Shopkick Uses the Sound of Rewards to Bring Smartphone Owners into Bricks-and-Mortar Stores

7/11/11Follow @wroush

Shopkick is a startup on fire. Its CEO, Cyriac Roeding, is busier than the heads of companies a hundred times Shopkick’s size; it took me about eight months to get a 30-minute appointment with the German-born engineer and entrepreneur. The day I finally visited the company, which occupies a cramped office above a downtown Palo Alto dim sum restaurant, a bucket brigade on the stairs was refueling the 28-employee operation with bottled water and snacks. They needed it: Just one day before, the company had crossed the 2-million-user threshold. That’s how many people have fired up the Shopkick mobile app inside one of the hundreds of brick-and-mortar stores where consumers can use the startup’s system to rack up reward points.

Not bad for a company that barely existed two years ago, and that didn’t roll out its service publicly until August 2010. If Roeding is right about mobile technology’s potential to boost real-world retail sales, the startup will be searching for larger quarters very soon—and making backers like Kleiner Perkins Caufield & Byers, Greylock Partners, Reid Hoffman, and Ron Conway look prescient indeed.

Roeding (it’s pronounced RHO-ding) reduces the whole premise behind Shopkick to this: retail stores will do almost anything to increase foot traffic. After all, once you get people in the door, the “conversion” rates for bricks-and-mortar stores are very high; the proportion of visitors who end up buying something ranges from 20 percent for clothing stores to 95 percent for grocery stores, compared to a paltry 0.5 percent to 3 percent for most e-commerce sites. The problem, though, is that physical stores don’t have good ways to offer visitors rewards that might bring them inside more often, since merchants don’t even know who’s there until customers pull out their credit cards.

But these days, more and more shoppers are carrying sophisticated, Internet-connected sensing devices in their pockets—they’re called smartphones. The “creative spark” behind Shopkick, says Roeding, was the realization that merchants could deliver rewards to visitors via their iPhones or Android devices, if only there were some foolproof way to know when these smartphone-toting shoppers are really inside a specific store. GPS isn’t accurate enough, and Foursquare- or Gowalla-style checkins don’t work either, due to rampant cheating. (Roeding says the company’s tests showed that 80 to 95 percent of check-ins at retail locations are from people who aren’t actually where they say they are.)

Shopkick’s solution is surprisingly low-tech. It’s a white plastic box that plugs into a normal wall outlet and sends digital data via sound waves at 21,000 Hertz—just above the range of human hearing (but well within the range of your dog’s hearing, meaning the system might not work out so well at Petco). If you walk into a Shopkick-enabled store with the Shopkick mobile app already running on your smartphone, the device’s microphone will pick up the signal and use an embedded code to activate the reward of the day. Just for walking into a Target, say, you might get 60 “kicks,” the startup’s virtual currency.

The sound waves don’t leak beyond a store’s doors and windows, so you can’t earn kicks without actually stepping inside. You can pick up additional kicks by scanning product barcodes with your smartphone’s camera; build up enough kicks, and you can eventually redeem them for things like in-store gift cards, restaurant vouchers, and Facebook credits.

As the first app to reward shoppers simply for walking into a store, Shopkick has the potential to build a business at Google scale or beyond, Roeding argues. “Online, when you go to a page, you are expressing intent,” he says. “Offline, when you come through the door, you are interested in buying something. Google has built a pretty nice business on clicks. What if you could scale this up to the much larger physical retail world?”

Shopkick’s launch partners last summer included American Eagle, Macy’s, the Sports Authority, Simon (the nation’s largest mall operator), and Best Buy locations in Chicago, Los Angeles, New York, and San Francisco. Since then, it’s won accounts with Crate & Barrel, West Elm, Target, teen clothing retailer Wet Seal, and hundreds more Best Buy locations. The app itself has been spreading at an accelerating pace: it took 7 months for the startup to obtain its first million users, but only 4 months to obtain the second million, Roeding says. And unlike apps that get used once and then forgotten or deleted, Shopkick seems to have staying power: 30 to 40 percent of users fire up the Shopkick app at least once a month, 15 to 20 percent use it at least once a week, and 5 to 10 percent use it every day, Roeding says.

Roeding, who’s 38 but looks a decade younger, says he realized mobile was “the next big thing” back in 1994, when he was studying management at Sophia University in Tokyo. After a consulting gig with McKinsey, he co-founded a European-based mobile advertising startup called 12snap in 1999, then moved in 2004 to Los Angeles, where he spent three years building a 60-employee mobile division for CBS. After a 2008 trip around the world, he ended up as an entrepreneur-in-residence at Kleiner Perkins, helping to evaluate applications for the venture firm’s $100 million iFund, which was created specifically to back ventures building apps or services for the Apple iPhone. (It has since grown to $200 million.)

The surprising thing about working on the iFund, Roeding says, was seeing how few of the incoming proposals made full use of the iPhone’s capabilities. “I couldn’t find anything that I thought had a breakthrough potential,” he says. “So I started taking time to think about what is truly mobile about the cell phone. The usual answer is the ‘anywhere, anytime’ argument—I can now watch video anywhere. But there is mobile video without mobile—it’s called YouTube. And there is mobile social networking without mobile—it’s called Facebook. What I was really looking for was an idea that would make absolutely no sense without mobile.” Rarely, Roeding argues, do extensions of existing platforms lead to venture-scale returns: “The breakthrough businesses are the ones that were simply not possible before.”

As the first interactive platform that people can carry almost anywhere, Roeding argues, smartphones will have their biggest impact in environments that are currently non-interactive, such as hospitals and retail stores. “So the next question I asked was, ‘What is the number one problem of every physical retailer in America? It’s foot traffic—getting people through the door.”

Which led to the idea for Shopkick, and won Roeding the $5 million Series A investment—from the iFund and LinkedIn founder Reid Hoffman—that got the company off the ground. A $15 million Series B round followed not long after.

While Shopkick went after the big chain stores first in an effort to build a wide national footprint quickly, it’s now expanding to smaller retailers. Last month Citi agreed to foot the bill for free installation of the ultrasonic signal boxes at 1,000 local merchants in Austin, Chicago, Dallas, Detroit, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C. (Citi didn’t explain its largesse, except to say that it was an early investor in Shopkick and that it’s “happy to help” small businesses take advantage of the technology. But it’s easy to see how greater retail spending might benefit one of the country’s largest credit card providers.) “We are focused on large stores because that’s where most of the foot traffic is, and by the way most of the dollars too, but the shopping experience of the individual consumer also entails your local bakery,” says Roeding. “If Shopkick is supposed to be the shopping app, why shouldn’t it contain that, too?”

Remember how Roeding says Shopkick sees walking into a store as the offline equivalent of a Web click? The startup takes that analogy all the way into its pricing scheme. “It’s the first 100 percent performance-based marketing model in the physical retail world,” Roeding says. Clients pay Shopkick a percentage of the value of each kick earned, meaning they only shell out for actual shoppers entering the store. And the retailers aren’t on the line for the value of the kicks (which convert to cash at the rate of about 250 kicks to the dollar, by the way). Shopkick covers the cost of all redeemed points out of its own profits. This has the added advantage of making Shopkick’s app into what Roeding calls a “the first and only coalition rewards program in America,” since kicks earned at Target, for example, can be spent at Best Buy and vice versa.

Roeding says Shopkick is signing up new retailers, and hiring more software engineers, as fast as it can. But its $20 million in venture cash should last a while nonetheless, he says. “Our vision is to transform shopping into a more personal, rewarding, and fun experience for everyone,” says Roeding. “We hope to make stores into interactive worlds where consumers are exploring in a completely new way. Shopping should be something you are not dreading but enjoying, and until we have managed to make that possible, we will not rest.”

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

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