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Simple Mobile Rewards Are Hard Work, Shopkick Learns

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The problem with building a smartphone-based rewards system is that retailers unintentionally jam the signal. It's not a metaphorical problem.

"A lot of them have thick walls, where you have a lack of connectivity — but your rewards depend on connectivity," says Cyriac Roeding, co-founder and chief executive of shopkick.

"It's a pain point," he says.

Shopkick's smartphone app rewards consumers for entering certain retailers' stores. A deal with Visa (NYSE:V) that went into effect in November allows shopkick to also provide rewards for users' spending. The company is seeking bank partners as well, and it counts Citigroup (NYSE:C) as an investor.

When a consumer enters one of shopkick's retail partners' stores, the app recognizes an audio signal that is undetectable to the human ear. The Palo Alto, Calif., company's app then transmits the record of that walk-in over the phone's data connection and rewards users with a digital currency called "kicks."

An April update to shopkick's mobile rewards app allows it to function without an immediate network connection. Though the change seems straightforward, "this was a massive engineering effort to make this possible," Roeding says. "A lot of the processing happens now in the client, on the handset … this was not a small thing."

Devices must still link to a data connection after users leave the store. In theory, this change to the app would allow shopkick's rewards system to work on devices that have only Wi-Fi connections, like e-readers and many iPads.

In practice, this isn't necessary. "Most people don't use their iPad in-store, if you think about the use cases," Roeding says.

Shopkick launched its service in mid-2010. Since then the company has learned a lot about consumer behavior. It used to offer rewards and Groupon-like discounts to its users, but it found that the rewards system was far more effective than discounts.

"Consumers are actually loving the rewards more than the discounts," which are retailer-specific, Roeding says. The rewards, which are earned from all retailers, were more practical to use, he says.

This is consistent with what the online savings account provider SmartyPig learned. The Des Moines, Iowa, company ended its location-based perks, which were retailer-specific, this year in favor of a flat cash-back offer for all spending.

JPMorgan Chase has also learned to keep discounts at arm's length. Last week it announced a credit card tied to the daily-deals site LivingSocial, a competitor to Groupon. The card provides straightforward, simple rewards — 5 points for each dollar spent on LivingSocial's deals, and fewer points for spending in other categories.

These points can be redeemed for credit toward future spending on LivingSocial, and the connection ends there. There is no app or statement credit or any other complex mechanism for encouraging spending beyond the pure rewards tie to the LivingSocial site.

Shopkick's rewards system works across all retailers, and it sometimes has systemwide promotions that benefit all of its retail partners. For example, on Feb. 24, exactly three months after the November Black Friday shopping holiday, shopkick hosted a promotion it called Black Friday 2.

It provided double "kicks" rewards at all of its retailers. "No discounts — just kicks," Roeding stresses. "They all go into the same account, and that means that every retailer that joins makes it more interesting for the consumer [and] more valuable to earn the currency."

The number of shopkick users visiting each store during the Black Friday 2 promotion rose 74%, which proves that "shopkick has now a true network effect going on," Roeding says. "Each store benefited from everyone else participating … people are literally going on a shopping spree."

Banks can benefit in the same way by tying shopkick rewards to a specific payment card, Roeding says. "The larger the issuing bank, the stronger the effect will be," he says.

Shopkick primarily rewards consumers for entering stores, or entering specific parts of stores. Its Visa partnership allows it to immediately reward spending, but only for Visa cards. Shopkick can expand the rewards it offers — and thus boost user spending — by forging more relationships with financial services companies, Roeding says.

Shopkick's ties to the banking industry predate its mobile rewards app. An earlier product, Causeworld, was launched in December 2009 with the support of Citi's growth ventures unit.

Causeworld, which was phased out as a stand-alone app a year ago, focused more on charity than rewards. Users earned Karma Points by tapping the names of stores as they walked past them. The Karma Points could be spent by donating them to specific charities.

By removing the app's reliance on a network connection, shopkick has improved the app's appeal among retailers, says Nicole Sturgill, the research director for delivery channels at CEB TowerGroup.

Reluctant merchants may have argued that the app would not provide a consistent experience in all stores, she says. The update "takes that argument away," she says.

Shopkick's update may also help it expand globally, since not all countries have the same telecommunications infrastructure the U.S. has, says Aaron McPherson, a practice director at research firm IDC Financial Insights.

An app that works without a network connection "adds value outside the U.S.," he says.

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