The New Breed of Loyalty and Rewards Startups

Shoppers go into stores for deals, but what gets them to stay and come back, day after day? That’s the question asked by a new breed of loyalty-focused startups that aim to provide lasting value to merchants and businesses, instead of just a flash in the pan that requires a lot of initial investment and brings only diminishing returns over time, like the recent infestation of daily deals sites and apps.

SCVNGR’s LevelUp mobile payments initiative announced a four-city expansion today. It provides merchant-specific rewards to customers who use their mobile devices to pay at physical retail locations. Users link their account to a credit or debit card and are then provided with a unique QR code that merchants can scan in order to accept payments for goods. Merchants can then offer rewards in exchange for those purchases. In an interview with the Chicago Tribune, LevelUp founder Seth Priebatsch said that while competition in the space is admittedly fierce, his platform is better because of its frictionless design. “LevelUp is not a high-tech punch card,” Priebatsch told the Tribune. “You just pay and it works.” LevelUp has found that 65 percent of customers who buy with its system return at least once over the course of the next month, suggesting users appreciate the built-in loyalty offerings.

PunchTab, founded in January 2011, announced a $4.4 million Series A funding round last November to help it refine and improve its loyalty rewards and giveaway platform. PunchTab offers its users the ability to create their own loyalty reward programs around the product, site or brand of their choosing. It allows companies to incentivize social sharing, as well as on-site engagement through commenting. The system uses Facebook Connect to make it easy for users to sign up, and allows companies to create catalogs complete with custom rewards, or use PunchTab’s own pre-stocked selection of real-world gifts.

PunchTab founder Ranjith Kumaran said in an interview that most of his company’s focus and traction so far has been on online services, publications and communities. So far, that’s been a winning formula; “We have over 5,000 sites using us to power the programs,” Kumaran said. “Over the last few months we closed our first few paid deals. The goal right now is to make those guys successful.” Going forward though the goal is to help businesses connect their online initiatives with their offline or other sales channels. “A lot of our paid customers are calling us because they want integration with online-offline and mobile,” Kumaran said, and his company’s mobile and location-based services are helping to connect the digital with the physical retail space.

Perkville, which emerged from stealth mode in October of 2011, offers merchants a very similar platform for creating loyalty programs targeted at their users. When customers buy products or services at a store using Perkville, or refer the store to friends, merchants can reward them with points, which can be tracked by users and then exchanged for discounts, free products and more. The startup is founded by two Yahoo! alumni, Sunil Saha and Eric Bollman, and aims to eliminate some of the steps required by more clunky QR-code or app-based loyalty programs. It also allows sellers the opportunity to recapture customers who’ve wandered by letting them offer special deals to people who’ve stayed away for an unusually long time.

CEO and co-founder Sunil Saha agreed in an interview that Perkville sees a lot of opportunity to capitalize on developing the customer relationship once daily deals have run their course. “Often, few people come back,” Saha said. “That gives companies like us an opportunity to add value and drive repeats, and we’re seeing really good results.” Saha pointed customer Charm City Yoga as an example. “People that have joined their reward program take 70 percent more classes than those that haven’t,” Saha notes. “We’re seeing those sort of stats across our entire customer base.”

Saha also sees opportunity not only for connecting businesses with customers, but also for helping businesses work together to support each other. He said that Perkville is working on a program that would allow one merchant to offer reward redeemable at a partner’s store, enabling them to find combinations that appeal to interconnected clusters of interests and tastes.

New York-based Here’s Your Neighborhood is an early pioneer of loyalty and rewards-based startups. Founded in 2009 with the Here’s Park Slope site, the company is actively working on expanding to other neighborhoods. The original Here’s Park Slope site averaged 70,000 visitors per month (a big number considering Park Slope’s total population is estimated at around 65,000) in December, and founder and CEO Dan Myers says that number has been growing steadily since. Instead of offering a broadly appealing solution marketed indiscriminately with little regard to region or merchant location, Here’s Your Neighborhood combines a journalistic approach that includes breaking news at the hyper-local level, and building relationships with local businesses in the process in order to show them how relevant offering rewards and deals to customers in their immediate area through the site can be.

The problem with traditional deal offerings like Groupon, Myers says, is that they aren’t specifically relevant enough, especially for users in big cities. “People who live in, say Lower Manhattan, if they see a Groupon for a massage place out in Queens, sure they’ll take advantage of it once, but they’re not going to become a repeat customer,” according to Myers. In order to build loyalty, not only must deals be attractive enough, but they also have to be so specifically targeted as to be convenient for users. Groupon itself recently introduced its own loyalty program to try to overcome the limitation, but startups who are focusing on building long-term relationships between customers and businesses have the advantage of addressing this specific pain point out of the starting gate.

By starting where users already shop, the new breed of loyalty rewards programs like PunchTab and Perkville have the potential to help keep people coming back in, and systems like Perkville’s which targets one-time customers who never returned after a deal at least have the potential to get those more far-flung shoppers back in the store.

But the bigger picture isn’t just about providing businesses with a way to attract and keep customers; the popularity and success of loyalty programs will be a key ingredient in helping Google, mobile payment initiative Isis and other major players drive adoption of mobile payments. Because rewards can offset the risks users associate with new ways to pay, expect the loyalty and rewards space to be a major tech acquisition battleground as mobile payments take off.