While their initial iterations may have been about replacing merchants’ punchcards with digital equivalents, local loyalty companies are now more focused on using an increasingly deep trove of consumer data to promote repeat visits and better understand customer habits and inclinations.
Street Fight recently caught up with FiveStars co-founder and CEO Victor Ho, who will be a speaker at Street Fight Summit West on June 7th in San Francisco, about the efficiency of retention marketing, the shift from daily deals to digital loyalty programs, and what analyzing the trove of SMB consumer data can potentially yield.
The rise of a lot of digital loyalty programs occurred in the wake of the daily deals boom. How did that dynamic affect the way loyalty companies developed, and how they’re perceived in the market today?
When we were starting FiveStars five years ago, Groupon was really blowing up, and everyone was talking about daily deals. I was employed by the consulting firm McKinsey at the time, and in my role there I helped a lot of Fortune 50 companies work through customer engagement. We were seeing the concept where it’s much more valuable to spend money on how to make your existing customers happier, rather than spending those same dollars toward acquisition.
This massive shift had happened in the Fortune 500, but small businesses were completely left behind and most of them did not understand or see that it was happening. That was huge for us at FiveStars, because usually when such a big shift happens for the Fortune 500, it takes a full 10 years or longer for that to trickle down into SMBs and for them to really begin getting it. In this case, it happened a lot faster because of how many of them were hurting themselves by being overly aggressive with daily deals. That really was a good backdrop for us to start the company.
Is digital loyalty is an improvement on daily deals, especially for small businesses?
I don’t think loyalty programs are improving on daily deals; I think they’re a completely different category that small businesses didn’t have access to until FiveStars came into the market.
When I think about marketing, I think about two buckets. I think about acquisition marketing and getting new customers, and I think about engagement marketing. When we make existing customers happier, it’s much easier to get someone who already likes a business to come in one more time, than to get a brand new customer who is going to come in once and probably never again. In terms of growth, it’s better to spend the money getting our existing customers who truly love us to start bringing in their friends, rather than running mass couponing or commercials that blast the general public.
For the typical small business it’s somewhere between 60-70% of people who try the business will never come back a second time. By far, the biggest opportunity is bringing existing customers back, not running a Groupon.
Also, I wouldn’t call FiveStars a loyalty company. We’ve never defined ourselves as loyalty. What we saw when we were helping Fortune 500s is that the loyalty program part is actually not that interesting. The only reason you give stuff away and run deals is to get people to identify themselves. Then you can collect all that data and use it to market to those customers and get them to come back.
Many local tech companies will start off targeting small businesses, and then pivot to focus more on brands and multi-location retailers. FiveStars has stuck with a strategy focused primarily on SMBs — explain a little bit about some of the choices you’ve made in developing FiveStars.
For us, the most direct angle is our mission. We started this company because we wanted to help small businesses. My co-founder and I, we had very lucrative jobs in finance. Our talents are in business and we realized that we could scale out the impact we wanted to make a lot more broadly by building a successful business behind it.
Also, it’s not that enterprises have more money. If you look at the space on a per-store basis, you earn a lot less with a big chain. If you’re talking about a 200 store chain, they will never pay you $300 per store for a product. You’re making more money because they have a couple hundred stores, but on a per-store basis, you’re making a lot less. The main thing that makes it really difficult to sell to small businesses is you need to maintain a large sales force, which is really expensive.
For FiveStars, our product is fundamentally different. We wanted to pick the lowest price that everyone could afford that still enabled us to serve SMBs, and we needed to be on the point of sale to get all the data — because loyalty’s not interesting, it’s more what it enables.
All businesses want more sales, whether that means making their current customers more frequent, or getting new ones in the door. Is money spent on customer retention more valuable than acquisition? Why?
If you look back 15 years ago in the 90s, the typical Fortune 500 brand would be spending about 90% of its marketing budget on acquisition. But if you look at today and even five years ago, that whole landscape is completely turned on its head, where from 90% of marketing budgets were spent on acquisition, that plunged down to 40%. Literally hundreds of billions of dollars suddenly shifted to focus on customer engagement.
Today the typical Fortune 500 spends 50 or 60% of their marketing budget on customer engagement, and only about 40% on acquisition.
It’s six to seven times more expensive to acquire a new customer than it is to retain an existing one. For the typical business, 60 to 70% of people who come the first time will never come back a second time. Say you find a restaurant that you saw on Yelp, you try it out, and you kind of like it, but you just get busy and you forget about it and you never go back. That’s the typical situation.
You can literally bring back six people with same amount of money it would cost you to bring in one new person. That’s the logic behind it and why such a huge shift happened in the Fortune 500.
Do you see loyalty as a category that will remain healthy as a separate offering (i.e., can companies like FiveStars build out by simply focusing on loyalty) or ultimately will it be a feature in a wider array of marketing tools?
One insight we had from our experience with bigger companies is once you get people to join your loyalty program, you know who they are and can track their behavior. What we did early on was we built some sophisticated algorithms to sort through a ton of different behavioral data and then figure out what the best times were to message different people or provide them with different promotions to get them to come back more often.
A lot of smaller companies try to do this same thing with less sophistication. For us, messages are custom tailored to specific people because we know things about them, and it’s been tested across hundreds of different coffee shops so we know what message works the best for certain verticals.
We also have a tool called Promotion based on a very simple idea. Groupon is a really interesting concept, but ultimately the downfall is you’re giving a deal to people who don’t know you, and it’s six-to-seven times more expensive.
If you could run a much more intelligent Groupon targeting your existing customers, then there’s something really interesting there. Promotion automatically segments a small business’s customers. We’ll send the business suggestions, for instance during holidays, to run a deal for existing customers. Let’s say St. Patrick’s Day is coming up, we might send them something that says, “Hey, click this button and we’ll send a ‘Buy one beer, get your second one for a penny’ deal to all of your regulars.” So they’re running a mini-Groupon and everything is tracked.
April Nowicki is a Street Fight contributor. This interview has been edited for length and clarity.
Hear more from Victor Ho at Street Fight Summit West on June 7th in San Francisco. Click on the icon below for tickets!