This company invented a new way to buy wine online

Customers always prefer lower prices. It sounds like common sense, but this assumption doesn’t always hold water. Plus cut-rate discounts are bad for the bottom line. The founders of Underground Cellar, a new online wine marketplace, understood that.

Escaping The Race To The Bottom

Jeffrey Shaw, the startup’s CEO, learned the lesson when he ran Arcadia ID, a company that provided employee ID badges. Instead of offering the same product as rival firms and competing on price, he developed a cloud-based service that allowed customers to design custom badges online. Rather than racing to the bottom, he added value.

Shaw and his cofounders realized the same dynamics were at play in the online wine industry. A slew of websites were vying to offer the lowest prices through discounts. That approach suppressed profits for everyone.

Figuring out an alternative business model that worked would be lucrative. Wine sales in the U.S. totaled $38 billion in 2015, including $2 billion from purchases shipped directly to consumers. Globally, online wine sales bring in $6 billion and represent a growing share of the market.

Delivering Value With Premium Wines

Underground Cellar launched In 2014, and Ben Herila, a childhood friend who had been working at Microsoft, joined Shaw as cofounder and CTO. They raised $2.25 million in a seed round from investors that included Barbara Corcoran and Y Combinator, the startup accelerator they graduated from in 2015.

Their idea was to sell high-quality wines in package deals and make each bottle eligible for a random, free upgrade to a more expensive one. For example, you can buy two bottles of champagne for $25 each, and at least one of the bottles will be replaced with another worth up to $305. Deals rotate on a daily basis.

The company also offers “CloudCellar,” a storage service that lets customers keep up to 500 bottles in a temperature-controlled wine cellar in Napa Valley for an unlimited time before having them delivered. There’s no membership fee, and the company ships to 42 states.

“We don’t do discounts. We offer the best value by giving customers better bottles than they bought,” says Herila.

The model also appeals to wineries, because they can avoid damaging their brands by advertising deep online discounts.

“Because of our unique business model, we’re able to access brands you’re not typically able to find in discount wine stores. I believe we’re unlocking a new collection of wine to a new audience,” Herila says.

Building An App With Gigster

When the founders were raising a seed round, potential investors started asking whether they had a mobile app. Shaw and Herila wanted to build one eventually, but they hadn’t prioritized it.

An app didn’t present the best financial return on investment, and their website was designed for mobile users. But as customers also began asking for a mobile app, they realized it was the right time to make that investment.

“From consumers’ point of view, an app’s existence validates the legitimacy of the company. It needed to be high quality, even if it didn’t have all the features the website had,” Herila says.

He and the company’s other full-time engineer lacked the time and expertise to build an app, and Herila didn’t have the experience to hire and mentor an iOS developer. Besides, with the holidays around the corner, he needed to focus on core functionality. So Herila turned to Gigster, providing a clear budget he wanted to stick to.

Underground Cellar’s new app launched this year in early July. It lets customers view deals, place orders, manage payments, create or sign in to an account, request customer support and view order history. Eventually, the company plans to add push notifications, the ability to manage CloudCellar and improved referrals.

“The real win was not having to find an iOS developer that we would only need for a short amount of time and being able to get started quickly and have a schedule we could stick to,” Herila says. “Gigster’s commitment to quality is fantastic.”

Looking Forward To Growth

With the app in place, Herila and Shaw are focused on making sure the technology runs seamlessly. They’re also gearing up for another funding round by attracting new customers. Eventually, they plan to apply their business model and technology to other products, such as gift cards and spa services.

“We’ve been growing a lot, and hopefully the app will allow us to grow even more,” Herila says.

No discounts needed.