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How to Turn Bargain Hunters into Loyal Customers

A new app blurs the line between gaming and hunting for deals.

A new service called LevelUp aims to combine several online business trends—game dynamics, social media, and location-based services—not just to win new customers for local businesses but to turn them into regulars.

Game on: LevelUp offers big discounts for those who return to a business three times.

LevelUp is something like a hybrid of the daily-deal site Groupon, which offers steep discounts at local businesses, and the location-based game Foursquare, which encourages users to share their location to earn points and kudos. LevelUp offers users a deal per day and also rewards customers with additional, even bigger discounts when they follow up by revisiting the location. The service was launched today in Boston and Philadelphia by SCVNGR, a company that already makes a location-based game tied to deals offered at local. “This is all about one word: loyalty,” Seth Priebatsch, the founder and “chief ninja” of SCVNGR, said of LevelUp.

Groupon, which boasts 60 million users, $1 billion in venture capital, and $760 million in revenue, has spawned countless hopeful imitators. To stand out from the crowd, Priebatsch has designed LevelUp to address some of the criticisms of social-media promotions websites and location-based services. In particular, experts have suggested that discount services like Groupon attract bargain hunters who are unlikely to return to a business. And location-based services like Foursquare are still seen as a niche phenomenon—in part because not many people have phones that are capable of running location-focused apps.

Priebatsch says, “We want to do what 500 knockoffs in the daily-deal space, and millions of dollars in the location-based-services space, haven’t been able to do: to get customers actually coming back.”

SCVNGR latched onto the gaming concept of “leveling up,” in which  players are rewarded with new powers for achieving in-game goals. Priebatsch wants to encourage new customers to “level up” into ever better customers.

Every promotion that LevelUp offers has three levels: “Try it,” “Like it,” and “Love it.” Typically, the initial “Try it” deal is about 50 percent off, and the subsequent deals progress to deeper discounts. Users have seven days to buy an initial deal, and the two subsequent deals have time limits that vary depending on the nature of the business.

“The number three is a really valuable tipping point,” Priebatsch says. Data collected through SCVNGR suggests that a customer who returns three times is much more likely to keep coming back after that. In some cases, LevelUp deals will try to get customers progressively more engaged. For example, an upcoming deal with MetroRock, an indoor climbing gym in Boston, will offer discounts on a beginner’s lesson, a more advanced lesson, and finally a membership.

LevelUp is available on apps for the iPhone and Android, and through a website. Priebatsch believes the site will help make the service more mainstream, even though the location-based capabilities of phones allow for more engagement with the businesses.

“Loyalty is about more than repeat visits and repeat purchases,” Priebatsch says. LevelUp encourages users to check in at the promoted business once they’re there, and offers additional rewards for users who recruit friends and bring them along.

SCVNGR raised $15 million in venture capital in January, primarily from Google Ventures, and the company plans to devote the money to projects like LevelUp, which will be launched as separate brands. SCVNGR plans to spend $1 million launching and promoting LevelUp over the next four to six weeks.

LevelUp charges a 25 percent commission on each deal—less than half what daily-deal sites typically charge—and it pays all credit card fees. In addition, it keeps for itself only the commission from purchases of the higher-level deals. The commission from level-one deals goes to local nonprofits.

“We’ve avoided this sort of promotion altogether until now,” says John Pepper, CEO and cofounder of Boloco, a Boston burrito chain that is the first company to launch a promotion through LevelUp. The company decided to try the pilot service, he says, because they were already looking for ways to encourage new customers to come back. Pepper was also attracted to LevelUp’s plan to contribute to local nonprofits, which he says Boloco always does as part of its marketing efforts. While he acknowledges that it is costing a lot for his business to run the LevelUp promotion, he hopes it will be rewarded with a corresponding degree of increased customer loyalty.

Utpal Dholakia, an associate professor of management at Rice University who has studied the economics of daily-deal sites such as Groupon, says LevelUp is “very interesting, very cool, and very cleverly done.” Dholakia previously found that many businesses do not profit from online social promotions and often fail to form lasting relationships with the customers a deal draws in.

But Dholakia says the LevelUp model is not perfect. Three escalating promotions may be expensive for small businesses to run, he notes—many businesses find that running a social promotion can eat through a marketing budget quickly. He also worries that customers will get a “price shock” after the string of promotions is over. “Ideally, you might want to wean the customers off the discount,” he says.

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