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Gift Cards: A Guaranteed 20% Return on Your Money?

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Over the last few years, I've noticed that more and more companies are pushing their gift cards over the holidays. Gift cards are a great deal for businesses because they get to book the revenue now... and if they are lost, forgotten, discarded, they don't have to give up the product or service. This is often called breakage. [It seems I was wrong about them being able to book the revenue now. They have to wait until the gift card is spent. Makes sense because having the money out there would be a matching liability I guess. Anyway an accountant made the point that does look good for the cash flow statement.]

The problem is that consumers only have so much money to spend over the holidays. This leaves businesses competing with each other for your gift card budget. And to borrow a slogan from Lending Tree, "when businesses compete you win." In this case, businesses have been giving more value for their gift cards, such as giving someone a free $5 gift card if you buy a $25 one. Or they may just discount the gift card. I've noticed that $50 iTunes gift cards can be bought for around $40 at some places. Finally, they may give you a free meal (Taco Bell is giving two tacos and a drink for instance).

Whatever the deal is, you stand to gain, if you realize something very simple. You don't have to give the cards, you can use them yourself throughout the year. So if I was going to spend $20 at Taco Bell in the next year, why wouldn't I just buy the gift card and get a free lunch worth around $4? Sure, I take the risk of losing the gift card (at least it's a risk that I can control) and I'm giving up the money now... but I'm effectively locking in a 20% gain on my money (in the form of the free lunch now).

One of the other things that you might not realize is that gift cards aren't promotions. They are as good as cash. So they can be stacked with other coupons and promotions. I'll give you a real world example of how I used this to my benefit recently.

I buy my dog's pet food from Petco because they have some super organic stuff that I can't find in my typical grocery store. I'm pretty sure it's grown on a cloud above a rain forest... and unicorn meat is involved as the 3rd ingredient. I may have some details wrong there, but the point is that it can be a little expensive. (And yes the point of me mentioning Taco Bell for myself and this food my dog is not lost on me.) Anyway, I noticed that I could buy Petco gift cards for 26% off. For example, right now I see a $239.70 gift card for $177.38. Yes, I'll take the $60 if you are just going to hand it too me. Since the gift cards are as good as cash, I can still use the 10% coupon I have and the $5 Petco Rewards they gave me. Combine them all and suddenly unicorn meat prices come a lot closer to penguin meat prices.

A couple of weeks I jumped on an Applebee's $50 gift card for $40. That 20% savings is usually my sweet spot. Sure I'll take less than that if it's something I know I'm going to a lot of (Amazon, I'm looking at you), but those deals can be rare. If you have an Entertainment book that includes Applebee's there's nothing wrong with using that coupon with the gift cards you bought.

I have one warning of caution. Businesses are getting wise to this trick and are starting to offer a "bonus card" as the extra perk. This bonus is not a true gift card. Sometimes it expires quickly. Sometimes it can't be used with other coupons. It can dilute the value the deal a bit depending on your use.

Are there any gift cards that you stock up on during the holiday season to use throughout the year? Let me know in the comments.

Posted on December 17, 2013.

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10 Responses to “Gift Cards: A Guaranteed 20% Return on Your Money?”

  1. Steve says:

    I am not an accountant (IANAA?) but my understanding is, the business does not get to book the revenue immediately. They get the money immediately, but can’t officially recognize the revenue until the card is redeemed. I’m not sure what happens in the case of breakage (in those states where it’s still legal). I guess they probably recognize the revenue after the card expires.

    • Lazy Man says:

      Hmm, I didn’t even think about that. I presumed that they’d count the sale upfront. I guess I may be wrong. Either way, though, they’ll getting the money up front, so that’s still a good deal for them.

  2. I don’t typically buy gift cards well i advance, but I do buy them with a specific purpose in mind. If I know a friend is getting married and registered at Crate and Barrel I will look for a discounted Crate and Barrel card and then use it to pay for one of the gifts they selected. I do the same thing if I know I need new furniture, a new coat for my son, etc. It’s a really easy way to save money and when you use them in combination with coupons you can save a bundle.

  3. Ben says:

    I am an account and Steve is correct for accrual-based account. Revenue is generally recognized when it is earned (i.e. when the sale/work is completed).

    It does make their cash flow statement look better though.

  4. robyn says:

    i stack up on bass pro shop [gift them to the family] some local bike shops give gifts with gift cards[water bottles, inner tubes et al] i like using gift cards purchased at 20-25% off [spend 40, get 50] and combine them with restaurant.com or groupon/living social deals. i ALWAYS tip on the FULL PRICE of the meal, though. lots of friends/family work as servers and too often they get screwed on tips by people using discounts.

  5. Great post! I love the gift card deals. Staples and Rite Aid were selling home improvement cards for 20% off and I jumped on them. I combined the discounted cards with sales and got an even better deal.
    With “couponing,” it’s all about the long game — not just the coupon at the register, but what form of payment you’re using and any post-sale discounts (rebates, ebates cashback, etc.) that you can snag. Discounted gift cards are the perfect starting point to getting a great deal!

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