• by Karlene Lukovitz  @KLmarketdaily, January 28, 2008

No doubt about it: SpaFinder, Inc.'s just-announced acquisition of SpaWish (SpaWish.com), a gift card/certificate company serving the beauty, skin and nail salon market, represents an aggressive push into a broader demographic and a significantly expanded market for gift cards.

But it's also part of a broader strategy wherein gift cards are a platform for building other, even more lucrative revenue streams, according to SpaFinder's chairman* and CEO, Pete Ellis.

Ellis certainly isn't pooh-poohing the significance of SpaFinder's gift certificate business. Gift sales have grown by more than 500% since 2001, including a 25% jump last year (the company doesn't divulge by-channel revenue).

That growth has been achieved through a combined online/brick-and-mortar strategy. On SpaFinder.com, consumers can purchase gift certificates ranging from $50 to $1,000, and search the site to find a participating spa/salon offering the desired treatment. SpaFinder cards are also sold at more than 30,000 retail outlets, including Walgreens, CVS, 7-Eleven, Rite Aid, and seasonally, Costco. Corporate/bulk gift sales are another channel. Each time someone redeems a gift certificate, SpaFinder reimburses the spa for the amount, minus a 17% marketing fee.

Since becoming the majority owner of SpaFinder in 2001, Ellis has built the company into the world's largest spa marketing/media company (with 2007 revenue just shy of $100 million) by surrounding the upscale or "traditional" spa market. Now, via the acquisition of SpaWish--rechristened Spa & Salon Wish--SpaFinder has its sights on the $40-billion mid- to lower-tier market represented by the approximately 400,000 beauty, skin and nail salons across the U.S., as well. (Whereas the average SpaFinder gift buy is $135, Spa & Salon Wish will target the $25 buyer.)

By developing SpaWish's existing network, the company expects to be selling Spa & Salon Wish gift certificates/cards in 4,000 to 6,000 salons by year-end, according to Ellis. In addition, the acquisition will enable the conversion of some SpaWish retail channels into marketers of the more upscale SpaFinder certificates, increasing SpaFinder gift outlets from the current 4,200 to a projected 6,000, he reports.

But gift certificates are one of five major revenue streams for SpaFinder, and their greatest long-term value lies in being door-openers for expanding the company's business relationships with spas/salons--most importantly, for its new SpaBooker spa management software solution.

"Once we're doing business with a spa" through the gift certificate partnership network, "they're natural candidates" for the fully hosted, integrated online point-of-sale and financial system, says Ellis.

The largely turnkey system handles every aspect of spa management, including enabling consumers to book treatments at a specific spa/salon themselves (bookings/schedules for all spa employees are transparent and automatically updated). It also enables spas to do powerful marketing cost-effectively. For instance, a spa owner can fill up a lightly scheduled day by using the system to broadcast a special discount offer by email, RSS and text messages.

SpaFinder charges a transaction fee for each order booked, based on a spa's annual sales volume. For the spas--or now the salons picked up through SpaWish--these fees are usually more than offset by cost savings realized through discounted credit card merchant fees, according to the company.

SpaFinder's other major revenue streams include Luxury SpaFinder Magazine and the annual Global SpaFinder Directory (both published not only in the U.S., but also in Europe and Asia, where the company has successful regional spa marketing programs), fees for the partner spa listings on its site, and digital ad revenue including non-endemic advertising from majors such as Procter & Gamble and Buick).

With all of these moving parts, however, Ellis has no problem whatsoever pinpointing the key to the company's growth. "You have to make sure everyone else you do business with is profitable first," he says. "We've invested heavily in making sure that spas grow profitably by doing business with us."

Horizontal growth, in the form of more spa partners signing on, and vertical growth, in the form of partners expanding the SpaFinder services they use, have come naturally as a result, Ellis says.

* Editor's note: The article has been amended after being posted.