CashStar Throws Its Gift Cards on the E-tail Table
It's hard to find a grocery or drug store lately that doesn't feature a rack stocked full of gift cards. CashStar wants to expand the business to the online realm. Using its technology, retailers can offer virtual gift cards that buyers can send to friends and family. The company has snagged a few recognizable retail names as partners, including a recent deal with drugstore megachain CVS/pharmacy.
07/08/09 4:00 AM PT
It seemed like a logical leap: If you already provide shoppers with coupons online, what's to stop you from offering them an online source for e-gift cards?
So the founders of online gift card company CashStar pooled resources with online shopping coupon mogul Coupons Inc. to create an outlet for merchants to offer more services than are available from plastic gift cards hanging on pegs in stores.
Though CashStar's founders quickly were met with lots of encouragement, they had few takers in their efforts to sign up merchants to try out the e-gift card experience. However, perhaps thanks to the struggling economy, some key vendors see CashStar's alternative to traditional gift carding as a way to entice more store traffic.
CashStar has signed a number of new customers, including Travelocity, Steak'n'Shake and Dippin' Dots. Last month, the major drugstore chain CVS/pharmacy decided to offer gift cards through CashStar's electronic channel. CVS now has for its customers an interactive, customizable online gift card store where they can create and purchase personalized gift cards. Although the Web site is branded for CVS, it is powered by CashStar.
"We are creating a new category of print on demand to replace the one-time payment method. Many segments of the market are one-time payments. Gift cards are clearly the leading one that people understand so that is the one we are starting with," David Stone, cofounder and CEO of CashStar, told the E-Commerce Times.
Living in a rural area of Maine, Stone saw first-hand how inconvenient it was to buy gift cards in stores when he wanted to send them to friends and relatives. His interest in the topic was personal as well as professional -- he spent 14 years at American Express, where he created its first universal pre-paid currency division.
Steven Boal, CEO of Coupon.com and chairman of CashStar, had worked at the options trading desk at JP Morgan and started Coupons Inc.
"I was frustrated with the lack of outlets to send gift cards to friends and relatives. That led to our 'eureka' moment. There were some outlets that had versions of this idea, but not fully functional for consumers," Stone explained.
A gift card transaction actually constitutes two purchases. The card purchase is the first; then a product is purchased with that card. When buying items with a gift card, most customers spend 40 to 50 percent over and above the face value of the gift card, Stone explained. For example, when presented with a $100 gift card for Acme Toys, the typical consumer will spend something like $140 when they go to visit that store.
About 98 percent of all gift cards are bought off store pegs or carousels, and gift cards account for as much as 10 percent of all sales over the holidays, Stone added.
CashStar offers merchants a SaaS (Software as a Service) delivery model. This taps into the extremely personal nature of gifting as an alternative for consumers over the Internet.
"We've tried to make the gifting experience via the Internet as personal and as expressive as possible for consumers. Our service lets people add messages, upload photos, etc.," said Stone.
CashStar also allows retailers to engage with the consumer. Retailers can add triggers and extra offers. Consumers can email the gift card without ever stepping into a store to peruse the gift card display.
Stone's experience with the payment card industry and Boal's background in the online coupon trade provided footing for starting up CashStar. Boal's operation focused on the use of bar-coded coupons consumers could get and print from the Internet. That market reached 360 billion coupons per year.
Moving into gift cards, CashStar takes an electronic approach to the product. The traditional physical approach, when used by millions of people every year, can end up producing a significant amount of waste.
"At least 85 to 89 percent of all gift cards are used once and tossed. This makes the plastic card expensive for vendors. Its petroleum base hurts the ecology. One-time payment is overkill, and purchasers can not email them to others," Stone said.
So Stone and Boal partnered to develop the e-gift card plan. Although the technology both Web sites use is similar, each is distinct.
CashStar does not use Coupon.com's technology for the online gift card business. Instead, the new company is emulating the concept behind printed coupons with its own software design, according to Stone.
"We share investors and board members, but it is not our parent company," noted Stone.
Getting potential customers to pay attention to the new idea that CashStar offered was one of the major hurdles the startup had to overcome.
The eight-person company started with a small handful of clients and desperately needed to land more. Despite interest expressed by some retailers, many were reluctant to strike out into new territories.
Finding good Web design talent to develop the CashStar system also put a strain on the startup. Stone went through five or six agencies in the process.
"So much of what we do is about completion rate. Getting the consumer to stay online and buy something is critical. When you have all these steps, the UI (User Interface) has to be really intuitive," Stone said.
The trials were difficult but not completely outside of Stone's experience -- CashStar, in fact, is the sixth new company he's developed.
Finally, momentum grew and more clients signed on. The company currently has 14 retail brands signed up. More are coming.
Uno Chicago Grill was the first major customer. CashStar used that experience to draw in other retailers.
"We got them live in 10 days just before the holidays. They more than doubled their gift card sales up through the Web site before Christmas," Stone said.
Stone has a three-part plan in the works. His short-term goal is to establish a user base for the e-gift card service. The medium-range goal is to add incentives to attract more traffic among vendors and consumers.
Perhaps his biggest risk is bundled around his long-term goal. He sees his e-gift card Web site evolving into a gift exchange network.
"CashStar is still a fairly small operation, and it's definitely a challenging space. But the company has managed to get some key contracts," Ed Kountz, senior analyst for e-business and channel strategy for Forrester Research, told the E-Commerce Times.
Elements of Stone's plan for an online gift exchange are already available through several gift card issuers and processors. Plus, merchants have a ton of incentives for transactions, Kountz explained.
"CashStar is working on what it calls a 'go-go initiative,' which is give one,get one. Other companies are doing transactional incentives similar to this. They are not an exact version but are similar. CashStar's focus is to bring all of this together and add a gift card exchange. What CashStar is doing is bring each of these elements to the table as part of this," he said.
Stone's approach is both innovative and an aggressive strategy for the company. From Kountz's perspective, it makes sense.
"CashStar's goal is to tap into optimizing it for the Internet," he said.