Derek Webster is a guest author. To submit a guest post, click here.

It’s no secret that merchants have reported challenges with the daily deal model. Chief among the concerns is that it attracts coupon-clipping customers who rarely return, and the economics are broken. Groupon’s announcement that they’re launching Groupon Rewards is an attempt at addressing the retention issue head-on. While this new product is a step in the right direction towards helping merchants, it won’t solve all of the key frustrations people have in working with Groupon.

There’s a lot to like about Groupon Rewards, from a consumer’s standpoint. There’s ease of use: they can use their existing credit or debit card to earn credit with Groupon Rewards. Groupon was wise to leverage the credit card rails, a channel that has near-ubiquitous penetration among both consumers and merchants. The mobile channel also offers convenience for those with smartphones. But let’s not forget that 60% of consumers who don’t own a smartphone, and only 12% of smartphone users routinely check-in. (Google Wallet is also taking aim at eliminating the proverbial wallet full of “buy 10 get 1 free” punchcards, but it’ll be a long time before they achieve widespread merchant or consumer adoption.)

And for merchants, near manna from heaven: Groupon Rewards promises increased visibility into whether Groupon customers are coming back to their store. This increased transparency is a step in the right direction, but it’s hard to say whether merchants will be happy with what they see. According to a study conducted by Rice University, as few as 13% of Groupon customers reported returning to the featured store after redeeming a voucher. Groupon Rewards aims to turn that around, but that’s steep numbers they’re working against.

As Groupon Rewards does not offer merchants any better terms on their offer than a regular Groupon, running the initial deal remains a significant loss leader, and it’ll take a lot of newly loyal customers to overcome that. Groupon is clearly hoping to change this, but Rewards doesn’t change some key weaknesses remain:

• Can a customer base that signs up for Groupon to “Save 50% to 90% in your city” be converted into loyal customers who pay full price? One of the biggest challenges for merchants who offer Groupons is being stuck with customers who expect deep discounts.
• Customer loyalty is often to Groupon and not to merchants. When you offer a massive discount, customers care more that they got 60% off on a massage through Groupon, not that they discovered a new spa. The next time a consumer wants a massage, they aren’t going to go back to the spa and pay full price — they’ll buy it from whichever new spa runs a Groupon deal.
• The Groupon rewards program will be optional, so only some merchants will participate. And, the terms will be different at each merchant. This can only lead to possible customer confusion.
• Consumers who earn an award have to pay for it. Groupon pockets 100% of the amount paid by the consumer for these awards.

Launching Groupon Rewards is Groupon’s acknowledgment that rewards programs are important to both merchants and consumer, and perhaps indicate the next step in deals. As deal networks look to move beyond deep discounting,  competitors and new entrants may keep innovating in loyalty.

Derek Webster is the Founder and CEO of LocalBonus, a New York City-based universal loyalty program in public beta. LocalBonus allows consumers to use their existing credit/debit card as their loyalty card and enables merchants to easily deploy a rewards program with no point-of-sale integration or employee training.