One of the fastest growing tech companies in LA may not even be based in the area. FiveStar, the four-year-old San Francisco-based loyalty and marketing automation company has seen its active user-base in the region grow by 90 percent in the last six weeks to more than 1 million users.
That massive uptick in adoption has made LA FiveStars’ second largest and its highest growth market. As a result the company is in the process of tripling its on-the-ground team from just four to twelve in the coming months. With mounting competition, it could prove a wise move for a number of reasons.
Surprisingly, given the geographic sprawl of the LA region, users here are even more engaged than those in the company’s other markets, according to FiveStars CEO and co-founder Victor Ho. LA has grown to 1,800 local users per active FiveStars merchant as compared to 1,700 per merchant in San Francisco, the company’s largest and second most engaged market. The most popular LA stores receive as much as 7,000 check-ins per month, Ho adds. FiveStars’ next most engaged markets are San Diego, Denver, Portland, Seattle, Dallas, and Toronto.
“Even though LA is spread out, the usage per merchant is off the charts here,” Ho says. “Maybe people there are just more comfortable driving. We don’t really have a great explanation. Maybe it’s a cultural or demographic thing. But we’re doubling down in this market based on the behavior we’re seeing.”
Density matters in the loyalty game, which is why FiveStars is focusing on signing up additional storefronts and trusting that the customer growth will drive itself as its platform becomes more ubiquitous. For the average retailer on the platform today, around 20 to 30 percent of its FiveStar-using consumers were already on the platform before the store was activated, according to Ho. But that means 70 to 80 percent are new FiveStars users, joining because a store they frequent adopted the platform. In other words, merchant acquisition is FiveStars’ best customer acquisition strategy.
For merchants, FiveStars promises to drive increased customer engagement. For example, a customer that visits a store twice per week on average may add a third or even fourth trip when they know they’re approaching their next reward – FiveStars users collect “stars” for each visit and are rewarded at various thresholds based on merchant-specific campaigns. Ho calls this “frequency compression” and explains that customer behavior gets stickier the closer to each reward they get.
FiveStars isn’t just about checkins and rewards. The company offers its merchants a comprehensive platform that includes CRM and marketing automation. These options are technically a la carte, but 95 percent of all customers choose the full-service option, Ho claims. FiveStars automates and personalizes marketing campaigns based on user behavior, including everything from re-engaging dormant customers, to incentivizing active customers to buy more frequently or spend more per visit, to rewarding customers on their birthday. All result in additional frequency compression, Ho says.
Loyalty is a hot area right now for the brick-and-mortar retail industry, which is looking to use mobile technology to drive engagement and, more broadly, to remain relevant in an increasingly ecommerce-centric world. Not surprisingly, FiveStars is not the only company to tackle this giant opportunity.
FiveStars’ biggest competitor, and arguably the largest company in the category by merchant and user adoption is Belly, a Chicago-based startup backed by Andreessen Horowitz* and Lightbank. Compared to FiveStars’ 6,000 active retailer locations, Belly is approaching 10,000. But this is hardly an apples to apples comparison given their drastically different business models. More importantly, there are some 2 million local businesses in the US that could one day adopt a mobile loyalty platform, meaning that even combined the two upstarts have acquired less than 1 percent of the addressable market. We are hardly in the first inning of this contest.
FiveStars’ approach is to integrate with merchant point of sale systems while Belly deploys standalone customer-facing tablets in-store. There are merits to each strategy and, not surprisingly, both companies think they’ve selected the winning model. The argument for FiveStars goes that by linking into the POS system, the company can collect transactional data like purchase size and composition, helping retailers learn more about their loyal customers’ buying habits and in turn deliver more personalized promotions. Belly, on the other hand, is able to deliver its merchants more personal demographic information about their customers because its tablet-based system connects with consumer social media profiles and allows the company to deliver content to the consumer at the time of check-in.
“Our promise to small businesses is that we can attach a name and demographic info to every purchase,” Ho says. “Loyalty is not actually about a rewards program. It’s more about using the underlying data for personalization. Consumers benefit when their experience is personalized. That’s the real value.”
The other major difference between FiveStars and Belly is that the former is entirely focused on small and mid-sized businesses (SMB), while the latter has signed up several nationwide brands, including 7-Eleven (which is also an investor), McDonald’s, Domino’s, and Chick-fil-A. Both markets are valuable, but the approach to winning in each is drastically different.
“We play in bottom 50 percent of the market, where merchants have one to 50 locations,” Ho says. “I don’t think we’ll ever target the top 35 percent which is your McDonaldses that work with software consultancies to do custom promotions, like Monopoly. If we expand, it will be in the middle 10 to 15 percent where you see mid-size chains like Peete’s or In-n-Out. There’s no great solution for this segment of the market and we hope to be able to address them eventually. For us the goal is really to start with small businesses. We have a heart for local. But the underlying business reason is that we can get lots of SMBs quickly, while large chains want customization.”
Whether it’s more valuable to know a customer’s age and gender, or their purchase history is an open debate, and one that may not have a singular answer. But while FiveStars and Belly are the two dominant startups in this category, it appears they will soon be getting some company from more established challengers. CurrentC (by MCX), a forthcoming mobile payment offering led by WalMartand adopted by retail giants like CVS and RiteAid, is being geared heavily toward collecting consumer purchase data (for better or worse) and powering in-store loyalty and rewards.
At the same time, there are credible reports that Apple will eventually add a loyalty component to its recently launched (and wildly popular) Apple Pay payments platform. When CurrentC and Apple Pay-Loyalty enter the market, the question for FiveStars and Belly may be less Tablet vs POS-integration, and more about how to compete with these deep pocketed giants with hundreds of millions of existing consumer relationships.
Across the board, these loyalty competitors will all be looking to adopt new technologies to make customer engagement more seamless. At the top of that list are beacons, or small, low-energy Bluetooth transmitters that automatically communicate with nearby mobile devices to deliver messages or prompt desired behaviors, like checkins. FiveStars is actively working on a beacons offering, Ho says, and you can bet that Belly and its incumbent competitors are thinking the same.
FiveStars is a Y Combinator alumni and has raised a total of $42.7 million from backers that include Menlo Ventures, Rogers Communications Inc., DCM, Lightspeed Venture Partners, Mayfield Fund, and several angels, most recently via a $26 million Series B round in September.
The company was founded by a pair of former McKinsey consultants who, in that role, helped build the popular loyalty programs for Starbucks and Macy’s. Now they’ve moved downstream and are taking that knowledge and a more entrepreneurial approach and targeting SMBs. With fresh cash in its pocket and momentum in the market, expect to see FiveStars spending aggressively over the next year to claim as much market share as possible. Judging by the last few weeks, LA could be one of the company’s strongholds.
“In the past, our posture has been ‘grow slowly and focus on delivering merchant volume,’” Ho says. “Now it’s just about growing really freaking quickly, and becoming be truly top of mind among consumers and merchants. Our mission is to turn every transaction into a relationship.”
(Disclosure: Andreessen Horowitz partners Marc Andreessen, Jeff Jordan, and Chris Dixon are individual investors in Pando.)