Show Us the Money: How Apps Such as Punchh Are Helping Companies Cash In on Social Media

With Twitter’s recent announcement of their intentions of going public, the focus is back on how social networking sites can make money. As Rod Tidwell (Cuba Gooding Jr.’s Oscar-winning performance in Jerry Maguire) puts it so eloquently, the mantra is one of: “Show me the money!”

At the same time, other companies—packaged-goods manufacturers, service companies, and business-to-business marketers, among others—are looking for ways to leverage various social media platforms in order to provide greater value to their customers or clients.

In this post, I will describe the model used by Punchh—a Bay Area startup—to illustrate how companies can leverage customers’ social networks. By using mobile technology in local contexts, it obtains measurable returns on rewards programs. The company was founded and is being run by a number of Chicago Booth graduates and provides services for restaurants and restaurant chains.

In an earlier post about Netflix, I discussed the importance of the customer lifetime value (CLV) metric for service businesses. Repeat business from loyal customers enhances their lifetime value. Companies need to engender loyalty and generate repeat business. At the same time, visiting restaurants is also a social activity, and first-time visits are often triggered by referrals from one’s friends. New-customer acquisition can be driven by referrals from current customers to their friends in their social network in the local market area of the restaurant.

This is where Punchh comes in: it sets up a loyalty rewards program for existing customers, which piggybacks on these customers’ social networks to reach potential customers. In the process, it not only helps restaurants acquire new customers but also strengthens existing customer relationships by providing additional rewards for every new customer acquired via referral using the network.

Specifically, the system works as follows: Say a new customer walks into a restaurant on the Punchh system. Point-of-sale materials direct the customer to join the restaurant’s loyalty program by downloading an app. The app creates a virtual punch card (hence the name Punchh) that keeps track of the number of visits by the customer to the restaurant. A punch is triggered by a scanned receipt every time the customer visits the chain, and allows the customer to share opinions about the restaurant with her social network. Reaching the end of the card triggers a loyalty reward much like you see at coffee shops, hair salons, and the like.

This builds customer retention and loyalty. (For further details, see the CLV formula in my Netflix post—retention is reflected in term R in that formula.)

The app also asks for permission to access the customer’s friend network, which provides the application with the names of the people in the existing customer’s networks. If one of the friends in the network also downloads the chain’s app and completes a transaction and punch at the chain, the app (using the network information previously obtained) queries this new customer whether he was visiting the restaurant on the basis of a referral from the original customer. An affirmative answer then triggers an additional punch for the original customer to reward her for the referral.

Accounting for this “referral value” of existing customers helps to further enhance the customer’s lifetime value to the restaurant chain. A key feature of the Punchh program is that outcomes are clearly measurable and in most cases attributable to the rewards program that the chain is investing in. This enhances its value to both marketers and CFOs who are interested in quantifying the return on investment of such marketing initiatives.

There are many different ways in which companies are leveraging social networks to provide more value to their customers. As networks grow, companies can benefit from enhancing both the customer base and the lifetime values of their existing customers.

As Jerry Maguire (played by Tom Cruise) notes, “So this is the world, and there are almost 6 billion people on it. When I was a kid, there were 3. It’s hard to keep up.” For marketers, being able to better understand and leverage the social networks of their customers implies that they can benefit if the world has 3 billion or if it has 6 billion.

Pradeep K. Chintagunta is the Joseph T. and Bernice S. Lewis Distinguished Professor of Marketing at Chicago Booth.