The fact is, what you get out of a gift and loyalty program will depend on the effort and commitment you invest. Gift and loyalty cards can be a powerful way to grow sales and retain customers. Smaller companies can take advantage of these benefits, but they must be ready to implement them creatively and aggressively.

In this article I will help you understand the costs, profitability and psychology of gift and loyalty card programs. I will also outline some creative, real-world examples where smaller companies have used gift and loyalty cards to outmaneuver larger, chain-store competitors.

The cost of gift & loyalty card programs

Typical gift and loyalty cards programs can seem pricey, but not if you understand how they work. Once you understand what the costs of the program will be, it is then easy to implement a profitable campaign for your business.

Gift and loyalty card programs have four main costs:

Consider a typical small business with products in the range of $25 - $50 that has ordered 150 cards. The company sets the value of 100 cards at $25 each and sets the remaining 50 cards at $50 each. That's $5000 in gift cards overall.

Industry averages tell us that for most companies the "costs of goods and services" is around 45% of a product's retail price. Using this average, when you sell $5000 in gift cards you will spend $2300 of that to cover your hard costs, leaving $2700 of profit on the table.

Out of the $2700 in profit you deduct your cost. In this example the costs would be roughly $250 - $625, plus your ongoing costs. With these cost of the cards factored in, you still have a profit margin of over $2000.

Breakage and uplift increase profits

Gift and loyalty cards have indirect benefits. Not everyone will use all of the money on their card and many people will spend more than the value of the card in your store.

In fact, studies have found that people will usually spend 30% more when using a gift card, which is known as "uplift" in the industry.

Add to that the fact that 15-20% of all cards are never fully redeemed - a phenomena the industry refers to as "breakage" - and you are left with even more profits from your gift and loyalty programs.

Using the previous numbers, the business owner would increase his or her profits by $1300 or 25-35%.

$5000 X 20% = $1000 extra profits for unredeemed product or services
$5000 X 20% = $1000 X 30% = $300 in extra sales

These two benefits alone will see gift and loyalty card programs pay for themselves. Go ahead, play with the numbers, you will get excited. There is a reason, 8 out of 10 "Big Store Chains" have an aggressive Gift & Loyalty Card Programs in place.

An important note about your legal requirements

As cards become more popular, it is important for business to be aware of new legislation that may affect your gift or loyalty program. For example, Manitoba recently passed legislation that prohibits expiry dates or fees on gift cards. Under the new legislation expiry dates can only be used on a gift card if the card is given away during a promotion for a specific good or service.

When implementing your program, make sure that you comply with existing or emerging legislation.

The psychology behind gift & loyalty programs

One the most basic psychological benefits behind gift cards is that people see the value on the card as "free money" or "found money". The psychological effect is similar to that of a credit card, only much, much stronger.

As a result, people spend more. Someone with a $50 restaurant card will usually indulge in a dinner for two, spending $120. Another shopper in a retail clothing store with $15 left on his or her card will splurge on an item that is $15 more than they would otherwise be willing to spend.

A person who has a $5 Starbucks gift card is more likely to visit Starbucks instead of another coffee store. What's more, they will probably use the gift card to buy an extra coffee for a friend or colleague.

Other psychological benefits include:

• The cards create a "walking billboard" every time the carrier opens his or her wallet.
• Cards create a bond between the customer and the store.
• Cards makes payments easy, with no searching for change for coffee, etc.
• Cards enhance a business's image, giving the company an image of "modernity".

Strategies to make your gift & loyalty programs successful

Gift and loyalty card strategies can get quite sophisticated. However, you don't want to rely on a display at the cash to promote your program, an approach that might work for a larger company that has huge marketing budgets to drive people to their locations.

Smaller businesses need to employ more creativity.

The trick to having great gift and loyalty card programs is never let the card run out. This is called "cycling" in the industry. A savvy merchant will work aggressively to continuously cycle their gift cards, because as long as there is an amount on the card then customers feel the need to come back.

If you allow the card to reach a zero balance then the customer has no benefit to return to your business. You do this cycling enough times you create an unconscious habit in your customers over time. The habit is to shop at your location.

Successful strategies in action

You should have 2 goals when planning your gift & loyalty campaigns:

1. Increase your customer base
2. Maintain your existing and new customer base.

Let's look at a few real life strategies that have been successful gift & loyalty Campaigns.

Lunch restaurant uses gift cards for launch

The owners of a lunch time restaurant, located near a university, was about to open. They wanted to create a real buzz from the moment the store opened to ramp up their business.

We came up with a plan to make 100 gift cards with a value of $4.00 each. The owners knew their average ticket price was around $8, with a "cost of goods and services" around about $2.50. They could afford to give the cards away and still make a profit.

Two days before the opening we hired someone to hand out cards to students, explaining that they would only be good on opening day. When the restaurant opened its doors there was a line-up out the door. A lot of students brought their friends with them and many ended up spending $12 as an average ticket price.

And since the food and service was good, still to this day this lunch time restaurant has one of the busiest lunches in that area.

Florist increases deliveries with gift card strategy

A florist I worked with knew that most of the flowers they were delivering were to people who were receiving flowers from someone. The company wanted to try to increase their customer base to include the people receiving the flowers.

After working out their "cost of goods and services" they determined they could maintain profitability and still include a free $10 gift card with each delivery. They tastefully added a free card when they delivered flowers, and soon saw a dramatic increase in orders due to their gift card campaign.

Clothing retailer challenges larger chain stores with savvy strategy

A clothing retailer who was finding it challenging to compete against larger chain stores used a gift card strategy to turn things around.

The owner trained his staff to ask new patrons if they had shopped at the store before. If the answer was no, the sales person would offer a gift card in the amount of roughly $5.

The free card was a big motivator. The store owner observed that patrons would begin to shop and would buy something due to being given a gift. (This is a sales technique called the 'reciprocal agreement').

But the store owner didn't just want one-time customers, so he trained his staff to reload the person's gift-card during the check-out. Customers, already in a positive frame of mind from the initial gift, received a cheery comment like "Thank you for your business, we added $X to your gift card for your next visit."

That simple strategy turned many casual shoppers into loyal, repeat customers.

Other strategies at play

Gift and loyalty cards can be used in many unique ways. A few other creative strategies I have seen include:

• Small business owners using cards as rebates on products instead of holding a sale. A sale gets people in the store, but it doesn't encourage them to return. Rebate gift cards do both.
• A high-end jewelry store giving out $50 gift cards during the holiday season to doctor's offices, knowing the doctors are likely to come in and purchase an expensive product due to the gift card.

Gift and loyalty cards have been used successfully by mechanics, massage therapists, beauty salons, restaurants, coffee houses, home improvement companies, accountants and companies in many other industries. This is no longer a business marketing method that is limited to larger companies, but a strategy that you can put to work in your business immediately.

1. Source: Tower Group. Gift Cards: How to Keep Them from Becoming Drift Card. January 2007.