Loyalty apps are dead: Why you need to solve the bigger problem

Jan 02, 2013

Table of contents:

1. A brief history
2. The problem with Groupon
3. Who are the winners, and why are they successful?
4. The real takeaway

A popular online theme and business model from the last 2 or 3 years has been the connection between online and the real world and the augmentation of loyalty schemes and brand awareness. As smartphone adoption rates and time spent on Social Networks increases, loyalty and reward applications seem like such a natural opportunity at this new intersection.

However, the loyalty opportunity has been so over-saturated that it has become a sea of competing apps and websites, with very little differentiation. Why would you choose one over the other, particularly when the whole model requires an inherent investment of your time?

As the weaker of these type of companies die off, the real winners begin to emerge. What characterises the winners from the losers is that loyalty and rewards are not enough. The real winners of this opportunity bundle the loyalty and rewards with a much larger problem that is associated with the space. It is the solution to the larger problem that actually makes these companies the winners.

The following post is a breakdown of the loyalty / rewards opportunity, what happened and why the winners emerged. The real takeaway from this post has actually nothing to do with this particular opportunity, but more for nascent opportunities in adjacent or future spaces

A brief history

Monetizing large networks that rely on a strong Viral Coefficient for growth is very difficult. Subscription based services are great when your target market is small and very focused on a given problem. However this just doesn’t work for consumer based applications that want to scale to a certain level.

Many companies try to go down the Freemium path (Is Freemium right for your product?) but again this relies on a very specific product that solves a specific problem. It is extremely difficult to add on a business model once your product has been developed as it should be one of the core decisions that is made at the very start of the process.

In late 2011 I wrote about Avoiding the “Brand partnership” trap. Combining online activity with real life rewards and brand partnership was an extremely hot business model at the time. Large brands wanted access to the new generation of consumers and had the marketing budgets to do so. Founders of consumer based websites and apps suddenly had a customer to support their users. It seemed like such a natural fit that companies wanted to access consumers and these new niche Social Networks could provide that platform.

Of course in reality, that was never going to work. Social Networks rely on a “Winner Takes All” model and so the majority of all new Social applications end up with an insignificant number of users. Without the users, there is no reason for a brand to spend money to attract those users and so the whole business model breaks down.

The problem with Groupon

Whilst Groupon doesn’t really fit into the “Social Network / Loyality / Reward” opportunity, I think it’s worth bringing it up anyway.

For a couple of years, Groupon was the latest hot dot com. Groupon is an email based coupon scheme that allows consumers to get big discounts from retailers in their local area. By signing up to their email newsletter, a user can get coupons delivered straight to their inbox.

Whilst Groupon was courted as the next big thing, the reality of the broken model was not revealed until after the company had gone public. Groupon is required to spend a huge amount of money sourcing deals from retailers and often has to pressure these businesses into giving huge discounts. On the retailer’s side, they often don’t make any money from the deals, and the consumers that are brought in have no value because they are only there for the deal, and won’t spend any more money or comeback.

The real problem with Groupon though is the complete lack of loyalty because there is no cost of switching. If you have signed up for Groupon, but there is a better detail on LivingSocial, then you are going to take the deal on LivingSocial instead.

Fundamentally, Groupon does not solve a bigger problem related to discovery or transactions for local retailers or small businesses.

Who are the winners, and why are they successful?

Despite the problems associated with this opportunity, there are two real big winners in this space, Square and Foursquare. Both of these companies have have managed to connect the online world and the real world through smartphones. Whilst Loyalty and Rewards form an important component of both of these company’s business models, it is the larger problems that they have solved that have really marked them as winners.

Square

Square is a mobile payment facilitator from Twitter Co-Founder, Jack Dorsey. Square has two major components to their business.

Firstly, there is Square register which enables small retailers to start taking payments instantly using their smartphone. It simplifies the cost of accepting transactions and removes a lot of the hassle of setting up and managing a traditional Point of Sales.

Secondly, there is Square wallet which is a consumer application that can be used in conjunction with Square register. Square wallet does a number of things that have turned this industry on it’s head. Firstly, it allows you to make a payment without taking out any cash or cards. All you have to do is say your name and you can instantly pay for your order. Secondly Square wallet will track your transactions and offer you coupons based explicitly on your loyalty. Square wallet keeps a record of your transactions and can store all of your coupons or money off vouchers all in one place.

Square is fundamentally different to every other Loyalty or Reward scheme because it is aiming to completely replace the Point of Sales unit. By intercepting at this point of the transaction, Square can become an integral part of the discovery and processing of sales. Whilst other Loyalty or Reward schemes aim to drop off consumers at the door, Square enables the discovery and also processes the transaction. This means they have valuable data on the purchasing habits of their customers.

By completely replacing the problem of the transaction, Square has positioned itself to become a critical component in the small business transaction process.

Square solved the bigger problem of enabling small businesses to take payment and process transactions. By doing so, they have wedged themselves into a very important area. Whilst other mobile payment processors have been focused on making money from the commission of each transaction, Square has positioned itself as a completely new form of discovery, payment and brand loyalty.

Foursquare

Foursquare is the other Loyalty Reward company that has actually positioned itself to become a market leader. Foursquare has over 3 billion crowdsourced checkins and has created a geo-location layer of knowledge over the developed world. I’ve already wrote about the Lessons to learn from Foursquare, but I will expand here on why I think they will really succeed in the future.

I think Foursquare will grow to become a huge company because of the parallels that the company has with Google. Google is a very data driven, scientific company that pioneered Search algorithms to provide it’s users with fast and accurate results. Google broke the traditional Search Engine model by aiming to get users to the resource they were looking for as quickly as possible.

In order to monetize Google, Google combined Google AdWords and Google Analytics to allow advertisers to directly track and monitor how each penny of their marketing spend was being utilised. By enabling this transparency of the Return of Investment, Google created a money-making machine where advertisers could track and optimise their advertising campaigns.

Google can now get a user from the Search results to an advertisers website and track that user through the payment process. This enables business owners to see the source of their sales and which campaigns directly attributed to sales. It is this transparency that creates the value and stickiness of Google’s services.

I believe Foursquare is in a similar position to build the same kind of business model but within the real world. Instead of getting people to websites, Foursquare can recommend places in the physical world. Instead of dropping people off at the door, Foursquare can get them into the physical location and track the habits of that user as well as every other user within that location. Foursquare has already partnered with American Express to provide money off when a user makes a purchase using their American Express card and so the transaction loop is closing.

The big problem Foursquare is solving is the exploration and recommendation of physical locations. By crowdsourcing data regarding the habits of it’s users, Foursquare can surface interesting recommendations based on a wealth of different parameters including, time, past experiences, the experiences of friends or people who share similar interests. This enables Foursquare to become the glue that creates the discovery and loyalty opportunity.

The real takeaway

The real takeaway from this post should be, if you want to be the winner within a certain opportunity, you need to be able to solve the bigger fundamental problem. Just turning up and hoping that your product is compelling is not enough to become a market leader.

There have been thousands of niche Social Networks that targeted brand partnership or loyalty reward schemes as their business model. The majority of these companies are now dead. You can’t build a big company by trying to be another me-too Social Network or product and trying to emulate the business model of a much large company that is solving a real problem (Startups that don’t solve a real problem).

To become a big company, you need to solve a big and difficult problem. If your strategy is to just be the next cool thing, you won’t get very far. Big problems are difficult and time consuming, but they give you a competitive advantage and a moat that can’t be crossed.

Don’t try and become the next hot me-too. Solve a fundamental problem first!