Gift Cards: 5 Things You Need To Know

It looks so easy from the other side of the cash register. Somebody gives you a gift card. You take it to the store. You pick out some merchandise. You give the cashier your gift card. You walk out of the store with something you want. Just like magic.

Except it isn't magic. Somebody had to make the decision to use gift cards for his or her business. Somebody had to order those gift cards. Somebody had to make sure the gift cards were put in a spot where customers would see them and buy one.

If you have a business and you're considering offering gift cards, it can be a great way to drive additional sales -- especially during the holidays. But it takes a lot of work to get things going on the back end. Here are five things you need to know.

1. It isn't free. Most businesses get their gift cards through their credit-card processor -- the company or bank that helps you gain merchant status with credit cards like Visa and MasterCard. In fact, if you have a small business and take credit card, your processor has likely already made you aware that you could be purchasing gift cards through them. Expect to pay $1 to $3.50, or more, per card, although that number drops considerably the more cards you want. If you order 1,000, for example, you may pay $1 per card. There also may be a one-time set-up fee of several hundred dollars, although if you have a good relationship with the company or salesperson, you might be able to knock that down or eliminate it entirely. And expect a transaction fee every time the customer makes a purchase with his or her gift card. Every credit-card processor is different, of course, and there are no hard and fast rules here.

2. The process takes time. You can't decide on Nov. 19 that you really should have gift cards for sale in time for Black Friday. "There is a calendar to follow," says Mike Hursta, vice president of gift cards at First Data, one the world's largest providers of merchant-processing services. "We recommend merchants order their merchandise in September to have an October delivery. Then you can get your cards in the store by early November, so they're visible in the consumers' minds."

3. Remember the display. Once you order the cards, you need somewhere to put them. You can buy signage and display racks from the credit-card processor that sells you your gift cards -- or come up with some other way to showcase them to your customers. Whatever you do, you'll increase your odds of selling them, even if you do something as simple as put a sign near the cash register.

4. Gift cards can be a marketing tool. "That gift card, especially if you customize it and your store's name is on it, is like a little billboard for your store," Hursta says. "It's a way to attract customers. I'd recommend that business owners think about gift cards as part of their marketing budget." Note, he didn't say anything about thinking of gift cards as a way to make big bucks. Not that the gift cards won't earn you money, because they almost certainly will if you do everything right. But you never know. What if you order 10,000 cards and only sell 500? Or what if you sell 1,000 $50 gift cards, and six months later, your finances are tight, and customers keep coming in your store and walking away with $50 worth of inventory? Think through the worst-case scenarios, and don't use gift cards as a strategy for bringing in some quick cash. And when people buy your cards, put that money away for a while and don't spend it all at once.

5. The customer is still always right. Credit-card processors will point out in their marketing that a significant number of gift cards are likely to be purchased but not redeemed. In fact, Adam Hanft, a branding guru who has helped top-tier companies like Viacom and Reuters with their marketing, says an estimated $8 billion gift cards are purchased every year, and retailers "make tens of millions from unused gift cards and from not returning small amounts of cash -- under $10 -- when the cards are used." That's great for you but not good for your customer, and what ultimately is bad for your customer will end up being bad for you. So make sure, after all the work you've put into bringing gift cards into your store, that it's a good experience for the customer. After all, the whole purpose of a gift card is to make a customer feel warm and fuzzy about your store, not to have them storm out, vowing never to do business with you again.

The original version of this article appeared on AOL Small Business on 8/17/10.