BrainTrust Query: Are Digital Loyalty Rewards Rewarding for Local Retailers?
If the recent flow of investment money is any indication, digital loyalty is poised to hit it big with customers at local restaurants, cafes, bars and salons faster than you can buy-10-get-1-free.
Peter Krasilovsky, vice president at BIA/Kelsey, estimated that over $155 million in VC money has been invested in companies like LevelUp, LocalBonus, Five Stars, Swipely, RewardMe, Square and similar solutions. Groupon and LivingSocial have started loyalty programs through credit card partnerships.
Those who believe the acceleration of the digital loyalty trend will push it past daily deals point to three tailwinds:
1. Cost
Local loyalty programs don't require steep discounts. They typically provide 10 percent incentives versus the 50 percent standard for daily deals. It's less work to get a casual buyer to revisit than to get a non-buyer to try you.
Repeat customers cost less. They are easier to serve and think more positively about their purchases. It's the psychology of escalating commitment. Daily deal hunters, you may have noticed, have a tendency to grouse about their purchases. Three computer scientists from Boston University and Harvard recently found that Groupon users give businesses 12 percent lower Yelp scores.
Loyalty programs offset the cost of database creation. They make it more convenient to ask customers for email addresses. They also double as customer communication channels.
2. Performance
Local digital rewards can generate 20 percent more trips and 10 percent higher orders. The question that baffles daily deal marketers — will patrons return — is answered prima facie by loyalty programs.
More importantly, local loyalty programs are acquisition programs. Some, like LevelUp, offer rewards for signing up. Many build network effects that bring in new business from the partners in the network.
3. Insight
Daily deals tout pin maps as insights. Digital loyalty programs provide analytics ranging from LevelUp's recency and frequency to CardSpring's analytics engine powered by First Data, with 6 million merchant locations.
Capturing dollar value, SKU data, timestamp and promotions data enables merchants to not only evaluate program performance, but also create purchase histories to improve future targeting.
Local businesses can survey heavy buyers about the products and services they should offer. There's no smarter way to cross-sell than by starting with the most valuable customers.
Challenges
Unfortunately, these startups are expensive to scale. After investments in product development, including POS integration, many are hiring direct sales teams — often the pricier "feet-on-the-street" kind. With fresh funding, most are expanding from home turf to more contentious markets. Some are purchasing hardware for each business to scan payments. Belly provides iPads and LevelUp furnishes Android devices.
Digital loyalty also places greater obligations on advertisers than daily deals. They must train associates to use hardware. Visit frequency and basket require a deeper understanding by merchants than a rush of redemptions. Further, once businesses start, it's painful to exit. Patrons feel entitled to rewards. Redemptions can become an added business tax. That's one reason some say these are not loyalty programs at all but simply repeat purchase incentives.