Gift Card Programs for Loyalty and Profit

For the seventh year in a row, gift cards are at the top of everyone’s gift list for gift-giving occasions. According to the National Retail Federation’s 2015 holiday survey published last October 60 percent of the consumers polled said they prefer receiving gift cards that let them select their own gifts. Department stores (40.3%) and restaurants (34.2%) are the most popular gift cards among shoppers and recipients alike but coffee shops, electronics and online merchants were well represented too.

This is excellent news for every type of retail outlet and it is incumbent on every retail company to set up a gift card program to take advantage of this surge in popularity. From pet salons to dry cleaners, gym, craft store or the specialty meat market, gift cards can give your bottom line a boost. The statistics on long-running gift card programs show that gift cards draw new customers to a store, business or restaurant and the amount spent per customer rises as well. 

Regardless of the denomination of the proffered gift card, the consumer nearly always spends more than the face amount. Even if the sale rings up at less than the amount of the card, the merchant is the all-around winner. If the tab is greater, the merchant has sold more than the original amount; if the tab adds up to less than the card’s value, the merchant gets to keep the money left over on the card. 

While some protest that gift cards are impersonal, their popularity is undeniable. Rather than taking the easy way out, many gift-givers are looking for gift cards at specialized stores that cater to their loved one’s unique interests. 

Our society is so used to handling credit cards that it isn’t a great surprise that plastic gift cards have more intrinsic value than paper certificates or even punch cards. Plastic cards offer a myriad of benefits to consumers and retailers alike:

  • Produce 30% to 50% more revenue per card 
  • Simple to track (retailer) 
  • Less likely to misplace or lose it (consumer) 
  • More convenient to carry in purses, wallets, pockets, backpacks, phone cases 
  • Sturdy, won’t rip, tear and the bar code remains scannable 
  • Another product or merchant branding opportunity 
  • Makes a good impulse buy item at the checkout 
  • Easy to use, add money or reload the card 

For more information about gift cards and how they should figure into your business, contact Mike Krause at (585) 672-6381.

Tips vs Service Charges: The IRS Changes the Game

It happens everywhere to restaurant patrons in large parties (six or eight or more): the restaurant tacks on an automatic gratuity percentage so that math-compromised guests don’t shaft the server(s) at the end of the meal. Tipping also helps to keep menu prices stable and attract high quality servers. So even as the American economy crawls slowly into a healthier place, the IRS ruling that an automatic gratuity is really a service charge tosses the country’s wait staff a rotten tomato.

The difference between tips and service charges is significant because tips are not subject to FICA (Federal Income Contributions Act) withholding and service charges are. This new ruling classifies service charges as a wage rather than a free-will payment made by a patron at the end of a meal. Ultimately, it means that while the wait staff eventually get their portion of the service charge, it is deferred and added into their wages with FICA, state and federal withholding taxes deducted.

To qualify as a tip or gratuity, a customer’s payment to a server must meet four requirements:

  • The patron makes the server’s payment of his or her own free will
  • The patron decides the amount of the server’s payment
  • The patron decides which server(s) are given an additional payment
  • The payment made by the patron is not negotiated or set by the restaurant’s policy

Automatic gratuities, now considered service charges, flunk the tip test on all four factors. So the service charge becomes part of the server(s) wages paid every week or two weeks, not hard cash they take home that evening.

The new ruling also changes how restaurants, country clubs and other hospitality enterprises handle their automatic and manual reporting for IRS purposes. The ripple effect is potent as merchant services and hospitality management software and terminals now must be adjusted to accommodate the IRS ruling.

Some restaurants are changing their employment model to pay servers a living wage rather than providing a low hourly rate and expecting the rest of the server’s money to come from serious hustle and schmooze. Still other restaurants are avoiding the service charge issue by providing large parties with suggested gratuity tables of 15 percent, 18 percent and 20 percent of the total check, then letting the patrons make the ultimate decision on tipping themselves.

For more information about merchant services and hospitality management systems, please call Mike Krause here or at (585) 672-6381.