New York City baker Eileen Avezzano says she has a better way than Groupon Inc. (GRPN)'s online deals to entice customers to buy her cheesecakes again: She doles out loyalty cards that reward buyers for return visits.
The cards, designed by Cartera Commerce Inc., are digital instead of physical, and are linked to credit cards consumers already use. They let merchants provide a discount, or a reward such as airline miles, every time consumers buy. A shopper may swipe a card, and a retailer will automatically deduct some money off the bill.
Businesses like Avezzano's can use the programs to collect data on when customers shop, how often they return and how much they spend -- way beyond the scope of old-fashioned paper punch cards. That can make them even more valuable than coupons from Groupon and LivingSocial. About 900 million transactions will be conducted with cards connected to merchant loyalty programs in 2015, generating $1.7 billion in revenue for the providers, Aite Group LLC estimates. That's up from $300 million in 2011.
"I see them going head-to-head," said Peter Krasilovsky, a vice president at researcher BIA/Kelsey. "It's an evolution of the deals space. The goal is to go beyond new customer acquisitions and become part of the integrated business of merchants."
The digital loyalty program market began exploding around 2010, when startups and venture capitalists starting thinking about how to bring loyalty punch cards into the digital age, Krasilovsky said in an interview. Makers of loyalty-card software have attracted more than $155 million in venture capital, he said.
Cartera raised $12.2 million this month in a round of funding led by Venture Capital Fund of New England. Along with Cartera, startups such as Plink LLC, CardSpring and Mirth Inc. are gaining attention in the world of merchant deals.
"We think it's a massive opportunity," said Jeffrey Bussgang, a general partner at Cartera investor Flybridge Capital Partners. "Card-linked marketing benefits card issuers and consumers equally."
These loyalty programs, which reward buyers on top of any airline miles or points their credit cards already offer, are often cheaper than coupon providers, too. LivingSocial and Groupon, the biggest provider of daily discounts, typically take a 30 percent cut of a transaction, versus 5 percent to 15 percent when a loyalty-linked card is used. The competition adds to concerns facing Groupon, whose shares have tumbled 51 percent since its initial public offering in November.
Some loyalty programs let consumers get rewards of their choice such as cash back, discounts or virtual currency for games like Zynga Inc. (ZNGA)'s FarmVille. American Express Co. (AXP)'s Zynga Serve Rewards card allows fans to amass the currency when they shop and use it for the online game.
Virtual currencies are seen as a way to attract people in their 20s, said Ron Shevlin, a senior analyst at Aite.
"Zynga has a large portion of players who are highly engaged in their games," said David Messenger, executive vice president of online and mobile for American Express. "We can connect that online engagement with offline behavior."
Plink, a Denver, Colorado-based startup, has designed a loyalty program that lets users earn Facebook Inc. (FB)'s virtual currency by dining at more than 25,000 restaurants such as Burger King Corp. and Outback Steakhouse. CardSpring allows clients to build their own Web-based and mobile applications for cards that can deliver coupons, digital receipts and loyalty programs.
Mirth, whose program is currently in trials in New York, rewards frequent customers with a 3 percent discount on purchases whenever they swipe their cards at participating restaurants.
"A lot of merchants have voiced their frustration with deep discounts and deals," Jeremy Galen, Mirth's chief executive officer, said in an interview. "With us, you don't have to lower your price."
On June 19, online-payments startup Square Inc. also introduced a loyalty program, letting small businesses offer rewards to customers who swipe credit cards through its handheld readers.
Increased competition may further damp analysts' expectations for Groupon. The Chicago-based company in March reported a "material weakness" in its financial controls and said fourth-quarter results were worse than previously stated because of higher refunds to merchants.
A survey earlier this year by Susquehanna Financial Group and daily-deal aggregator Yipit showed that about half of businesses that had offered an online deal-of-the-day weren't planning to do so again in the following six months. Merchants were concerned about a low rate of repeat business from new customers gained through such offers, the survey found.
"We continue to question whether Groupon can sustain its high growth and begin to generate sizable profits while scaling back marketing costs," Edward Woo, an analyst at Ascendiant Capital Markets LLC, wrote in a May 15 note.
As a result, Groupon's IPO has been among the worst market debuts for a Web company since the dot-com crash. Closely held LivingSocial, whose backers include Amazon.com Inc., Lightspeed Venture Partners and AOL Inc. founder Steve Case, doesn't disclose sales or earnings figures.
Both LivingSocial and Groupon have started their own loyalty programs. LivingSocial introduced its first co-branded credit card with JPMorgan Chase & Co. in May. Cardholders can earn points that can be converted into DealBucks and used toward LivingSocial deals.
Groupon's Rewards program, which gives consumers points for shopping at participating companies with a registered credit card, was rolled out nationwide at the end of the first quarter.
"We are signing up hundreds of merchants every week, and have hundreds of thousands of customers on this platform," said Jay Hoffman, vice president and general manager of the Rewards program. "The adoption has been incredible."
Still, some business owners view rival loyalty programs as a better investment than daily deals.
"With Groupon, it's a one-time offer -- it doesn't last," New York baker Avezzano said. Customer numbers at Eileen's Special Cheesecake have jumped 18 percent since the shop started using Cartera's loyalty technology a year ago, she said.