You love doing Retail Arbitrage and Online Arbitrage, but your margins are getting tighter and tighter. How in the world can these other sellers race to the bottom? You know they aren’t getting the items any cheaper than you are. Or are they?
Welcome back to the “How I Cut My Sourcing Costs Up to 50%” Series. This is the final post in the series. In case you missed the first two posts, here’s the topics we covered in this 3 post series:
- The Wholesale Discount Master Game Plan
- The Retail Arbitrage Discount Conductor
- The Gift Card Shark Strategy
When wondering how those sellers get the items for a cheaper cost, it’s likely not because they got it cheaper. They paid the same price you did. But why can they sell it for a much cheaper price than you? It’s because they are a Shark. No, not a Shark from Shark Tank:
They are what I like to call a “Gift Card Shark”. They improve their margins and effective purchase price by purchasing gift cards on discount, and using those gift cards to pay for the items they are reselling. This strategy works extremely well for anyone doing Retail Arbitrage or Online Arbitrage as a business model. You can also convert this strategy to nearly every aspect of your life. If you buy something from a place that offers gift cards (business or personal), it’s likely you can purchase those same cards at a discount. Follow along, and I’ll discuss this strategy, and how to use it!
Why Are Gift Cards Discounted?
The first question a lot of people have is “Why can you buy discounted gift cards?”. It is estimated there will be $140 billion in gift card sales this year. That’s a LOT of gift cards out there. The truth is – a lot of people don’t use the cards. It’s estimated 0.5% – 0.75% of all gift cards go unused each year. That’s a whopping $700 million – $1.05 billion worth of gift cards that won’t be used. This also doesn’t account for gift cards people don’t really want.
Think about that $100 Gift Card to HEB Uncle Sal sent you for Christmas. Awesome gift right? Well, you moved last year, and the closest HEB is now 6 hours away. What do you do? You don’t want to let Uncle Sal know his gift was trash, so the best thing to do is try and sell it. If you have a $100 gift card, how would you entice someone to buy it? I doubt you would sell it for $100. You would discount it and say “You can get this $100 gift card for $80”. The person buying the card is happy, because they are getting a $20 discount. The person selling the card is happy, because now they have $80 cash, which is $80 more than they had before.
That my friends is a perfect example of why you can purchase gift cards at a discount.
Gift Card Basics
When buying gift cards to purchase products for resale, a proper strategy needs to be used. The last thing you want to do is buy a bunch of gift cards and never use them. Now, you have a pile of unused gift cards, which can severely hurt cash flow.
When starting out, I would recommend purchasing gift cards only for places you know for a fact you will purchase items – and only for the amount you know you will spend on the next trip. Once you’ve built a relationship with gift card companies, a few of them will send you electronic gift cards only minutes after purchasing them. This makes it quite easy, because you can literally be in the store, get an estimated total, purchase the gift cards, and use them immediately during checkout. I’ll talk more about where to purchase them later, but the company that works best for this strategy is Raise.com.
Once you start getting comfortable using gift cards, it’s time to start setting monthly budgets. Figure out what your average spend is per month, and purchase the gift cards ahead of time. When you are able to buy them in bulk, you can contact the bulk department of the gift card resale companies and get even bigger discounts than what you see at face value. I’ve heard of businesses that have specific agreements with gift card resellers where they will buy every single card that comes available for a certain retailer. You’ll never see that retailer available on the gift card resellers website due to these agreements. And, they are probably getting an extra 2-3% off (if not more).
Where and How To Purchase Gift Cards
There are a few different places you can purchase gift cards on discount. Let’s dig into them.
Gift Card Websites
There are two types of gift card websites: Gift Card Resale Portals, and Gift Card Resale Websites. A Gift Card Resale Portal is a website that lists all of the gift cards available on all the Gift Card Resale Websites. When you click on a link on that page, they are affiliate links to the Gift Card Resale Websites. A Gift Card Resale Website is a site that actually acquires the gift cards in some fashion, and resells them to end users like you. So, you’ll never actually purchase gift cards from the Portal websites, they just make it easier for you to find who has the cards available, and who has the biggest discount.
The most popular Gift Card Resale Portals are Gift Card Granny and Gift Card Wiki. Personally, I like Gift Card Wiki better, because they give you more data in regards to pricing trends, and the availability of gift cards. Here’s an example of Walmart gift cards on both of those portals:
As you can see, Gift Card Wiki gives you a lot more information regarding pricing trends and availability trends. I like to look at those graphs and trends to make sure I’m getting a good price if I’m not already familiar with the average discounts for a card.
There are many Gift Card Resale Websites. Here’s the ones I personally use and recommend:
- Raise.com (non-affiliate link: Raise.com)
- Cardpool.com (non-affiliate link: Cardpool.com)
I’ve used the following websites one or more times, but I don’t use them on a regular basis. I can’t necessarily recommend these, because I don’t have extensive experience using them.
How can you tell the difference between the companies if you haven’t used them before? First, make sure they are legit. Look at the return policies of each brand. Do some google searches – see if people are talking about them. Just because they are listed on the portal websites doesn’t mean they are a good company. Next, you’ll know how good of a company you are working with the first time you have a problem. If you buy enough gift cards, you WILL run into a problem. I’ll discuss this topic a little later. If you receive good customer service when you have a problem – that’s what separates the good companies from the poor ones.
Based on their poor customer service, the only company I currently would not recommend is Gift Card Rescue. I did a previous post here that explains why.
Most companies will offer two types of gift cards – Electronic and Physical. Electronic gift cards are generally sent to you via email or are accessible on their website. Electronic gift cards are typically used on websites for Online Arbitrage. However, most of them can also be used in physical stores. I would recommend looking at the Gift Card Resale Website for any wording saying if they will or won’t work in physical locations if you plan on using them in physical stores. There are some cases where stores will not let you use electronic gift cards in stores.
Physical gift cards are pretty self explanatory. They are physical gift cards that are sent to you in the mail. It can take anywhere from 3 days to a week to receive the cards. For some stores, you have no option but to purchase physical gift cards. This is where having a spending budget comes in extremely handy.
Ordering gift cards from these sites are pretty simple. Add the gift cards you want to your cart, and go through the checkout process. You can typically use a credit card for payment, which is great to get the additional credit card rewards. If it’s the first time you are placing an order with most of these sites, expect a phone call from them to verify your identity. They may also ask you personal questions that are public domain.
Once your order is approved by the Gift Card Resale Website, you’ll receive an email letting you know. If you purchased a physical gift card, they will mail them directly to you. If you purchased electronic gift cards, they will either email them to you, or they will be available on their website to use. Most websites will also give you a printable version of the cards to print out for physical locations.
If you don’t plan on using the gift cards immediately, I would recommend checking the balance. Raise has a page dedicated to links and phone numbers for all the different companies here.
Retail Stores Where You Have a Large Cash Back Bonus
If you use credit cards at all, you likely have one that gives a “category bonus” for rewards. This usually means purchasing items from a store in a specific category earns larger rewards, sometimes 5-10x the amount of regular rewards. For gift cards that are hard to find on Gift Card Resale Websites, or ones that have small discounts, purchasing gift cards full price and earning the rewards can sometimes bring a greater overall value.
The most common categories that bonuses are given to are office supply stores and grocery stores. If you get 5x rewards at office supply stores, buying a full price $100 Kohls gift card at Staples would give you $5 worth of points.
Wholesale clubs such as Sam’s Club and Costco sell discounted cards. The discounts aren’t usually huge, and they are usually for restaurants – but it’s another source for discounted gift cards.
Sometimes people pawn gift cards. Visit your local pawn shop and ask them if they have any gift cards for sale. They are usually getting them for pennies on the dollar, so substantial discounts can be had. Before paying for the gift card, I would strongly recommend checking the balance of the card by calling the number on the back of the card, or visiting their website. If you aren’t going to use it right away, it may be wise to take the cards to a store and transfer the balance onto a different card. This eliminates the possibility someone would use that same card online, and give you no recourse.
Craigslist / Facebook Groups
Take a look on craigslist for people selling gift cards. Also, put a post up saying you are LOOKING for gift cards. Use something like this:
“GIFT CARDS FOR CASH! Get a gift card for Christmas or your Birthday you don’t want? We are looking for gift cards you won’t be able to use, and will pay you CASH for them. We purchase gift cards for these stores: XXXX, XXXX, XXXX. Send an email with the value of the cards you have, and which stores they are for. We’ll figure out a fair price to pay for those gift cards, and we’ll send you an offer within 24 hours. Contact us today!”
You can likely get a much better deal buying them directly from the sellers than anywhere else. The gift card resale companies typically charge a 15% commission to people wanting to sell cards. Why not give that extra little bonus to yourself by buying direct?
Always check the balance before paying for the gift card. If you aren’t going to use it right away, it may be wise to take the cards to a store and transfer the balance onto a different card. This eliminates the possibility someone would use that same card online, and give you no recourse.
You can use the same philosophy in local Facebook groups where people buy and sell items.
Friends / Family
Let your friends and family know you’ll buy unused gift cards. Have them contact you whenever they have a card they don’t want. Make some posts on Facebook. Just let everyone know you are in the business of buying gift cards. Once people know what you do, when they have gift cards they won’t use – you’ll be the first person they think of. The gift card guy (or lady)!
You can find gift cards on discount everywhere. You just need to know where to look.
How To Keep Track of Gift Cards
Once you start purchasing gift cards, you’ll quickly realize it can be a huge mess if not tracked properly. Especially if you have employees or contractors also using your gift cards.
What I personally did to resolve this problem is I created a spreadsheet to keep track of all the gift cards. As the gift cards are purchased, they are logged into the Gift Card Tracker. When physical gift cards are handed out to employees or contractors, their name is logged in the tracker. Every time someone uses a card, it is logged in the tracker. This method isn’t exactly 100% fool proof, as humans can make mistakes. However, it does give you a pretty decent way to keep track of your current balances on gift cards, and who has them.
I’ve made this spreadsheet available for download so you can use it in your business. It is 100% FREE. Enjoy!
I’ve heard other people that use Quickbooks or other accounting software to keep track of gift cards. That leads us into….
How to Account for Gift Card Purchases For Book Keeping Purposes
This is honestly a tough topic to even discuss. Mainly because accounting is like a foreign language for most people. Everyone seems to have a different opinion of how to handle things, and it’s explained 8,000 different ways. Not to mention, 7,500 of them might not even be in alignment with what the IRS wants. Even though this is the case, I’m going to try and muddle through some information on accounting for gift cards. I have one way of doing it which I’ll share. As mentioned, there are differing opinions on this, so I’ve also added opinions from two other Amazon sellers on how they handle it.
Before we get into it, I’m going to put the standard disclaimer:
I’m not an accountant or CPA. The other people mentioned in this section are not your personal CPA’s or accountants either. We are just sharing how we do our books in our businesses. They may or may not be right so do not take anything mentioned below as legal advice. None of us can be held responsible for anything that may negatively impact your business. I would strongly recommend contacting your CPA for specific advice on your business before taking any action on methods listed below.
The Chris Potter Way
Lets get into the specifics. We personally use two different book keeping / accounting systems. We use Inventory Lab and Quickbooks. Why two systems? We use Inventory Lab for day to day aspects of the business. The listing function is great, some of the reporting is great, and overall is an excellent product. However, I just don’t trust it for tax and cash flow purposes. The main reason is because it can’t fully align with your bank accounts and credit card accounts. We use Quickbooks to import all of the credit card and bank transactions, which allows us to properly reconcile everything. I’ll go into details on this in a later post at some point, but this gives you a basic background on the methods I use.
Gift cards are technically assets, just like a bank account. In Quickbooks, I have an account setup for a “Gift Card Asset”. When a gift card is purchased with a credit card, it is debited from the credit card liability account, and credited to the gift card asset account. As mentioned above, I use a gift card tracker in excel / google docs for day to day gift card usage. In the tracker, there is a tab called “Total Gift Card Value”. I use this tab at the end of the month to calculate the actual current value of the gift cards we currently have on hand. I look at the current value of the Gift Card Asset account in Quickbooks, and enter in that amount in the “Current Balance in Gift Card Asset Account” field in E5 on the tracker. I then create a journal entry equal to the amount shown in the “Amount to Debit the Gift Card Asset Account” field in E6 on the tracker. The gift card asset account is debited, and the Inventory Asset account is credited. The last step I use to keep everything properly in balance is I also adjust the Inventory Asset account to match the inventory valuation shown in Inventory Lab. This adjustment debits the Inventory Asset account and credits the Cost of Goods Sold account. This process ensures I have granular information on each individual gift card, and allows me to have fully updated Quickbooks accounts at the end of the month. Now, how do I handle it in Inventory Lab? The price paid for the item from the supplier is what is entered in as the buy cost in Inventory Lab. It does not take into account the gift cards at all. This gives me an overhead view of actual profitability at the SKU level. When I purchase gift cards, I immediately book the difference between the value and cost as “Other Income”. It does potentially throw off profitability numbers some, because you aren’t necessarily using gift cards immediately. However, since I’m not using Inventory Lab for tax purposes, it’s not necessary. If you don’t use any other accounting software at all, and you hand over Inventory Lab information to your accountant to do taxes, you will need to make sure your accountant understands what that is. They will need to credit that “Other Income” as a deduction of the Cost of Goods Sold shown in Inventory Lab.
The Anna Hill Way
Anna Hill is an Amazon and eBay seller, and has a background in Accounting. She operates the Accounting We Will Go Facebook Group, which discusses accounting systems, routines, best practices, and other accounting and business related topics. If you want to know anything about accounting or book keeping for online selling, that Facebook Group is an amazing resource. I recommend you join the group right now. But don’t forget to come back and read the rest!
When asked about gift cards, here is Anna’s standard response:
“To account for inventory purchased with gift cards, you need to do one of two things.
Here is an example with $100 GC purchased for $80 (20%.)
1. Record inventory acquisition cost at $80. This is not a big deal with one item. However, heavier GC users have a bit of an accounting headache when they buy many items and the receipt shows a net reduction at the bottom of the receipt. In that case you need to calculate a 20% discount on each item manually. If you’ve used more than 1 GC with varying discounts, it’s even trickier.
2. Record acquisition cost as $100, and when the item sells, record $100 COGS and $20 revenue on GC discount. The same issues exist as with #1 when multiple items and/or multiple discounts exist. It’s also harder to track because you have to wait until the item sells to reflect the fact there is a GC discount.
The other challenge with GC is recording the purchase itself. You debit the asset GC and credit cash, but it’s difficult to reconcile the GC account because there is no summarization. Tracking the GC in a spreadsheet is the most effective way that I’ve found to do this.”
The Georgene Singletary Harkness Way
Georgene Singletary Harkness is another online seller with an accounting background. She does her accounting in Peachtree. Here’s what she says:
“This first picture is an actual journal entry I did when I bought a gift card in the amount of 431.90 and paid 350.34 for it. The difference is recorded in Cash Discounts. (I used the account Petty Cash but the name could be easily changed to Gift Cards).
Then when I go to the store and take the gift card with me, the debit is to Inventory (to increase the inventory asset), and the credit is to the Petty Cash/Gift Card account in the amount of the purchase. There can be some left over or you could have used all the gift card and ended up paying some in addition with your credit card, but those are simple entries.”
Consult Your CPA
As mentioned above, there are many different ways to skin a cat. Discuss this with your CPA to ensure the way you are accounting for gift cards align with their accounting principles.
Potential Gift Card Pit Falls
There are some potential pit falls that can happen when using gift cards. As long as you keep an eye out for them, you can address the issues as needed.
Here’s the common issues you’ll run into:
- Gift cards you receive have no balance.
- Gift cards you receive have a different balance than what you paid.
- Electronic Gift Cards have an incorrect PIN number.
- Physical store will not accept printed gift cards.
In any of these cases, I would recommend contacting the Gift Card Resale Company immediately. Each company has their own policies, so I would recommend reading up on their policies to understand how they handle problem situations.
How a Gift Card Resale Company handles problems is really the difference between the different companies. If you purchase enough cards, I can guarantee you will run into some problems. I’ve had nothing but good experiences with the companies I mentioned above:
- Raise.com (non-affiliate link: Raise.com)
- Cardpool.com (non-affiliate link: Cardpool.com)
You can severely increase your margins by purchasing gift cards at a discount and using them to purchase product.
To recap, the Gift Card Shark:
- Understands how to properly leverage gift card discounts to improve margins.
- Uses multiple sources for gift cards.
- Properly tracks gift cards to ensure they are used.
- Uses accounting principles to ensure they are within IRS Tax guidelines.
Continue The Discussion
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