For most consumers, gift cards are a routine part of the retail landscape. They’ve steadily increased their coverage, from big chain retailers to smaller businesses in many industries. We recently talked to Dan Battista, Vice President of Sales at ProfitPoint, about how small businesses are using gift cards and the best ways to maximize an investment in a gift card program.

BuyerZone: What are the basic types of gift card programs?

Dan Battista: At its core, whether the retailer runs it themselves or a third party runs it, any gift card program has a few basic components. There are the custom cards themselves, then the ability to track value on those cards. In one way or another, the system lets merchants provide customers with stored value cards to use in future.

There are two different types of programs. Open loop programs can be used anywhere, like prepaid credit or debit cards. Closed loop programs can only be loaded and redeemed at the one retailer and tend to be more effective for merchants.

Even within closed loop programs, each one is different – some have more limited capabilities, only allowing basic loading and redeeming of dollar values. Other programs differentiate themselves with additional support and assistance they provide to the merchant: web-based reporting, the ability to load and redeem value without the card being present, or 800 numbers or web sites to conveniently check balances. Those types of features start to differentiate better programs from the pack.

Another example is the loyalty card. Better gift card programs also have the capability to run and manage a loyalty program. A loyalty program gives you the opportunity to reward good customers, encourage them to visit more often, and entice them to spend more when they visit you. In the best systems, it’s a two pronged attack: the gift card program attracts new customers who may not have visited before, while the loyalty program encourages customers to visit more often and spend more when they do.

BZ: What are the biggest benefits of gift cards for merchants?

DB: One of the biggest benefits in my mind is that gift card programs enable your best customers to refer friends and family very easily. When customers give a gift card for a holiday or birthday present, or if other businesses distribute gift cards to employees, they’re providing a stamp of approval for your business – and that referral brings in new customers.

Word of mouth via gift cards is a very cost effective way to attract new business – and it’s also word of mouth the easy way for customers. Whoever purchases the gift card doesn’t need to go into a lot of detail about the appeal of the business to make their recommendation.

Another major benefit is that gift cards easily deliver positive and significant ROI thanks to unredeemed cards. Of course you want people to redeem the cards – but somewhere between 10% and 20% of prepaid gift cards never get redeemed.  The percentage tends to be higher in smaller businesses with fewer locations, as opposed to chains or franchises. That 1 in 10 or 1 in 5 tends to pay for the costs of the program.  Also, when using gift cards, customers tend to spend 20% to 40% more than they would have otherwise.

BZ: When should small businesses consider a gift card program?

DB: There isn’t really a threshold before a business should consider a gift or loyalty card system. Gift card systems are affordable, robust, easy to use, and easy to implement – even for the smallest businesses. Most systems don’t require additional expensive equipment.

In fact, brand new businesses are some of the best candidates for gift card systems. Take a restaurant that’s just opened its doors: every customer is a new customer. You only get a couple of opportunities to earn their loyalty, so they should have a loyalty card system in place to reward those new customers and turn them into regular customers. They can also load gift cards with a small value and distribute them to new customers as they come in.

BZ: Gift cards have an obvious market in retail companies. What other industries use gift cards, and how?

DB: Gift cards don’t have to be pigeonholed for specific industries. It’s true, restaurants, retailers, and salons and spas are the most likely users. But we see our customer base vary widely, from those traditional customers to colleges and universities, hospitality and hotels, and even B2B industries.

An example: a customer of ours is in B2B sales: he sells paint to contractors. He goes to a trade show early in the season every year – this trade show sets the tone for the year, both for him and for his competitors. To stand out, he set up a gift card program and encouraged contractors to prepay for paint for the year – offering the prepaid paint at a discount. He had a great amount of success with the program and now uses it every year. It might be the last place you’d expect a gift card system, but it really helps his relationship with customers. In addition, all the prepayment has really helped his cash flow, helping him launch some new products that previously had too high a barrier to entry.

I’ve also seen event-driven programs for charity events. One customer distributed gift cards through direct mail to potential attendees of a charity auction. They didn’t say what the value on each card was, just a range: most cards were $5 or $10, but some carried $50 or $100, and one had a $500 balance. To find out how much their card was worth, recipients had to go to the auction. It’s easy to do, and brings more value to event: folks who come to the event are happy to spend money anyway, to help the cause, but the intrigue gets more of them to attend.

BZ: What’s the minimum investment to get started?

DB: It’s really very small, depending on how much functionality you want and what you want to accomplish. Getting started entails setting the program up, getting access for merchant to process transactions, and designing and printing cards. All that can be done for as little as a few hundred dollars in some cases. And even typical startup costs aren’t that much more: a typical one location merchant can expect to pay $300 to $500, depending on the components they select.

The best route to a great ROI is to put in place everything you need to be successful, even if it costs a little extra at the beginning.

BZ: What can gift card users do to get the most ROI on their purchase?

DB: This is really important to consider: the more aggressive they are with the program, the more successful they’ll be. The worst situation we see is when a merchant buys a set of custom cards, puts them in a drawer below the register, and waits for customers to ask about buying gift cards. It doesn’t work!

To get good returns the cards have to be displayed prominently. The gift card supplier should supply point of purchase displays to make the cards obvious and available – that’s just a must-do. Since you load value at the time of purchase, you don’t have to worry about theft of prominently displayed cards – with no value loaded, they’re just pieces of plastic.

Merchants can help customers get in the habit of using gift cards by implementing a gift card with purchase program. A customer spends $50? Give them a $5 or $10 card for their next purchase and require them to spend at least $50 to use the card.  Another good way to be aggressive is to offer the cards at discount: 10% off a gift card of $50 or more, for example.

BZ: How does a great gift card system differ from a mediocre system?

DB: There are a couple of ways. One is the support you receive from the provider. Look for a provider that sets you up with the right program, teaches you how to use it fully, provides guidance and suggestions for marketing the cards, and is available for support throughout the relationship. From a merchant’s point of view, there’s a big difference between that and a provider who sets you up and then is never heard from again or isn’t available to work with

In addition, the tools that are available with the program are important. Reporting is one – robust reporting enables you to track the overall success of your program. You want to make sure you receive point of purchase materials and signage. And finally the cards themselves should be high quality, custom cards.

BZ: What security concerns do gift cards create?

DB: The security risks are less than you might think. A gift card program really tracks stored values – it doesn’t actually carry the dollar value on the card. Good systems let you attach demographic information to the card, so if card is lost or stolen, the customer can call and request a new card. With the right system, closing out and replacing a lost card is very easy.

The system should also include risk or fraud detection as part of its reporting. These features will flag any unusual activity that occurs, whether by customers or staff members. That helps take the guesswork away from merchant and eliminates any issues that might arise.

ProfitPoint, Inc. is the leading provider of stored value solutions for the mass merchant marketplace. They specialize in the design and implementation of custom Gift and Loyalty Card Programs and support their programs with all forms of non-cash payment processing products including Credit Card Processing and Merchant Cash Advance.