Digital loyalty programs are poised to jump from the pioneers to the masses of local restaurants, cafes, bars, salons and more that rely on repeat business. Companies like LevelUp, LocalBonus, Five Stars, Swipely, RewardMe, Square and others are rapidly expanding to new cities. Peter Krasilovsky, vice president at BIA/Kelsey, told Bloomberg over $155 million in VC money has been invested in digital loyalty-card companies.

What are the benefits of e-loyalty programs for local businesses and why is this sector likely to surpass daily deals? The three accelerants are cost, performance and insights.

1. Cost

Local loyalty programs don’t require steep discounts. They typically provide 10% incentives versus a 50% standard for daily deals. The simple reason is that it’s a lot easier to get a casual buyer to come back one more time than it is to get a non-buyer to visit you for the first time.

There’s another cost advantage related to satisfied customers. Repeat customers are easier to serve and hold more positive views about the businesses they frequent. It’s the psychological pattern of escalating commitment. On the other hand, daily deal hunters complain, don’t tip as well, and give lower ratings. In fact, three computer scientists found Groupon users give businesses 12% lower Yelp scores than non-Groupon reviewers.

Finally, loyalty programs offset the cost of database creation. First, they double as customer communication channels. They generate well-received messages—patrons regularly identify offers and discounts and their most requested content. Second, by capturing contact information, they replace the need to ask customers if they want to be added to mailing lists.

2. Performance

Digital rewards can generate 20% increases in trips and 10% increases in order size. Light buyers become medium buyers and medium buyers graduate to heavy buyers. The demand is particularly elastic in impulse retail categories. The question that baffles the daily deal industry—will patrons come back—is answered prima facie by loyalty programs.

But here’s the part that most people miss: local loyalty programs are acquisition programs. For one, the best ones offer free rewards just for signing up, which influence the first visit. For example, LevelUp encourages new  advertisers to offer $2-4 credits for first time customers. Moreover, loyalty providers build network effects that bring in new business from the partners in the network. Here’s how the head of marketing at a coffee shop describes his partnership with Five Stars Card:

Right now we’ve been working with them since January, and [we’ve gotten] something like 600 new original customers that have been sent over to us from FiveStars. That’s a lot.

–David Hermann, Groundwork Coffee

3. Insight

Daily deals count pin maps as an example of innovative insights. In contrast, digital loyalty programs provide analytics ranging from LevelUp’s business-specific recency and frequency generated by the POS system all the way to CardSpring’s analytics engine powered by First Data, which serves more than 6 million merchant locations.

Jun Loayza of RewardMe identifies dollar value, SKU data, and timestamp as the critical data to collect. I’d add promotions to that list. This kind of data enables merchants to not only evaluate program performance, but also create a patron history that improves future targeting.

Beyond simply pushing promotions, small businesses can target heavy buyers to learn what other products and services they should be offering. There’s no smarter way to cross-sell than by starting with your most valuable customers.

Industry momentum

Earlier this year, both Groupon and LivingSocial realized the power of reward schemes and started similar programs of their own. Groupon Rewards benefits  consumers who buy from participating companies with a registered credit card. LivingSocial partnered with JPMorgan Chase to issue credit cards where holders earn points toward LivingSocial deals.

The next step on the horizon is payments. Vendors like LevelUp offer free payment processing (“no interchange fee”) so merchants can save 2-5% on card fees. The fit between payments and loyalty is not only technically convenient, it’s materially cost effective for businesses and patrons.

Categories: Analytics, Local, Loyalty, Mobile, Promotions | Tags: , , , , | 4 Comments

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  1. SimonSays

    This is a crowded space indeed. Here are even more participants include Belly, Perka, PerkVille, PunchTab…the list goes on. Not as fragmented as daily deals but moving that direction with all the capital rushing in. I think the hype is a little overblown.

    • Thanks for pointing out ones I missed. Keep in mind many participants are market-specific so the “crowd” isn’t as tight within each city. As the well-funded ones expand, that will naturally change.

  2. I think payments is a bigger opportunity than loyalty. There are over 10 million small businesses in the US that don’t accept credit cards. Companies like Square and LevelUp charge small businesses 100-400 basis points less credit card providers. Sure, loyalty creates value through more frequent visits, but reducing merchant credit card fees, especially for the under $10 transactions that carries extra penalties, is a real bonanza for businesses.

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