3 Reasons Why You Shouldn’t Discount Gift Certificates

Well, it’s that time of year.   Thanksgiving’s over and the holiday season is in full swing.  Every business, big and small is out there trying to get their share of the holiday sales pie.   It’s rumored that some retail businesses pull in upwards of 25% of their annual revenues during the month of December.

If you’re a business owner, it’s so easy to get caught up in the hoopla and craziness this time of year.   What’s worse, it doesn’t help that we can see what our competitors are doing.   All you have to do is log into Facebook and suddenly when you see your competitors offering two for one specials or a complimentary gift with purchase, you feel that instant urge to jump in and offer something too.

One of the most popular promotions that I see during the holidays is discounts on gift certificates.    It also happens to be the most destructive promotion that any business owner could possibly run for a number of reasons.

Here are three reasons why you shouldn’t discount gift certificates:

1)  You can’t afford it.  – There’s a big difference between discounting products and discounting services.    In most cases, you have a much larger margin on your retail sales versus your service sales.   If you priced your services out accordingly, hopefully you figured in at least a 10% profit margin.   If you’re smart, 15% if it doesn’t price you out of your market.   Many salon owners are clueless when asked what their margins are on services because they haven’t figured the associated costs of providing the service beyond payroll costs.  Chances are their margins are razor thin, if they have any margin at all.   And then there they go, discounting their services by selling $125 gift certificates for $99.   Do the math.  With what it’s costing you per hour to perform services, you surely can’t afford that kind of reckless discounting.  Commission-based salons are the hardest hit.   Let me show you how.   Imagine paying 45% on the face value of a $125 gift certificate when you only took in $99?    Let’s see .45% commission x $125 = $56.25 commission pay out.   Now, take  $56.25 / $99 (what you actually took in) = 56.8% commission payout.    So, because you discounted your gift certificate by 20%, you just increased your payroll commission percent from 45% to 56.8%!   No bueno.

2)  Cash: Here now, gone tomorrow. – There are many reasons why salon owners sell gift certificates during the holidays.   One of the most popular reasons is that it’s a great way to raise cash quickly.   The logic is that  when you offer a discount,  you create an opportunity to sell more.   There’s a great deal of responsibility when dealing with gift certificates, especially in the area of cash management.

Ideally, the thing to do is to have a separate savings account set up where you can quickly transfer cash into the account when gift certificates are sold and then transfer cash back into the operating account when gift certificates are redeemed.   A sales summary report can help you track how much to move in and out of the savings account every week.  Keeping the cash separate from the business operating account will prevent you from spending the gift certificate sales money.   Technically, the money isn’t yours until the client comes in to receive services and redeem their gift certificate.   The gift certificate is actually a liability because you owe services to the client at a later date.   By purchasing the gift certificate, your client is giving you money in advance to be used towards services at a later date.     Many salon owners don’t understand what is happening from an accounting perspective when selling gift certificates. They mismanage cash by immediately spending it on other things, instead of holding onto it until the client comes in and receives services.

3)  You still have to pay your employees. –  Payroll is clearly one of the largest expenses for any business.  Imagine the predicament when January arrives and all of your clients are paying for their services with gift certificates.  Your employees can’t cash gift certificates.  They can only cash paychecks.    When salon owners spend their gift certificate sales money prematurely and then find themselves in a cash crunch because they can’t pay their employees, they often end up selling more gift certificates at a discount to entice clients to buy more.   Meanwhile, their gift certificate liability account just keeps growing and growing, making it harder to get out of gift certificate debt.   This situation is often called gift certificate welfare.   It’s very dangerous, and it could put a company out of business if you’re not careful.

Solution:  This holiday season, don’t bury yourself in gift certificate debt.   At the very least, if you’re going to sell gift certificates, sell them at face value.   If you really want to offer an incentive,  deliver a free gift with purchase option.   Consider a travel size gift set or samples with every gift certificate purchase.   That’s the smart way do do business this holiday season.