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.
Discussion Questions
Discussion Questions: How would you rate the upside potential of local digital loyalty programs relative to daily deals? Do you believe that the inherent startup expenses and steeper learning curves will present too much of a disincentive for retailers and marketers?
Loyalty programs are easy to start, but need constant care and feeding to successfully maintain. Well run programs offer quick and frequent gratification to consumers to hook them on the program and reinforce desired buying behavior. Once started, loyalty programs are difficult to end without alienating consumers.
A number of companies that offer digital loyalty programs may receive funding and go into the marketplace. Like the daily deal companies, there will be a shakeout. Unlike daily deals, when one of these companies goes out of business, there could be significant impact on the retailers that rely on their services to run a loyalty program.
Retailers should think long and hard before creating a loyalty program. Understand the long-term costs. And have an exit strategy. Loyalty programs can run well and generate repeat business. They also can cause practical and financial woes.
Growing pains aside, digital loyalty will be huge.
Big data (and the associated analytics) is greatly increasing what retailers know about individual customers. Digital loyalty will be a mechanism that they will use to drive loyalty with the “right customers” (right = profitability over time).
Customers will love the convenience and the personalization.
The key to digital programs hosted by startup providers is enabling the sponsoring retailers to gain access via opt in to ongoing communications. Why give discounts to unidentified buyers without the ability to market to them post acquisition? Pay for the access initially, but the proprietor or small chain store must build a back-end process to dialogue with their newly acquired customers over time. Markdowns forever will drain profit and cause their doors to close prematurely. These “partners” must enable the retail client to succeed and it is not measured in pure redemption rates but in incremental spend and lift in visit frequency WITHOUT discounts.
The technology hurdle will be addressed over the next 18 months which should make this type of loyalty solution more affordable and accepted by local retailers. I imagine local programs running off of a customer’s phone so the POS integration issue will go away. Beyond that, local Digital loyalty programs are true loyalty. I see Groupon and other Daily Deal sites as more of a trial program similar to someone giving you a free sample in store to try. They are both needed but for different reasons.
The potential for digital loyalty cards is very strong, over the longer term. Usually, disruptive technologies come in with scaling challenges — that does not mean that the approach is wrong, just that the product has not yet become widely accepted.
One of the biggest gains from digital loyalty cards will be standardization of POS across smaller retailers. Once POS is standardized, data can quickly flow both from the POS for analysis and insight, and to the POS, for real-time personalized offers. This technology will permit smaller retailers to have the same capabilities as the larger, most sophisticated ones, leveling the playing field.
Net, net, digital loyalty cards attract repeat customers with more profitable offers than daily deals — tough to be wrong with that combination!
Hair salon chains have done this for years, with paper cards. Regardless of the technology used, modest and tangible rewards for loyalty work. I don’t predict a long life for the larger daily deals companies.
I think local loyalty will be big, particularly with the network effects as providers consolidate and membership carries privileges across multiple local businesses. But I’m not ready to count out daily deals. Research out of Rice University published last month showed strong trends in daily deals, particularly in repeat rates, spending beyond the voucher amount, and profitability for local businesses (see www.screenwerk.com).
Digital loyalty programs can be considerably more efficient than daily deals. It allows for easier management and frees time for the merchant to focus on other factors that also affect customer appeal and retention (cleaning, inventory control, etc.).
Learning curves are inevitable, but will not be a barrier. Ultimately, the customer is always right and they will favor activities that make life easier for them.
One way that digital loyalty providers can transcend their current model is to give members the ability to collect their earnings in one bucket. Shopkick has this coalition concept incorporated into its model, while others such as Belly, LevelUp are oriented to helping individual merchants. Advancing the model gives consumers more power with the rewards they earn in their programs.
The key is ease of use. Here in San Francisco I have seen some that require the consumer to download the app, check in and then show the cashier the screen to get the promotion, which slows down the line drastically. Sometimes people forget that loyalty programs can significantly impact the checkout experience, especially in casual dining.