-card strategy this holiday season … and year-round, too.

Reason No. 1: Consumers crave them: 53 percent want to receive one this year, says the National Retail Federation (NRF) in its recent 2006 Holiday Consumer Intentions and Actions Survey of 7,623 consumers.

Reason No. 2: Growing demand and competition among providers now has made the handy and trendy cards an easy and inexpensive way for small businesses to boost both seasonal and year-round income, and build customer loyalty.

Here’s what’s happening: Customers spent $18.5 billion on gift cards during the 2005 holiday season. That’s up 6.6 percent from the previous year, says NRF.

Sheer popularity has made cards more affordable and fast for even the smallest business. Example: Start-up costs for personalized packs of 100 cards now run between $100 and $200. Plus, design and delivery typically take only a week.

The early stigma attached to gift cards is gone, retail experts say, as consumers no longer view them as “impersonal” gifts, and many states have enacted consumer laws that either ban expiration dates or limit fees. Respondents to a MasterCard International survey of 3,000 shoppers this year said they now view gift cards as a reliable method of giving people what they want.

Another business factor in the strategy’s wide acceptance: Gift cards come with a financial advantage over simple gift certificates. With both mechanisms, you get the benefit of holding consumers’ money before having to provide any merchandise. But, unlike gift certificates, which count as sales immediately and therefore as revenue come tax time, gift cards show up as sales only when they’re redeemed.

Example: At InSpa Corp., a small but fast-growing Seattle-based day-spa chain, cash-flow wrinkles are smoothed out by “borrowing” from customers. When retail gift cards first hit the scene some years ago, the company realized their appeal for spa clients. Now, prepaid gift cards account for more than 25 percent of InSpa’s incoming cash flow. And since the cards often go unredeemed for up to 12 months, InSpa can use that cash in the interim.

Significantly, too, almost 14 percent of gift-card recipients never use their cards’ full value (called “breakage” in the industry). Of those customers, 40 percent leave balances of more than $5, according to Atlanta-based Synergistics Research Corp., which studies the financial services industry and spending patterns.

Finally, when customers redeem paper gift certificates for amounts less than the certificate amount, most merchants give cash back. Plastic gift cards, on the other hand, can be “reloaded,” and that encourages additional purchases.

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