This is the 3rd of a three-part post discussing Thinktiv's investment strategy and the case study of our first lead investment in QuickGifts. So far, I've discussed market size and multi-party value propositions (in G-50 Markets & Power Triangles), along with unit economics and distribution pull (in Fun With Math(!) & the T-Bone Corollary). This week I'll address the final two (major) variables that we love about the QuickGifts business, and that we always are happy to see when evaluating venture acceleration opportunities. Social Multiplication Lots of companies sing elaborate show tunes about their solutions being inherently viral. They want the market to believe there is some intrinsic (typically social) factor that allows the acquisition of a single end-user to create the acquisition of other end users -- without additional expense. This is generally viewed as a tremendous market advantage, because companies with these characteristics can build huge user bases, while spending much less than the norm to acquire those users. There are powerful examples of this phenomenon -- Hotmail, Skype, and Facebook being three. There are also many companies for whom this talk is pure bullshit... just another piece of spicy sausage in the gumbo of a startup's VC investor deck or PR machine. Groupon, for example, has many things going for it. But but being viral isn't one of them... not when they are currently paying north of $30 for every new user on their network.
Whenever we find user acquisition multipliers that are real, we pay attention. With QuickGifts we see two:
1) QuickGifts gives merchants the tools to "turn on" gift card sales within their existing online marketing channels -- via their Web sites, Facebook, Twitter, e-mail marketing programs, etc. The merchant, without spending any additional marketing dollars, can now convert lucrative card sales through the communication mechanisms they are already using every day. Because QuickGifts manages the entire commerce and fulfillment process for the merchant, once an end user buys a card, they also become a QuickGifts customer. In 2010, the average QuickGifts merchant client sold an additional 84 cards through these newly available channels (the number for restaurants was 151).
2) Compounding the benefits of #1 is the fact that gift card commerce is distinct from direct e-commerce and coupon commerce, in that every transaction involves two parties: a buyer and a recipient. The average U.S. gift card buyer in 2010 purchased 5.3 cards, presumably not all for the same person. That means for every new card purchaser a merchant activates through its marketing activities, at least one more QuickGifts end user (the recipient) will be added as well. Often several more. QuickGifts also sells directly to business customers, who use the company's universal Dibbs currency as the basis of their diverse corporate rewards and incentive programs. The multiplier gets even more powerful in this case. In 2010, the average business client issued unique Dibbs currency rewards to nearly 600 recipients, all of which are now also QuickGifts end users.
It's the Intent, Stupid Many of us at Thinktiv spent our formative professional years at an Austin-based software company called Trilogy. That collective experience can (and probably will) fuel many additional blog posts, but for these purposes, this will provide relevant background. The reason I bring it up now is that Trilogy surfaced an important insight in the 90's when it was building online configuration solutions for the world's largest auto manufacturers. That insight revolved around the power of intent. Forever, automakers based future manufacturing plans on the historical order data gathered from their dealer networks. For example, Chrysler would see that the majority of the LeBarons ordered on dealer lots during the last quarter were "midnight blue". The obvious conclusion to reach was always "let's build more midnight blue LeBarons!"
What they didn't consider was the fact that "midnight blue" was already the most prevalent color on their lots, and that buyers were often settling for that color because their preferred color was not available. Others would abandon their purchase altogether, opting for another brand because they had their heart set on a "fire engine red" vehicle. What Trilogy enabled was interactive needs analysis for prospective car buyers on the Web. It allowed the automaker to see for the first time what customers were asking for, rather than what they ended up buying. Predictably, their manufacturing plans became more aligned to buyer intent, and conversion rates increased.
We see substantial parallels between this Trilogy lesson and the consumer gift card market. Currently, 100-200 major retail brands dominate the market -- because they have the dollars and the leverage to maximize distribution reach, where smaller merchants do not. But if that distribution advantage went away, and consumers had the opportunity to choose gift currency from a much larger universe of their favorite merchants, wouldn't purchase behavior change? In other words, if consumers buy $80 million worth of Chili's gift cards each year, isn't that number partially inflated by the fact that Chili's cards are among the small handful of restaurant cards available on the "dealer lot"? Isn't it likely that at least to a certain degree, Chili's cards are equivalent to the midnight blue LeBaron? We think that is a huge opportunity.