Universal Loyalty

Derek Webster is the Founder & CEO of LocalBonus. He’s a former management consultant at Oliver Wyman, Stanford MBA graduate, and very well versed in the payments and rewards industry. We sat down at Wogies, my favorite cheesesteak/Philly bar in New York City, to talk about what LocalBonus is doing, how they’re doing it, and why they’re going to win. For more from Derek, you can find him on Twitter at @websterderek or email him directly.

First off, what is LocalBonus?

LocalBonus is a universal rewards program that helps you use your existing credit or debit card to earn cash back rewards at over one thousand local businesses. It’s totally free to use. You sign up once, and whenever you spend money on one of your credit cards at a participating merchant in our network, you’ll automatically earn LocalBonus points that you can save up and redeem for cash back.

What was the inspiration for it?

I’ve spent a lot of my career in the payments and loyalty industry. But perhaps more importantly, before founding LocalBonus I was a management consultant who traveled around a lot. I always used loyalty programs and saw how they changed people’s behavior. For my bachelor party earlier this year, I took a connecting flight to get Delta SkyMiles. I was at a conference in Chicago a few weeks ago and stayed at a Starwood across town from where the conference was, for points. There’s clearly the ability to change consumer behavior with a loyalty program, but right now it only works if you’re Delta or Starwood or Starbucks. It doesn’t work if you’re a mom-and-pop business. That’s the problem we’re trying to solve.

Loyalty is a crowded space that’s getting more crowded. What sets LocalBonus apart from the rest?

When you talk to merchants, they want help. They want new and repeat customers. So there’s a lot of noise out there in response. There’s a statistic saying the average local merchant is called on about forty times a month by someone like me. But it’s not like the merchant is making a big RFP process saying “I’m going to compare eight programs and their benefits and choose one based on some scoring system.” You have to convince them to join your program over inaction, indifference, and not caring.

I also don’t view it as winner-take-all like the tech press would frame it. That being said, it’s tough to build a network-effects business where you have both merchants and consumers, and you have to build both sides of the business. I’m less worried about the competition. I’m trying to find more ways to build the network.

As you mentioned, you’re in a two-sided business. What are your strategies for acquiring merchants and consumers?

On the merchant side, we recognize the noise. If you’re pitching someone something for the first time, well they’ve heard it before a lot of times. Merchants, generally speaking, are skeptical. The best way is to find someone who has an existing relationship for an introduction. We formed various partnerships that help get us merchants without having our own sales team, without having to start from scratch on building that relationship.

On the consumer-side, we have a few different channels. We get positive PR from tech press and mommy bloggers, or other people who care about savings. There’s a movement around supporting local businesses. The notion of Cash Mob has gotten picked up a lot lately. We’re in discussions with large organizations that can send traffic our way as well. Sometimes the merchants work with us, depending on the relationship.

How’s your growth been?

We’ve clearly demonstrated progress on the merchant side. We still have a long way to go. We don’t view one thousand merchants as an endgame in and of itself. We’re focused on building new partnerships.

It’s the same on the consumer side. The average consumer is in eighteen different loyalty programs and active in eight. Getting their attention is challenging. But it’s not that they have to give up their existing credit card rewards or Delta SkyMiles. It’s that we need to get them to care about LocalBonus. We’ve found stuff that works and stuff that doesn’t.

Five years from now, what do you want people to say about LocalBonus?

We’re trying to build a modern version of S&H Green Stamps.

Twenty, thirty, fifty years ago, businesses offered these stamps. People would collect books of them and turn them in for toasters or something similar. It was a universal rewards program across local businesses. That’s really our vision and it’s relatively unique.

The modern twist is you’re not collecting physical stamps that owners and merchants have to protect. You’re just using a credit card. But compared to almost every loyalty program you see, we’re offering a universal currency. You can pool your loyalty across all our merchants. That solves a pain point. You might have two stamps at one restaurant’s punch card system, and one at another.  And three tenths of a frozen yogurt somewhere else. But actually, the sum of that is zero. It’s a much better consumer proposition to combine that across businesses.

From a revenue perspective, how does LocalBonus work?

A merchant pays whenever a local business member shops at that merchant’s store. It essentially goes to fund the cash back reward for our users and a marketing fee for us. There’s no up front signing fee or monthly minimums. It’s a straight pay-for-performance model. The merchant funds the reward we send out.

Tell me about your team.

I was the solo founder. We brought in Tim Saunders, our CTO, in August of last year. He’s my sanity check. I started LocalBonus before he joined, but in many ways he’s like a founder. As we went through the ER Accelerator program over the winter, we also added a community manager and a developer. We’ve added freelancers and consultants, but the four of us really form the core.

Talk about your fundraising experience.

You get told no a lot. My view of fundraising is that to a certain extent is it’s a numbers game. You should still invest a lot in your interactions and prepare for meetings. But at the end of the day, if you pitch one hundred people and three are competing for you, then you’ve got a bidding war going on. That’s if you’re doing great. That also means you’re getting told no ninety-seven times. It’s challenging because you have to have a lot of conversations, and a majority of them will result in failure or rejection. If you’re passionate about your business, that should make you stronger. Do you get depressed or more resilient? Or do you say great, now I’m gonna find more investors to talk to?

I live and breathe LocalBonus and the industry we’re in. It’s very tough for an investor in a couple meetings to share that same passion I might have. There’s going to be people that don’t understand it, which is a normal human behavior. That explains the one out of a hundred hit rate. It can be consuming from a time or emotional perspective, but if you stay disciplined it makes a difference.

How do you measure success?

One thing I love about the startup environment is we’re offensive, not defensive. In a large company, they may have made $1 billion last year. Well, maybe they want to grow to $1.1 billion, or a bad year is $900 million in profit or revenue. My point is: people have a territory they’re defending. It’s risk adverse and scared of change.

For us, we start with a basis of zero. Not succeeding becomes failure. We don’t view any given test that doesn’t work as failing. The biggest failure for us would be putting six or more months into something and then it fails. If it’s a week, we’ll learn from that and that’s valuable. Our culture is about running experiments, knowing they’ll fail, and changing. When you create that culture, when something isn’t working, it gets discussed openly and we move on quickly. If you’re a middle manager, you have an incentive to make any past decision you did look good. You’re not willing to admit you made a decision. They hold onto sinking ships longer to make it look like they float. When it’s not working with us, we’re finding root causes, not finding who’s responsible. We solve it or try something different.

What’s the advantage of basing LocalBonus in New York City?

When you look at the tech scene in New York, the amount of resources that have come up largely in the last couple years are impressive.  There’s always been an industry here but there’s a lot of great momentum. I’m a huge believer in the power of serendipity. When you’re surrounded by others in a position to help, randomly lucky things happen. New York’s been a great thing for that.

And to be honest, our business isn’t targeted at the most active 10% of Foursquare users. It’s targeted at a mass market consumer. New York is an interesting target in its own way. It gives us a better place to build a product for consumers that aren’t just tech savvy early adopters. I think that’s one of the biggest challenges in the bay area. If you’re trying to test a loyalty application, every consumer there loves mobile apps and will download and try anything. It’s a good environment that can help get an idea off the ground, but it’s not valid feedback of will this work well in Kansas City. New York has a lot more going on than just tech. That’s beneficial for us.  

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