The Retailer's Clever Little Helper

The battle between online and brick-and-mortar retailers has, until now, been a lopsided fight. Internet stores enjoy the paradigm-busting advantages of the Web, like the ability to personalize deals to shoppers and offer on-the-spot price comparisons. Offline retailers, by contrast, may never know anything about a shopper who walks in, pays for a single item, and walks out the door.

Over the past year tech entrepreneurs have raced to correct this imbalance and extend digital efficiencies to the physical world. Internet services such as Foursquare, Gowalla, Booyah, and—as of Aug. 18—Facebook have enticed millions to digitally "check in" to real-world locations. These smartphone-centered services encourage anyone out on the town to open up an app when they enter a venue. By clicking a button, the phone's GPS registers a user's location and sends it out to selected friends. Along with the debatable social benefit of letting people constantly broadcast their whereabouts, the services are designed to give businesses the chance to tailor deals to patrons and forge enduring relationships with the otherwise unidentified folks who may be their best customers.

Until recently, big-box retailers and other mainstream businesses have largely sat on the sidelines as early adopters toyed with the technology. Now that Foursquare and Booyah have each signed up roughly 3 million people and Facebook's 500 million users now have access to similar, location-sensing technology, the big brands are coming around. Says Tristan Walker, vice-president of business development at Foursquare: "We see upwards of 500 to 1,000 new business inquiries a day." Many of those are from mom-and-pop stores, but Foursquare has also recently made deals with major retailers including Gap (GPS), Starbucks (SBUX), and Sephora.

For retailers, foot traffic is everything, says Cyriac Roeding, the CEO of Shopkick, a new service similar to Foursquare. In e-commerce, a small percentage of a website's visitors make a purchase. In physical retail, the proportion of people who walk into a store and actually buy something—known as the conversion rate—is much higher. Roeding says the conversion rate for fashion retailers is 20 percent; in electronics, it's 40 to 60 percent. Shopkick, which launched last week in 600 stores and 100 malls across the U.S., encourages users to visit its retail partners—including Best Buy (BBY), American Eagle (AEO), and Sports Authority—by rewarding them with gift certificates and other prizes after a certain number of check-ins.

For traditional businesses, one of the advantages of these new services is the ability to reach customers on the go. "We know that consumers are out there at four o'clock in the afternoon with no idea what they're going to have for dinner," says John Faulkner, the director of brand communications for Campbell Soup. "If we can communicate with them the way they want to be communicated with, we can get them thinking about our soup." Clay Cowan, vice-president of e-commerce and digital marketing at Sports Authority, says that these services are much more effective at targeting customers than traditional methods: "Rather than accuracy at the quarter mile, it's accuracy at the aisle."

Campbell's is working with Stickybits, part of another batch of startups distinct from check-in services like Foursquare and Shopkick but still pursuing the same goal of overlaying the Web onto the physical world. For Stickybits and its cohort, the bar code is the crucial ingredient—users don't just check into a store, they check into a product by scanning a UPC with the camera on their smartphones. Users of Stickybits or a competitor like Barcode Hero scan bar codes and compare prices, win prizes, or write reviews. Campbell Soup (CPB) is offering Stickybits users a chance to win a $500 prize by scanning the bar code and posting a photo of one of the company's redesigned soup cans.

These startups acknowledge that scanning soup cans may come across as odd to some consumers. To make the process more appealing, many fill their services with "game mechanics." The term refers to interface and design flourishes—including competition for points and virtual badges—that originated in the gaming world and can make for addictive experiences. Users of Foursquare compete to become the "mayor" of a bar or coffee shop, just as Barcode Hero's users jostle to become the king, queen, or duke of a product category&mdash"the queen of lipstick," for example.

Game mechanics is the concept du jour in Silicon Valley. "You talk to venture capitalists here in the Valley, and they'll tell you that every new startup coming in has game mechanics as part of their pitch," says Rajat Paharia, chief executive of Bunchball, a San Jose startup that helps other companies build game-like features into their websites. "Most of the startups don't know why. They just know that they need game mechanics."

Scvngr, a year-old Cambridge (Mass.) startup that received a $4 million investment from Google's (GOOG) investment arm, Google Ventures, is the most avid of the companies embracing game mechanics. It gives guidance on game design to its partners, including Sony (SNE), AT&T Wireless (T), and the New England Patriots, and helps them devise challenges for customers using a Scvngr smartphone app. At AT&T stores in four Midwest states, for example, customers can earn $50 off the price of a new Samsung smartphone by completing challenges like checking into the store and taking a picture of themselves with the phone.

Facebook's new check-in service, called Facebook Places, may be the best evidence yet that the real world is getting a digital overcoat. With Places, people can check themselves and their Facebook friends into any local business. Those establishments will ultimately have pages on Facebook and be able to communicate directly to their customers. If the service catches on, businesses may know exactly who their customers are, where they are, and in some cases, when they are nearby and ready to spend—just like an e-commerce site. "Once you have the ability to target specific consumers based on what they told you about themselves, you change the entire retail dynamic," says Paul Gunning, chief executive of ad agency Tribal DDB Worldwide. Or, as Shopkick's Roeding puts it: "The real-world click has arrived."

The bottom line: Location services like Foursquare and Facebook's Places let real-world stores offer deals and other enticements to nearby shoppers.

Checking In:

A Sample of the startups building location-based services, and the retailers and brands they're working with.

Brands: AT&T
Scvngr designs smartphone-enabled scavenger hunts that bridge the digital and physical worlds. A current AT&T promotion offers $50 off a Samsung phone for completing certain tasks, like taking a picture with a store display model.

Brands: Starbucks, Sephora, Gap
Foursquare is a check-in service with nearly 3 million users who compete to become the virtual "mayors" of real-world places. In early summer, users had a chance to win a $100 gift certificate at Sephora.

Brands: Pepsi, Campbell Soup
Use the Stickybits smartphone app to scan product bar codes and attach digital information—like reviews or pictures—visible by other users. Scan a Campbell's soup can for a chance to win $500.

Brands: InCase, TOMS Shoes
Gowalla is a check-in service similar to Foursquare, with photo uploads and badges to earn. Check-ins at Apple stores earned users a chance to win an iPhone case in a promotion that ran earlier this year.

Brands: Macy's, Best Buy, American Eagle
The Shopkick app rewards users with gift certificates and discounts when they check in to retail spots and scan products. American Eagle offered a deal on jean leggings in mid-August.

Brands: H&M, Pantene
Booyah's MyTown app is a blend between a check-in service and a virtual game, and has over 3 million users. Use the app's bar code scanner on a Pantene product for bonus points to use on virtual goods.

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