Groupon expands beyond deals with rewards program

Groupon (s grpn) wants to be known for more than just deals. It is launching a free loyalty program called Groupon Reward for U.S. consumers and merchants, part of a bigger effort to become the “operating system for local commerce,” as Groupon CEO Andrew Mason put it earlier this week. Groupon Rewards, which builds off an earlier trial in Philadelphia, will give merchants a way to track and recognize loyalty without employing old punch cards.

The system works by getting consumers to opt in and share their credit card information. When they visit a Groupon Rewards business (which doesn’t have to participate in traditional Groupons) their spending on that saved card is tracked by the merchant, which can choose at what milestone to reward their customer. The card-based system lets merchants reward users for their actual purchases, not their visits or check-ins. The rewards can be free items or it can be a Groupon discount similar to a regular Groupon.

This program could help Groupon become more of a commerce tool for merchants. The company gotten some flack from merchants, who complain about the steep discounts they have to offer or the lack of repeat visitors that come from offering a Groupon. By wading into rewards, Groupon can not only be a way for merchants to bring in new users but another way to help retain them.

Mason laid out the larger vision for Groupon in a letter to shareholders earlier this month in which he said Groupon would offer a suite of tools that is designed to go beyond marketing and spur on more transactions. This is a key test for Groupon, which has seen its stock price trend downward after a big IPO debut. It needs to show that it can become an indispensable tool for merchants, who are getting bombarded by marketing, loyalty and analytics options.

Groupon Rewards is a good start. With Groupon’s base of users, it’s in a position to get a number of people to sign up. The card-based system is also pretty elegant without requiring big changes at the point of sale. Consumers can participate by just swiping the cards they normally use and they can see their progress toward a reward in the Groupon mobile app though they have to look inside their profile to find it.

But I’m still not clear on how a merchant is notified in real-time when someone hits a milestone. I’m told by a Groupon rep that a merchant will get notified in their merchant center dashboard but if that’s not next to their point of sale, I’m not sure how easy it will be to recognize a customer at the moment they earn their reward. Also, it’s unclear how Groupon will make any money off this if it’s offering the tool for free.

But overall, I think it’s good that Groupon is moving in this direction as it tries to expand its business. So far, it looks like the Groupon Now deals are not turning into a big money maker.  The company will face a lot of competition including Facebook, Foursquare, Yelp (s yelp) and other newer start-ups like Belly, which just raised $10 million this week.