FiveStars Goes Digital to Boost Loyalty

Editor's note: Innovative entrepreneurs are just about everywhere in the United States. And this year, the 40 weekly newspapers that are part of Portfolio.com's parent company American City Business Journals chronicled some of the most creative business ideas around. Here's an excerpt from one, originally published September 23 in the Silicon Valley/San Jose Business Journal.

A customer who stops by her favorite coffee shop multiple times every week suddenly stops coming in as often. Did she find another place to pick up her morning vanilla lattes?

For the owner of the coffee shop, the loss of loyal, repeat customers can put a huge dent in revenue. A startup in Mountain View, California, is trying to use technology to help small businesses keep those customers and attract more.

FiveStars Inc. makes a plastic, digitized version of a customer loyalty card, like the sandwich stamp card available at the counter of a local deli. Unlike most of the digital loyalty cards used by grocery stores and other companies, though, a customer would only have one FiveStars card to scan at every location that signs up for the service, whether it be a frozen-yogurt shop or an auto-parts store.

Loyalty programs "just drive unbelievable revenue, but when you look at small to medium-size businesses, restaurants, and coffee shops, it’s really, really antiquated, and their solutions are pretty subpar,” said FiveStars CEO Victor Ho, pointing to stamp or punch cards as examples.

FiveStars publicly launched its cards in mid-2011. As of September, it had about 250 businesses in the San Francisco Bay Area signed up and was adding about 40 every week, Ho said.

The company currently charges a flat $50 a month for the service, which Ho said is “pretty much at cost for us” and cheaper than competitors like Georgia-based Radiant Systems’ Aloha Marketing products. FiveStars is currently making about $250,000 in annual revenue, Ho said.

It has about $2.5 million in funding from investors that include: SV Angel; Mayfield Fund; Eric Stein, former Google Inc. director of local markets; and Chamath Palihapitiya, former Facebook Inc. vice president of mobile and international growth.

“The goal is to make a lot more of our revenue from big chains [by charging them more] and large players that can really afford it, because we really do have a desire to continue helping small and medium-size businesses,” Ho said.

Ray Wang, an analyst at the Constellation Research Group, said these types of programs can be much more effective at creating ongoing business than a Groupon-style daily deal coupon.

“There’s a loyalty component here that’s useful,” Wang said. “The more you buy, the more we reward you.”

To read the full story about FiveStars, click here. And to subscribe to the Silicon Valley/San Jose Business Journal, click here.

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Diana Samuels writes for the Silicon Valley/San Jose Business Journal.