Few industries remain as stubbornly inefficient as the gift-card business. Consumers spent $100 billion on cards last year; roughly 10% of that pile will expire or go unused. Retailers enjoy the cash float while recipients rue their absentmindedness. Want to sell the cards for cash? An intermediary will capture a 10% spread.
David Leeds aims to change all that with Tango Card. His two-year-old Seattle startup makes software that tracks gift-card balances in real time and blasts e-mails about looming expirations. Leeds also sells tangible Tango Cards, which buyers can redeem for gift cards usable at 11 national retailers, including Starbucks, Home Depot, Gap, REI and Amazon.com. Tango takes an average 10% cut of each card redeemed. (If you buy a $100 Tango Card and put it all with Starbucks, Tango keeps $10 and Starbucks takes the rest.)
One big wrinkle: Tango balances not turned into retailer credit can be redeemed for cash or donated to charity. Retailers don't like giving money back, and they hate losing "lift"--the extra purchases that consumers tend to make on top of their gift-card haul. The average lift is 40%, meaning that a $100 gift card will result in $140 in sales.
Partnering with retailers while ruffling their feathers has been a tough balancing act. Tango has only 5,000 users thus far and minimal revenue. "Everybody is fighting against the cash-redemption option," says Leeds, 41. "But that's where the business is going."
Leeds struck out on his own in 1995, ditching a steady paycheck as a planning manager for printermaker Lexmark and opening a consulting shop in Guangzhou, China to help American companies set up manufacturing plants there. The business sputtered, but Leeds' attempt was enough to impress the admissions committee at Stanford Business School, from which he graduated in 2000.
As the tech market melted, Leeds, with three of his classmates, saw opportunity in what telecom types called "backhaul." A decade ago most cellphone towers fed data into the copper wires of local phone companies, which, for a big fee, moved the data to the big telcos' main fiber-optic networks. Leeds' crew was able to cut out the local phone companies by moving the data using microwave radios. For half the price the radios fed tower data to a central point with a direct connection to a telco's fiber. After a successful pilot with AT&T in Dallas, the group managed to raise $625 million in capital. FiberTower went public in 2006, giving Leeds 1.3 million shares worth $8 million at the time.
Burned out by the long weeks, Leeds left the company a year later. As he cleaned out his office, he came across ten gift cards scattered beneath the files. Total outstanding balance: $450. "Back then the most sophisticated way to manage gift cards was in a manila folder," he says.
To find a better solution Leeds spent $6,000 on gift-card focus groups in Seattle, Detroit, Atlanta and San Francisco. The 300 consumers he interviewed held an average of five cards; many craved a way to track balances and expiration dates. Encouraged, Leeds raised $500,000 of angel funding and spent $30,000 to roll out a Tango iPhone app, which automatically tracks gift-card balances and expirations.
Leeds spent most of 2010 begging big fish like Home Depot and Amazon.com to let him market their cards. He also retooled his website: In usability tests last August, people looked at the site and had to ask what the company did. Two months later Leeds launched a new site, with three navigation tabs instead of six. "We gave people fewer choices, but made it more obvious where they could find important functions," he says.
Not that retailers were impressed. The second-party gift-card market that Tango was trying to crack is primarily controlled by two companies: InComm and Blackhawk Network, the latter owned by supermarket chain Safeway. Together they account for $25 billion in gift-card revenue annually. (Primary sellers--say, Starbucks selling its own cards, of which they moved $1.5 billion worth last year--make up the other $75 billion in gift-card sales.) "If you can't generate $100 million in sales right off the bat, a lot of the big players don't want to bother with you," says Leeds.
One thing Leeds had that big brands didn't was hard research on gift-card buyers. Once he had their attention, Leeds buried the hook by planning to sell Tango Cards as seamless add-ons offered by popular online retailers. (The next time you buy a bouquet of roses online there may be an option to tack on a Tango Card.) In January 2010 Williams-Sonoma bought the pitch; others soon followed.
Such bundling opportunities are legion, and Leeds will need as many as he can find. In November Tiny Prints, which ships 1 million customized greeting cards a day during the holidays, began offering customers the option to print a Tango Card directly inside Tiny's cards. Recipients can log on to Tango's website, pick the retailer card they want, redeem the Tango Card for cash or donate their balance to charity. Tiny Prints keeps half of Tango's 10% cut.
The big bet: mobile. Leeds is bringing on five full-time developers to build an app that will plant a bar code on smartphone screens that can be scanned in lieu of a physical gift card--finally separating the card's value from its plastic delivery vehicle. Says Leeds: "We want to ensure people use every penny of their gift cards every time."
