In the last decade the online economy has provided countless nightmares to the brick-and-mortar retail model including the rise of profitable e-commerce platforms, digitalization and streaming of content, and freely available expert and peer review on products (reducing the utility of the in-store salesman). Fortunately the rise of the smart-phones may let traditional retail catch a little break and create unique opportunities to increase the efficiencies of current advertise expenditures. At least that is the idea Shopkick has been successfully selling for little more than a year.

Business Model

Shopkick is a location-based application that differentiates itself by rewarding users merely for entering retail establishments. It also differentiates itself from competing location-based social networks like foursquare with a more passive system that only requires the user to open the app. Rewards are measured in kicks that can be exchanged later for gift cards, digital content, products like Xbox 360 or Sony Flat-screen TVs or even donated to charity. Users also win kicks for scanning specific product’s bar codes or performing more elaborated tasks further down the convertibility lane like entering dressing-rooms.

But can this kind of advertisement be profitable? Shopkick CEO claims that nonbelievers are usually not aware of the value of foot traffic to brick-and-mortar retailers. Grocery and fashion stores have conversion rates of 95% and 20% respectively compared to 3-5% on e-commerce shops, meaning that traditional retailers are willing to pay a lot more for traffic (an expense that is usually hidden in the high rents they pay for high-traffic locations). Additionally entire product lines are dependent on concepts like impulse purchases.

Growth

Shopkick success started by developing a patented technology that identifies when users enter a store: a $ 100 device that emits low frequency sound waves that can be detected by the phone’s microphones. This device addressed the inaccuracy of GPS (especially in urban areas) and Wi-Fi and cell tower triangulation technologies (which are still street-bound and unable to identify in which floor users are located).

This technology enabled negotiation for trial phases in key retailers allowing Shopkick to attract its first users. The company has been experiencing exponential growth signing up its first million consumers in 7 months and its second million in only 4 months. According to the company the average user opens the app 14 times a month and looks at products from 16 stores each time. Since launch in Aug 2010 they had over 7M product scanned. Besides its strongly growing user base, Shopkick counts with other relevant assets including operating contracts with large retailers like American Eagle, Best Buy, Macy’s and top Brands including P&G, Unilever, Kraft, Colgate, Clorox, Disney, HP and Intel. The network effects are clear: the larger number of consumers the more interesting the value proposition to retailers and brands; the larger the number of affiliated merchants the larger the potential rewards consumers will be able to collect.

Relevant Questions

The main question in retailer’s minds when pondering about Shopkick is how incremental can this additional traffic really be? Even if it is incremental, what is the conversion rate of this traffic compared to usual traffic?

According to Sports Authority’s VP of E-Commerce: “We do see these people come through the checkout [lines]. I think there is still the question in terms of incrementally—is this actually an additional sale? But with the user base being young and pretty tech-savvy, which is an attractive user base, you have to believe that at least some of those are new customers”

Shopkick executives state that the additional traffic is real and valuable. The company claims one of its largest and more committed retail partners has already shown $50M incremental sales due to Shopkick. Individual campaigns show that when a store doubles the kicks per walk-in, next week traffic sees increase in Shopkick users from 50 to 100%.

The market seems to agree… Wall Street Journal elected Shopkick as one of the top 10 apps in 2010 and relevant retailers like BestBuy moved quickly from trials to national roll-out. Some even see it as a platform to become the largest shopping rewards network in the world.

Other questions managers will have to answer as the business scales include:

• What is the right balance between value to users and value to retailers? For example sorting out free-loaders that collect points by entering stores in their way to work or male users scanning barcodes of women’s fashion magazines.
• Where to fall in balancing the value of exclusive contracts against the potential network effects and risk of providing blank spaces that invite competition.
• Where to fall in balancing the trade-offs between signing restrictive and discounted contracts with large retailers vs. depend longer on external capital that will dilute founders’ equity stakes.
• Can this model be profitable in smaller retailers? Is this kind of advertisement too sophisticated for this public? What kind of subsidies can the company afford in order to bring them on board? (e.g. the CEO has announced the intension to provide the technology for free to increase adoption among smaller retailers)

Additional sources of value:

I am particularly bullish about the concept and believe there are two additional sources of value that can make Shopkick even more successful as it scales.

First, the opportunity to send consumer-personalized advertisement the moment a consumer enters a store or the moment a consumer scans a bar-code, which could dramatically increase the efficiency of ad and promotional dollars.

Second, focus even more strongly on Brands to capture “trade-marketing” budget. Shopkick rewards for scanning products is a very strong tool for product introduction, inviting customers to see innovation the moment they enter stores. Additionally, larger retailers have squeezed manufacturer’s margins due to the negotiating power of the scarcity of good shelf space. Millions of dollars in trademark budgets are spent to guarantee products have big displays in high shelves. Shopkick may be an alternative to that, guaranteeing brands that consumers will pick-up and consider their products despite the fact that retailers are increasingly auctioning visibility or reserving shelf-space to store-brands. Of course, striking the right balance between the value to retailers and the value to brands is a big challenge in capitalizing this opportunity.

Please contribute with comments regarding other sources of value and potential challenges/questions you believe the Shopkick business model will encounter in the future.