Palo Alto Weekly

News - November 25, 2011

Merchants seek to cash in on Internet chatter

Palo Alto start-up creates rewards program for loyal shoppers

by Cyrus Hedayati

For years, small businesses have been cautiously looking for ways to convert their online publicity into sales. Recently, the dominant trend among consumers has been "daily deal" websites like Groupon and LivingSocial, which offer a stream of one-time-only price promotions to lure shoppers into stores. This month, Groupon successfully made its initial public offering debut, selling $700 million in shares.

But other entrepreneurs, such as the Palo Alto-based PunchTab, are betting on another model to help merchants leverage the Internet. Rather than seeking new customers through deals, they're trying to ramp up the loyalty of the store's current shoppers.

"It's about getting someone who's spending $20 to spend $30," said Ranjith Kumaran, founder of PunchTab, "rather than getting a bunch of new shoppers to come in and buy a bunch of stuff."

Rewards programs are nothing new, from frequent-flier miles to "buy 10 sandwiches, get one free" cards. But a handful of start-ups, including San Mateo-based Chatterfly, CrowdTwist, Badgeville and PunchTab, are moving that model online.

"You know when you go to your favorite restaurant and they have that little fish bowl" for a drawing of customers' business cards, Kumaran said. "We're trying to take that and apply it online. ... It's really the secret of reinforcing behaviors that you're already seeing."

PunchTab has created a mobile-phone app, called PunchTab Local, that rewards consumers for actions they take both online and off, with a focus on reaching loyal shoppers through social media. Customers can gain points for tweeting about the business, promoting it with a Facebook "like," or through repeat purchases. The goal for the business is to amplify its promotions by encouraging customers to share them online. The goal for the customer is to earn a reward, such as a gift card, discount or product.

To get online shoppers into the stores themselves, the app awards more points, known as "entries," for actions taken closer to the cash register. Customers earn 10 entries if they check in to the store using PunchTab Local.

The app is free for merchants to use, making it cost-effective for small businesses, unlike many of the "daily deal" sites, said Kumaran, whose company will move to its new El Camino office in December.

Groupon promotions end up losing money for close to one-third of the small businesses that run them, according to a recent study conducted by Rice University Associate Professor of Management Utpal Dholakia. The study also found that close to 80 percent of "daily deal" users were new customers, but significantly fewer spent beyond the deal's value or returned to make a purchase at full price.

"A lot of the merchants say, 'The daily deals guys have been here, and we're not sure that applies to our model,'" said Kumaran, who also founded the digital-file delivery site YouSendIt. "But we always say that we're not trying to create some new kind of behavior in customers, we just want to amplify what they're already doing."

For their part, the "daily deals" sites are looking for ways to incorporate rewards programs into their business models to encourage customer loyalty. LevelUp, which launched this year, offers a series of increasingly better giveaways from the same merchant in an effort to turn one-time, daily-deals-shoppers into repeat customers.

"People forget that it's a young, nascent space that's going through a lot of changes," Kumaran said of his "daily deal" competitors. "Our focus from the beginning was, the user who sticks with you for years is going to be the one who creates the most value for you."

Keith Wilson, owner of the Boardroom bar and restaurant in San Francisco, has been using PunchTab Local to market his business.

His customers use the app to recommend the restaurant to their friends on Facebook, earning entries for themselves, he said.

"I'm always trying to get those eyeballs on my web page so that when people go out and they're deciding where to go, they think, 'Let's go to the Boardroom,'" he said. "You want a good base of regulars — that way there's always a few seats in the bar, and then everything else builds from there."

With PunchTab, "It's not just getting random people in to get cheap deals," he said.

In exchange for PunchTab users' loyalty to his bar, Wilson is offering the chance to win a $20 gift certificate.

Freelance writer Cyrus Hedayati can be emailed at cyrus.hedayati@gmail.com.

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