Mall Networks Gets $7 Million to Help Clients Compete for Loyalty

8/26/08Follow @wroush

Why do airlines give away frequent flyer miles? For the same reason that credit card issuers offer cash-back programs: because hanging on to existing customers by giving them rewards is generally cheaper than recruiting new ones. That basic truth has made frequent-flyer programs and other loyalty programs into a huge business: one in three Americans has a frequent flyer card on at least one airline, and 88 percent of all credit-card purchases in the United States are made using rewards cards (many of which help consumers rack up even more miles). There are so many loyalty programs, in fact, that it’s getting harder for each company to make their rewards program look better than the next guy’s.

That’s where Mall Networks comes in. If you went just by the Lexington, MA, startup’s name, you might think that it owns chain of shopping malls, or that it runs a TV network for malls, sort of like the CNN Airport Network. Not at all. In fact, the company’s business is to help ensure the loyalty of loyalty-program members, by creating online malls—really, just collections of products from 700 name-brand merchants such as Lands End.com, Wal-Mart.com, HomeDepot.com, and Buy.com—where people like Chase credit card holders or Spirit Air frequent flyers can earn extra points or miles for every dollar they spend.

Today Mall Networks announced that it has earned a big reward of its own: a $7 million Series B investment led by Waltham, MA-based Dace Ventures, with participation from Series A investors Flybridge Capital Partners of Boston, Wellesley, MA-based Venture Capital Fund of New England, and LBO Enterprises. Mall Networks CEO Dave Andre says the three-year-old, 40-person company will use the money to expand its platform to accommodate more clients and to hire about 10 additional sales, marketing, and service staff over the coming six months.

It’s easy to see how Mall Networks attracted the new investment: it’s one of those companies that has capitalized on the fluidity of Internet-based transaction data to carve out an entirely new niche, engineering what might be called, if you’ll forgive the lapse into biz-speak, a “win-win-win” scenario. Consumers who buy stuff through the malls—which are generally branded to look like they’re run by Chase, or Spirit Air, or whoever the Mall Networks client may be—win by earning rewards faster than they would if they made their online purchases elsewhere. The credit card companies and airlines win because they’re able to provide a benefit to their loyalty-program members at zero added cost to themselves (the rewards are generally funded by the merchants, out of the standard commissions they pay for purchases referred by outside websites). And the merchants win because they’re picking up customers who might not have shopped at their sites otherwise.

If you wanted to throw in a fourth winner, it would be Mall Networks itself, which charges clients to administer the loyalty-shopping programs. It’s a function most big financial companies and other service providers are happy to farm out. “It takes a whole bunch of expertise of different sorts” to set up the malls, monitor customers’ accounts, move points around, and market the programs correctly, says Mall Networks CEO Dave Andre. “The banks don’t want to have to put together 600 contracts with different merchants. That’s clearly something that needs to be outsourced. And with the banking and airline industries in turmoil—canceling programs that cost them money—these programs, properly executed, can be profit centers.” For example, companies can keep a slice of the merchant commissions for themselves.

For loyalty-program members, the only downside to shopping at a Mall Networks mall is that the prices offered by participating merchants aren’t always the lowest ones available on the Web. But retailers are free to sweeten the deal by offering higher multiples on what consumers spend—Target.com, for example, offers 6 miles for every dollar spent by the members of one airline frequent-flyer program. Which means it can be worthwhile to pay a little more, if it gets you enough points or miles for that next big reward. “If you’re 350 miles short of a European family vacation, those last 350 miles are really valuable to you,” points out Andre. “The value is really in the eyes of the consumer.”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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