LevelUp adds mobile payments for renewed local deals push

LevelUp, the daily deal venture by location-based service SCVNGR, got off to a promising start in March with an interesting take on deals that spread out discounts over three visits. But the service as it was first conceived was shut down three months ago after it didn’t live up to SCVNGR’s expectations and was reportedly losing money.

So what was missing? Seth Priebatsch, founder of SCVNGR, said it needed a better take on building loyalty for merchants. So Priebatsch went back to the drawing board and has relaunched LevelUp with a new approach to driving loyalty that begins with credits for users who visit a business and includes a new mobile payment system built by SCVNGR.

LevelUp, take two

The new LevelUp works like this: Instead of buying a deal outright, say $20 for $40 worth of food at a restaurant like other daily deal sites work, LevelUp offers a more modest instantly redeemable credit of perhaps $5 or $10 for customers on their first visit. The new service is now expanding beyond Boston and Philadelphia to New York City and San Francisco

To pay, users just link a debit or credit card to their LevelUp app and present their app to merchant, flashing a QR code. The code can be scanned by the merchant using their own mobile device or special Android (s goog) devices provided for a limited time by SCVNGR. The credit is immediately applied, and users can start working toward their next reward, which is triggered after a certain dollar amount in purchases is made. While plenty of others are doing punch cards, Priebatsch said LevelUp works because it’s tuned to provide the most incentive for consumers to come back, which he said requires a reward to be unlocked after about the equivalent of four to five visits, and it has a payment element.

The payment play inside the app provides a number of benefits for both consumers and merchants. Users don’t have to mess with coupons or worry about loading up an account. The app draws money when it’s used and makes payment easy, kind of like the Starbucks (s sbux) card mobile app, only without the need to fill up an account. And it can provide transaction information to users.  Google Wallet also provides some similar benefits with its NFC payment system, but initially, it can’t provide consumers much immediate information on transaction history because many of the payment terminals aren’t updated to pass on purchase data.

A new upside for merchants

The new LevelUp payment system is even more helpful for merchants. Priebatsch said SCVNGR has done some clever work on the back end to reduce the fees on payments by about 35 to 50 percent compared to using the same payment source with a credit card swipe. More importantly, LevelUp can provide users and merchants with instant information on the transactions, which can help merchants understand how effective their offers are, who their new customers are, what their habits are and how best to target them. Essentially, LevelUp can own the entire deal process, from the first deal offer to redemption, something Google, PayPal(s ebay), American Express (s axp) and others are doing as well.

Priebatsch said the LevelUp service, which has quietly been in testing for the last nine weeks at about 500 locations in Boston and Philadelphia, has proven to be a helpful tool for merchants with consumers. LevelUp’s 100,000 users are turning to LevelUp about twice a week now and are tipping about 21 percent at sit-down restaurants. Priebatsch said 45 percent of customers return to pay full price within one month, and 65 percent of customers at quick service restaurants do so within 30 days. Users increase their spending by 38 percent on a transaction when they unlock new credit. LevelUp isn’t taking a cut of transactions but is instead charging merchants a $55 monthly fee.

Priebatsch said the first version of LevelUp, which he said made money, worked like many other daily deals in building buzz and attracting users to a merchant, but it didn’t solve the problem that it can be expensive for merchants and can hurt their brand. Now with credits applied only when people show up the first time and then after several visits where people pay full price, a business has a better way of managing how much they spend on discounts and they can do it in a way that doesn’t paint their brand with a big discount label. Instead, it emphasizes loyalty.

But will consumers buy in?

I think there are decent ideas at work here. It’s clear that any daily deal system needs to be a win for merchants, and some critics of Groupon accuse it of not being ultimately beneficial for merchants, so a more retailer-friendly system has merit. It’s also helpful for merchants to not have to offer such big discounts and associate their name with huge deals, which can erode their brands. In theory, building a payment network makes some sense because you can streamline the purchase process and provide instant information to both consumers and merchants about transactions. And you can close the loop on offers so merchants understand how their deal investment is doing.

But it remains to be seen if people will step up in big numbers to have their credit and debit accounts linked to a LevelUp app. Starbucks’ success, however, suggest it might work, though SCVNGR will need to do a lot of marketing to get the word out about LevelUp. But it’s still going to be an uphill battle. It’s a very crowded market, and Groupon and Living Social are still the best-known names in this space, with Google coming on as a rising challenger.

From the sound of it, LevelUp as it was first conceived had a tough go initially. It’s unclear whether the app will be able to do a whole lot better on a big scale, even with the new updates. The early results sound promising, but even with some interesting ideas, it’ll take a lot of work and money to ensure that consumers and merchants take notice. This could be the last gasp for LevelUp — or the major tuning it needed to finally get going.