The Right Reward

Drew Ermenc

October 8, 2008

A s consumer spending continues to sag in this - dare we say it — recessionary economy, retailers both big and small are looking for any extra edge that might convince customers to keep shopping. Enter loyalty programs, a device once monopolized by airlines and credit card companies, but now maintaining popularity with big box retailers, grocers and e-commerce merchants trying to entice shoppers to visit and spend.

Former Oracle exec and local entrepreneur Dan Draper believes he sees the future of these loyalty programs, and he launched My Retirement Rewards, a company with a unique program that lets consumers save the rebates they receive from shopping at participating online stores and invest the money into various financial instruments, including mutual funds, IRAs and - if you're bold enough - the stock market.

Expecting profitability in the first quarter of 2009, My Retirement Rewards has already signed up nearly 1,200 merchants, with top-tier retailing names like Target and The Home Depot already on board. Perhaps the biggest sign they're on to something? In late September, Wal-Mart called: They want in.

CatalystMag.com's Associate Publisher and Editor Drew Ermenc sat down with Draper to discuss his Reward's business model, the concept of self-funding and his belief that shopping online will soon be the norm, not the exception.

Drew: Tell me about My Retirement Rewards.

Dan: We call it "savings without sacrifice." In the past, we've dealt with different types of rebate programs that no one could ever seem to understand. Whether it's points that don't really quite add up to dollars or a bank with a savings program where they save the change, all they're really doing is sweeping money from your checking account to your savings account. So it's still a sacrifice because it's your money that you're putting into savings.   

Right now, we have contracts with the merchants themselves. We have about 1,200 merchants that pay us an actual commission by having our members shop with them through our membership. Then, we take a majority of that commission and pay it back to the member into an investment account of their choice.

So if it's their own investment account they have set up, we can sweep it to that. If they don't, we have an incredible partnership with financial service providers, like MyStockFund, for instance. You can invest into ETFs, mutual funds, IRAs; you can even trade stock with the money if you want. And the cool thing about them is, for the first time ever, whether it's MyStockFund, e-Trader, any of those guys, they've taken a little different direction on investing. They used to be these big commission loads up front, but they don't commission load anything anymore. They typically charge $5.95 a month, so that's $7.95 a month just to be in their program. Then you can invest in anything you want, whether $5 to thousands of dollars.

So you're partnering with these financial service providers as well?

Yes. The cool thing that we've done with MyStockFund is they saw the value in us and the value of having massive numbers. For our members - for the first time ever - you can open up a MyStockFund account for free. It costs our members nothing to open up an investment account with MyStockFund. So it's truly free from beginning to end. Unless you're in the financial realm, you can't understand how big that is.

Is there a cost to your membership?

No. That's the whole purpose that we were really driving home to them. Banks.com bought MyStockFund. Huge company. They've got a lot of members, and are going to promote our business to all their members. Banks.com is going to have us up on their homepage as well.

We don't want it to cost our members anything. We want this to be truly savings without sacrifice. All they have to do is shop like they do every day. Some of their habits need to change a little bit, although in our next stage, we're going to have an in-store application where they can shop in-store. We really want to push people to buy online.

All the big box and brick-and-mortar retailers want people to shop online because it's cheaper for them to do business. And in the future – I'm telling you the next two to five years – it's going to be the only way you're going to be able to buy many things.

It's a paradigm shift we are starting to see. First, we started seeing [retailers] say, 'Shop online and it costs to ship.' And people were like, 'Forget that! I'm going to go in the store and just pick it up.' So then, they started saying, 'Shop online and we'll ship for free.' And then there are those people that said, 'That's great, but I still want to touch and feel it.'

So now, with most of the major brick and mortars – Wal-Mart, Target, Best Buy, most all the big ones – they say now, 'Buy online and if you want to pick it up just come to the store and pick it up.' To give an example, I went to Staples because I wanted a certain HP laptop. I found what I wanted in the store, logged on to their computer onto my account, bought the computer and took it home. And I got 6 percent back. It was cheaper.

And that's because of the deal that you struck as the co-founder of My Retirement Rewards.

Exactly. It's because that's the percentage we get back. Now, it was cheaper. The computer was on sale, so it was already cheaper by about $700 in Best Buy, and we have an agreement with Best Buy, too. So I went to the cheapest place I could find it, bought it and then had that put in my account.

This is going to change the way people think a little bit, but it's not just us changing it. The way the economy is going, it's going to force people to change the way they thing, the way they buy things.

You mentioned a paradigm shift. Are you talking about the way you were thinking about your business, or in the way consumers shop?

I would like to say that we're enhancing this paradigm shift, but it's the market. The push is for people to buy online. We're just the first ones to do it where you also get a reward back that puts money into savings.

You've seen the news. U.S. consumers are some of the worst savers and it's now one of the biggest things they're talking about in Washington. How do we get people - consumers - to save money?

What about competitors?

There was actually another company that was a similar platform as ours called Upromise, and it's an interesting story. Upromise was purchased by Sallie Mae a year and a half ago. The COO that was with Upromise now sits on our advisory board. He found out about us, called us through one of the financial guys that we work with. And wanted to be a part of us.

They went down a direction to capture as many families as possible. And they figured the best way to do it was through the grocery stores. So when you go into a Publix you see a Upromise sign on all their carts.

And they did. They got tremendous numbers from that - about 8 million members. The problem is that they also bred apathy because there's almost no margin on groceries. Their margin was around one to one-and-a-half percent. And there was this other problem. They only put it in 529b's, a college fund retirement account.

So [consumers] were very limited to what they could do. I mean, our members can put - they can put [money into] a 549 if they wanted. They could put it anything they want. We're not limited by that but - as he said - it was the worst marketing direction they could ever make. It cost them to do business with grocery stores. The overhead was so high. But with all that said, in five-and-a-half years, they had over $19 billion under management in their program with 8 million members.

Still impressive.

Blows your mind, but it also goes to explain financial guys have been telling us forever, "Save a penny, double it a day." That concept.

Right.

Money will grow if you just start putting it aside. I don't care if it's a small amount or a lot amount. But if you never put anything aside, nothing is going to grow.

Are you profitable yet?

We've only been really out of beta for close to a month. Profitable – I'd say – by first quarter of next year. Very profitable by the end of next year.

How do you convince the big box retailers with significant market share commit to something that's in beta?

In the beginning, it was tough. And I'll tell you what they did. They saw the site - we actually started going to them before we even had a site. And they said, 'Sounds like a good idea. When you get your site, call us back.'

So we got our site, and they started seeing it and they started coming on in droves. The one thing they got from Upromise was that it took them a year and a half to get 800 merchants. It took us about five months to get almost 1,000 merchants.

[One advantage is the emergence of] online advertising, and how it has doubled every year for the last three and half years. Primarily, [merchants] see us as a low cost way of getting the word out to everybody.

The big buzzword is target market advertising over the past four or five years. We are a target market advertising.
   
How are you a target advertiser? Explain this.

When members join, it's free membership but they join based on their zip code. For a local merchant, when the member logs on, they're only going to see the three zip codes around them with local merchants.

Interesting. Switching gears, tell me how many employees do you guys have?

We're very small right now. We have only eight.

How many did you have a year ago?

Three.

So you've more than doubled. Are you currently bootstrapping?

I hate the term bootstrapping but yes, we have been self-funded.

[The co-founder and myself] were going to self-fund the whole way but we decided back about a month ago when we went live ... we decided we wanted to look for funding because we need to get the word out to as many people as we can, as fast as we can.

So you are currently looking for investors. Have you had any bites?

Yes. We are expecting to hear an answer from somebody actually this week.

That's great news.

After we presented our pitch, they said, 'You guys are in our sweet spot. You're not a charity or a science project; you're already live. You've already got proven numbers from the time you've been live. You just need a little help to get to that next level.'

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