Loyalty Solutions are everywhere
The “loyalty industry” is crowded. So crowded that store owners and investors are starting to blur the differences between each company. There seems to be anywhere between 3-10 local players in EACH major city that are trying to saturate their own neighborhoods.
And of course, why wouldn’t it be? When there’s a lot of gold somewhere, there’s bound to be a lot of gold diggers. And especially post-Groupon, stores have been more open to new technologies, investors are getting interested in the space, and entrepreneurs are all thinking about better experiences when they are sitting at a restaurant.
If it were eight years ago, and an entrepreneur pitched an idea to sell technology to brick-and-mortar stores, investors would have laughed in his/her face and point out that the new wave is on social networks and eCommerce. Offline is no longer sexy.
Today, it’s a very different story.
Loyalty Action is happening everywhere
Punchd got acquired by Google for a speculative $10M when they haven’t gotten any real traction yet. Tagtile got acquired by Facebook without accomplishing that much more. And most recently Belly raised $10M from Andreessen Horowitz after showing they have 1400 stores and 200,000 users in 6 cities.
Many startups see that, and are creating a “built-to-flip” model, hoping for the same wins quickly. On the other hand, while Belly’s numbers seem large, it is still minuscule compared to the market.
The challenge is, once you saturate your own neighborhood and try to expand into others, you hit a dead end when all the tech-savvy stores in the other cities are taken out by someone else. To me that’s like a game of Risk, where each square only has 1 solider on it, eventually getting no where.
In the meantime, companies like that are burning cash like crazy. They’re hiring foot soliders in more cities. They’re opening up new offices. They’re giving away iPads for free. Belly already has 40 employees prior to the $10M funding. Ramping up might increase that to 100 employees. If each employee is conservatively paid $50,000 a year, that’s already $5M a year!
That along with a multitude of other costs and free iPads, money is burnt quickly while they still just have a very small % of the market.
Consolidation in this industry won’t happen with a strategy like that.
Of course, if a large player such as Belly raises $1B one day and starts to acquire all the local players for $10M here and $40M there, perhaps it can capture a bit more of the market. Now we just gotta wait for that $1B investor to show up.
Consolidation of the Loyalty Industry will happen through capturing Large Chains
I personally believe that consolidation in this industry won’t happen from the dozens of solutions that each have a thousand mom-and-pop stores in their own cities, but will happen to whoever has the ability to tackle the hard problem of capturing the large brands and chain stores.
That’s truly prime real-estate that is growing (in store count), can scale nationwide, and can be defended as a sustainable advantage. Yes, it takes longer to capture the chain stores at the beginning, but once you have it, a large chain like McDonald’s would use a solution because this solution is already being used by Carl’s Jr. instead of a ton of little burger stores.
Once a large amount of the large chains use a solution, that will trickle down to the mom & pop stores that aren’t even looking for the newest technologies, achieving true market penetration and potential consolidation.
This is the underlying thesis for RewardMe’s strategy – aim for market consolidation by targeting large chains early. RewardMe is not trying to be a quick-flip by selling door-to-door to hundreds of stores quickly and then hoping to be bought in a year, but we aim to be a solution that is the gold standard in the industry 10 years later with a proven ROI.
Scaling Prematurely is the #1 Reason for Startup Failure
A while ago, The Black Box Report started by the Startup Genome Project analyzed thousands of startups, and found that the number one for startup failure is premature scaling. In fact, we’ve gone down that path too.
RewardMe was probably one of the earliest companies to take an iPhone/Android App that scans QR codes and go door-to-door to sell a loyalty solution back in 2010.
We found that one person could quickly get 70+ stores to participate in 2 months. However, we also found out that our solution is not ideal and the value we create is fluffy at best. Instead of continuing to capture more stores with a faulty model (many players are doing exactly that these days), we decided to pivot and actually introduce something of lasting value.
Serving chain stores aren’t easy. Instead of less sophisticated mom-and-pop owners who don’t invest in much marketing nor understand deep analytics, chain store executives are completely focused on metrics, data, and ROI.
What doesn’t kill you make you stronger
Because of that, we were forced to create a product that not only sounds fancy, but delivers actual metrics. And with that discipline, we were forced to stay “small” until we created a product that performs more than 10X better than other “successful” companies.
We also became the only company that could measure direct ROI, instead of wondering whether user average growth increases are a result of customer segmentation or revenue lift causation.
All this has finally paid off, as we are getting deals from some of the largest national chains, charging fees up to $1000/mo every store.
A Barrier of a Thousand Cuts
And even though our “store count” doesn’t sound as impressive as some other startups, the work we have put in to satisfy chain stores both from a sales cycle front and a product front has become a very tangible moat that prevents others from catching up before we have meaningful market share that builds on itself.
In the past year, we have literally discovered thousands of little challenges and adjustments that made us the perfect solution we are today for chains, and most other companies don’t even know these challenges exist yet.
Over all, I think the plethora of loyalty solutions may become successful, especially when some bigger company just wants to buy a player in the press that has many stores. But I believe in terms of industry consolidation, they don’t have the right product nor the right strategy to tackle the market. And that’s what RewardMe is betting all our chips on.
Would you like Yu-kai Chou to work with your Organization?
If you are interested in working with Yu-kai Chou for a business project, workshop, speech or presentation, or licensing deal, please fill out the form below.